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
#9. Is The Stock Rising Out Of A "Base"?
Once you've found a stock with all the elements in
the stock-buying checklist, there's one final step:
deciding when to execute your buy order. This is something
you can't do with only financial figures or performance
ratings. Charts will help you pinpoint the best time
to buy or sell a stock. How? Once you learn to recognize
a few distinct price patterns, these formations will
be one of your best indicators of a stock's potential.
The lesson titled "Using Stock Charts To Round
Out Stock Selection," helps you learn to identify
these formations easily.
- In a nutshell, to buy at the best time, you need
to recognize when a stock is breaking out of a price
consolidation (or base) area.
The Formula For Success
The stock-buying checklist gives you the most important
traits to look for in a stock. These guidelines are
backed by half a century of research into the characteristics
of the best stocks before they made their major price
You may be tempted to buy a stock that has some of
the traits. But if you really want to find the absolute
best stocks, there are no shortcuts. You must find stocks
that exhibit most or all the criteria in the Checklist.
Being aware of the characteristics of winning stocks
arms you with the best research conclusions.
A Stock-Buying Checklist
Here's a suggested summary of what to look for in your
search for winning stocks.
- The best companies have superior earnings growth
before their big price gains. In IBD's stock tables,
look for stocks with Earnings Per Share Ratings of
80 to 99.
- Besides strong earnings, look for strong sales growth,
pretax margins, after-tax margins and return on equity.
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 . Stocks with no earnings,
by definition, have no margins or ROE, and thus will
have low SMR Ratings, even if sales growth is high.
- The best stocks display price strength, historically
ranking among the top 13% of the market, before making
their huge advances. Look for a Relative Price Strength
Rating of at least 80, preferably above 85.
- Often, stocks move as part of a broad advance in
a top-performing industry group. The best stocks are
usually in top-performing industries. Look for stocks
with Industry Group Relative Strength Ratings of A
or B or in one of the top five broad industry sectors
in IBD's New Highs list.
- When mutual funds and other professional investors
start buying a stock, it represents heavy demand that
tends to lift stock prices higher. If a stock goes
up in price as trading volume surges, it could be
a sign that funds are buying, as long as the stock
is not too far extended in price above a sound chart
- Watch the general market's direction. When the market
turns down, three out of four stocks will also fall
-- even quality stocks. This is why you should never
"fall in love" with a stock, no matter how
good the story. Also, keep on top of the price and
volume movements of the market averages on a daily
- Once you've identified a quality company, check
its price and volume chart to spot the best time to
buy and maximize your profits.
- Avoid low priced stocks. NYSE stocks $20 or more
and Nasdaq stocks $15 or more are better-quality securities.
- Concentrate your buys in the No. 1 company in its
particular industry in terms of sales and earnings
growth, profit margins, return on equity and relative