In baseball, home run hitters do more than just lift weights.
They study the pitchers that are trying to strike them out. They
look at the location of pitches, if it's a curve ball or a fastball
and, of course, the speed. Picking a home run-type stock takes the
When I look for home run stocks I stick to a few key things that
will weed out the pretenders from the contenders. Each step will
eliminate more and more stocks and decrease your chances of
Where to Start
The first thing I look for is consistent increases in earnings
estimates. The Zacks Rank is a great tool that helps me take the
total universe of stocks down to only about 1,000. Zacks #1 Rank
(Strong Buy) and Zacks #2 Rank (Buy) stocks have seen earnings
estimates increases over the last few months. I cannot stress the
importance of buying #1s and #2s enough.
The Zacks Rank is great for looking into the future, but I will
also want to see what the company has done over the last few
quarters. A great way to see this is through a "price and
consensus" chart. I can quickly see if earnings have been moving
higher or lower, which could signal other trends that I might not
catch just looking at the last quarter's results. I can also tell
how closely the stock pays attention to the estimates based on how
the stock reacts to changes in estimates.
Next you'll want to look at market capitalizations. Bigger
companies grow, but smaller and mid-cap companies have a much
greater chance of doubling than the behemoths do. My sweet spot
resides in companies that are in the range of $250 million to $5
billion. Sometimes I stretch the limits on each side of that frame,
but for the most part I stick with what works.
Home Run Stocks from Zacks
Only a few companies have great potential to increase their
earnings beyond the normal 1 to 3-month Zacks Rank profit zone.
These under-the-radar small and mid caps are primed to rack up
positive earnings surprises quarter after quarter.
We'll ride them past today's erratic market for 12, even 24 months
to realize their exceptional upsides. Gains could reach +50%,
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Along with the market cap, I try to make sure the company I am
looking at has decent volume. This is a subjective idea, but
generally I look for volume at acceptable levels for an
institutional buyer to be able to step into or out of the stock
without rocking the boat. Thin floats can wreak havoc on execution
and the small guy will always lose that battle. A more subtle red
flag is when you see volume decreasing in a big way. Dramatic
declines in volume are indications that the general market is not
that interested in the stock and there is usually a good reason for
Beats and Acceleration
Earnings beats are a symbol that management has a handle on what
Wall Street wants. That is a concept that should not be
underestimated. You want to own a stock that has a management team
that can set the correct expectations for the future earnings. This
metric is the easiest to manipulate, as a company can preannounce,
but it goes more to the point that misses are big red flags. I like
to see at least three positive earnings surprises but the more the
What I really like to see is the acceleration of earnings growth.
When earnings increase, we smile. When they accelerate - each
quarter is a bigger beat (in percentage terms) than the previous -
we jump up and down. This implies that things are not only getting
better, they are getting much better.
Understanding the Landscape
As part of my research I like to listen to a recent presentation
more than a recent earnings conference call. These presentations
are readily available in the investor relations site of most every
company. You can learn much more from these presentations than you
can from an earnings call. The presentations often give a clear
picture of what the company does and how it expects to grow the
business. Often times you will find an informative PDF of the
slides that accompany the presentation. Just looking at those
slides alone can be helpful.
Most companies like to say that they are unique and they don't
really have an exact comparison to point to. This is just plain
false as everyone is out there trying to eat everyone else's lunch.
I try to make sure that I know who the competition is in each
business line. If my pick is eating the lunch of a big behemoth,
then I know there is room for growth. If it's a new industry, I
want to see all the competitors growing revenues. That will tell me
that the whole pie is growing, not just one company's share of that
One part of the puzzle that really doesn't take much up front
effort is patience. Stocks don't double overnight and itchy trigger
fingers can cut you out of positions long before the move is made.
Patience is a virtue, and investors that want to hit home runs
better have some. Stocks move with the market, and rarely do we see
big 20% and 30% moves. The slow and steady gains will pile up over
time but you have to give those picks that time.
What To Do Next
You can build a portfolio of great names that have a Zacks #1 Rank
and Zacks #2 Rank and watch them daily. You can monitor research
reports from the big brokerages to get some deeper insights into
the industries you have invested in. You can then stay even closer
to your investments by listening to earnings conference calls to
hear for yourself what the prospects are. You can do all of that on
your own. Or, you can look into our
Zacks Home Run Investor
service that will help you find stocks with the potential to rack
up impressive gains.
This long-term investment approach narrows down strong Zacks Rank
stocks to the few that have exceptional potential to blast through
our normal 1 to 3-month profit zones. These are companies that
could continue to generate positive earnings surprises quarter
In pursuit of gains amounting to +50%, +100, and more, we are
prepared to ride stocks for 12, even 24 months. Be sure to check
into this service now. Today's market worries present us with a
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All the best,
Brian is our aggressive growth expert and one of the hottest
hands at Zacks with several double-digit gains already on the
board. He is the editor of the
Zacks Home Run Investor
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