INVESTORS BUSINESS DAILY
Educational Articles - My Snippings
KEY POINTS TO REMEMBER
Insist on the best earnings performance, not just a promise of earnings. This way, you will pick stocks with the best probability of making Yahoo-like gains.
- Look for companies reporting earnings growth of at least 25% in the most recent quarter.
- Find companies with earnings that have accelerated in the three or four most recent quarters.
- Identify stocks with annual earnings growth of at least 25% over each of the previous three years.
- Focus on EPS Rating for a quick way to evaluate a company's earnings. EPS Ratings of 80 or higher are best.
- Don't overemphasize the price/earnings ratio as a way to compare a company's stock relative to its earnings.
Sales Growth, Profit Margins, Return on Equity
Use the SMR ratings of IBD for this. Look for A or B rating. (Range is A ... E).
- Strong sales growth is one key indicator of a company's success. Quarterly sales growth should be up at least 25% in the most recent quarter. Otherwise, they should be accelerating.
- Profit margins tell you how much of a company's sales end up as earnings after expenses. Generally, the higher profit margins, the better.
- Return on equity measures how well a growth company can produce earnings with shareholders' capital. Look for ROEs of at least 17%.
- You don't have to check the company's financials to be sure a company's sales, margins and ROE are acceptable. Just check the SMR Rating, making sure your stocks are rated "A" or "B."
- Institutional investors represent the bulk of trading activity in the market. As such, their buying and selling power can move a stock's price up or down dramatically.
- You can learn to spot which stocks institutions are buying and selling by watching for surges in trading volume and the Accumulation/Distribution Rating. Look for A and B stocks for buying opportunities; you should generally avoid D and E stocks.
- Look for stocks with a Sponsorship Rating of A or B. This rating tells you if a stock is held by top-performing mutual funds, and the number of fund owners is increasing.
- You can tell if the market is shifting to small- or big-cap stocks by watching the performance of small-cap growth fund vs.large-cap growth funds. It's also important to see if growth funds are outperforming value funds. IBD publishes charts to track these trends daily.
- Much of a stock's move is due to the strength of its industry. You want to own stocks in industries that are displaying strength and market leadership.
- Different industries move to market leadership as economic conditions and consumer trends change. You can identify the new leaders by watching IBD's 197 Industry Group Rankings and the top five industry sectors with stocks making the most new price highs.
- The stocks you buy should be in the top 20% of industry groups, that is, groups rated "A" in IBD SmartSelect® Corporate Ratings. It's even more significant when the industry group has been moving up the industry prices table. "B"-rated stocks may also have potential.
- The table of new price highs can also provide good insight on which industries are drawing interest among professional investors.
- Relative Price Strength Rating measures a stock's price move over the last 12 months compared to all other stocks. Relative Strength is rated on a scale of 1 to 99, with 99 being the highest.
- Look for stocks with an RS Rating of 80 or higher. The better-performing stocks tend to go higher, while the lagging stocks tend to lag even more.
- The Relative Strength line helps confirm a stock's upward price movement. You want to see the RS line moving in a strong uptrend.
- Quality stocks making new price highs just as they emerge from sound bases on higher volume are often likely to continue climbing, while stocks making new lows are probably headed even lower. Therefore, focus on the new price highs list for the best potential opportunities.
- The great paradox of the stock market is that what seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down.
- You can think of a stock's price as a measure of its quality and, consequently, its potential. Typically, stocks higher in price reflect higher quality.