I'm regularly asked how I go about picking winning stocks,
especially now with the market's recent pullback.
The short answer is: I simply focus on what works.
Since there are over 10,000 stocks out there, you need a way to
find the good ones.
And by focusing on what works vs. guesswork (or worse), you'll not
only be able to pick winning stocks, but you'll be able to do so
consistently. And that's really the key to success; having a
repeatable way to find profitable stocks, again and again and
I run a lot of individual strategies. But I will often go thru a
checklist on all of my candidates before I get in.
- Almost every screen I run nowadays (if I'm looking for long
candidates) begins with a
Zacks Rank of less than or equal to 3
. Zacks #1 Ranks and Zacks #2 Ranks are Strong Buys and Buys,
respectively, and have consistently outperformed the market over
the last 23 years. The Zacks #3 Ranks are market performs, but
you'll find plenty of great candidates in this position. And when
the market is in a confirmed uptrend, this is a fine group to
pick from. (Zacks #4 Ranks and Zacks #5 Ranks, i.e., Sells and
Strong Sells, are excluded of course.)
- I also look to see if a stock is in the
top 50% of industries
, based on either the average Zacks Rank or the percentage of
stocks trading within 10% of their 52-week highs. Since half of a
stock's price movement can be attributed to the group that it's
in, this put the odds of success in my favor.
Earnings Estimate Revisions:
While the Zacks Rank takes care of much of this, I still look at
these items separately as well. And I like to see the estimates
rising (or at least not falling) for Q1, Q2, F1 and F2, over the
last 1, 4 and 12 weeks.
Positive EPS and Sales surprises:
Since a company that has surprised in the past has a tendency to
surprise again in the future, these are two good measures that a
company is on the right track.
Positive Growth Rates:
Nothing extreme, but I want the current year's growth rate to be
positive and I want next year's to be even better. As a stock
picker, ask yourself: Do I want my stocks to have increasing
growth or decreasing growth? Since it's my right to choose, I'd
prefer my stocks to have increasing growth.
I like my valuations in ranges that have proven to be the most
optimal for producing profitable results.
My favorite is the Price to Sales ratio being less than
or equal to 1.
Less than or equal to 2 also produces market beating results. And
often I'll compare it to its industry as well (less than or equal
to the median for its respective industry). But I'll typically
avoid Price to Sales ratios above 4, as, historically, stocks
above that number usually underperform or go down.
Return on Equity:
I like to see the Return on Equity or ROE above the median for
its industry, and preferably increasing from the previous year or
5 year average. This shows good management and efficiencies.
- Additionally, as an extra measure, I'd like to see
as well. This shows more profits are being made for each dollar
of sales the company makes.
I'll also look at the charts:
- I'd like to see the
weekly price and volume increasing
. A rising price accompanied by rising volume is a great sign of
strength. And it could show institutional buying. These are great
indicators of increased demand, which usually means higher price.
Ideally, I want my stocks trading above the 50-day and 200-day
moving average. Being above the 10- and 20-day is a bonus. But
being above the long-term and medium-term moving averages, i.e.,
the 50- and 200-day, is a bullish sign.
Is the chart pattern bullish or bearish or both the daily and
weekly chart? I will not get into a stock with a bearish chart
pattern. If it's bullish, yes. If it's neutral, ok -- assuming
it's hitting on the other items above. If it is bearish, it's a
By sticking with this basic set of proven criteria, I know I have a
high probability of success in picking winning stocks. And if it
doesn't work out, I don't have to panic and wonder if my system
works or scurry to change these up. That's the kiss of death.
Picking winning stocks consistently comes down to a set of rules.
And these are my basic building blocks. I look at plenty of others
as well. But this is my basic checklist.
And here are five stocks that passed the checklist this week:
- Clearwater Paper Corp.
- ConAgra Foods, Inc.
- First M&F Corp.
- First American Financial corp.
- Journal Communications Inc.
If you consistently do what works over and over again, you too will
find yourself picking winning stocks, beating the market and
accomplishing your trading goals.
To apply this checklist to your own stock picking, sign up for your
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Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and
strategies are available at:
CONAGRA FOODS (CAG): Free Stock Analysis Report
CLEARWATER PAPR (CLW): Free Stock Analysis
FIRST AMER FINL (FAF): Free Stock Analysis
FIRST M & F CRP (FMFC): Free Stock Analysis
JOURNAL COMM-A (JRN): Free Stock Analysis
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