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 moves.

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 base pattern.
   
• 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 basis.
   
• 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 price performance.

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