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Lessons On Buying Stocks

1. Earnings: The Indispensable Element Of Great Stocks

  • Insist on the best earnings performance, not just a promise of earnings. This way, you will pick stocks with the best probability of making substantial 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

  • Don’t overemphasize the price/earnings ratio as a way to compare a company’s stock relative to its earnings.

2. Sales, Margins & ROE

  • 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. The rule of thumb for all companies except retailers: seek companies with annual pretax profit margins of at least 15%. After-tax margins should be at all-time highs for the company or within 10% of the high.

  • Return on equity measures how well a growth company can produce earnings with shareholders’ capital. Look for ROEs of at least 17%. In most industries, the top-performing companies tend to have ROEs of 20% to 30%. Occasionally, companies will boast ROEs of 40% or even higher. The higher the percentage, the more efficient a company is in utilizing its capital.

3. Sponsorship

  • 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.

  • Look for stocks with an increasing total number of institutional owners in recent quarters. Look for those stocks that are owned by more funds each quarter.

4. Industry Groups

  • 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 the top five industry sectors with stocks making the most new price highs.

5. Leaders

  • Relative Price Strength Rating measures a stock’s price move over the last 12 months compared to all other stocks.

  • Look for stocks with high Relative Strength. 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.

6. New Highs

  • 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.


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