Your Stock Buying Checklist � A Review
step-by-step guide to finding stocks with the characteristics
that make them market winners. This lesson reviews stock
buying concepts presented in this course.
Investor's Business Daily's Key Buy Rules
#1. Top Fundamentals
Concentrate your buys in the No. 1 company within its
particular industry in terms of sales and earnings growth,
profit margins, return on equity (ROE) and relative
price performance. A leader should have the characteristics
shared by the best stocks before they made their major
price moves:
- At least a 25% increase in the most recent quarter's
earnings per share (EPS) vs. the same period in the
year earlier.
- Ideally, accelerating earnings growth in the three
most recent quarters.
- At least a 25% increase in annual EPS in each of
the past three years.
- The most profitable companies have Earnings Per
Share Ratings of at least 80 or 85.
- Sales growth should be up at least 25% in the most
recent quarter, or accelerating over the past few
quarters, or both.
- The most profitable companies tend to have annual
ROE of 17% or higher.
- Pretax and after-tax margins should be improving
and near their historic peak.
- Stocks should have Sales+Margins+ROE (SMR™)
Ratings of A or B, which means they are in the top
20% or top 40% of stocks, respectively, in terms of
sales growth, profit margins and ROE.
#2. Leaders In Leading Industries
Historically, the best stocks ranked among the top
of the market before making their huge advances. Also,
stocks often go up in price as part of a top-performing
industry group.
- Look for a Relative Price Strength Rating of at
least 80.
- Look for stocks within the top 40-50 groups shown
in IBD's 197 Industry Group Rankings.
#3. Institutional Demand
When mutual funds and other professional investors
start buying a stock, it represents heavy demand that
tends to lift stock prices higher.
- Pay close attention to stocks with Accumulation/Distribution
Ratings of A or B. C-rated stocks may be O.K.
- It is also desirable to see an increase in the number
of mutual funds owning the stock over the past few
quarters. It's even better if a stock shows up on
the list of "New Buys" or "Largest
Holdings" of top-performing mutual funds.
- Avoid low-priced stocks, which are typically shunned
by institutional investors. Focus on NYSE stocks $20
or more and Nasdaq stocks $15 or more. These were
the minimum price levels among most of the greatest
stock market winners when they began their major moves.
- Put another way, focus on stocks with Industry Group
Relative Strength Ratings of A or B.
- Check market leadership by studying the top five
or six sectors in IBD's table of new 52-week highs.
investors.com
|