Checklist, continued
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.
|
