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Recent articles by Harry Domash: • Pick stocks like the heavy hitters, 8/14/2005 • Value stocks that live up to the name, 7/31/2005 • Follow analysts to their sweet-spot stocks, 7/17/2005 More... |
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Between the Web, TV, market gurus and market-minded friends, it's easy enough to find dozens of stock tips. Here's how to pick out the best -- in a flash. By Harry Domash Do you usually research one or two stocks at a time? If so, youd do better if you tackled a whole bunch at once, say 10 to 20. Heres why: The more stocks you have to choose from, the better your chances of picking a strong candidate. But few of us have the time to analyze 10 or 20 stocks in depth. The key is to eliminate the dogs as soon as possible so you can spend your time researching the best candidates. Here are nine checks for differentiating the worthwhile candidates from the duds. Using these checks, you can separate the wheat from the chaff in less than two minutes per stock (no kidding). You wont need a calculator and all but one of the checks can be done using just one report, MSN Moneys Company Report.
Too many ideas? No such thing Where do you find 10 to 20 stocks to analyze? Screening is one way. Here are a few MSN Money has put together. But you probably already get plenty of tips from TV gurus, magazines, and people at the gym. The more the better. Take them all. With these checks, you can quickly spot and discard the stupid ideas. Ill demonstrate the process using a list of 15 stocks of different-sized companies and from a variety of industries. I chose the list to be representative of the types of stocks you are likely to encounter every day.
Remember, eliminate weak candidates as soon as possible. Disqualify a stock as soon as it flunks one test. Avoid weak industries Stocks in the same industry tend to move together. Even if you pick a great company, youre likely to lose money if the market sours on its industrys prospects. Related news and commentary on MSN Money
How do you know which industries to avoid? MSN Moneys Industry Winners/Losers report is a good place to start. The report lists the 10 best-performing and 10 worst-performing industries, in terms of stock price changes, over the past month.
These pennies aren't from heaven Penny stocks are stocks trading below $1 per share. I know, those stocks are fun. After all, you could turn $100 into $10,000 if you bought 200 shares of a 50 cent stock that eventually went to $50. But, alas, that doesnt happen very often. Cheap stocks are cheap for good reason. At least in my experience, theyre much more likely to go down than up.
Real companies have real sales If you use e-mail, youve probably received messages touting stocks with great stories. They may have a cure for cancer, a miracle battery that will power automobiles for days without recharging or a hot new homeland-security product. Unfortunately, those stories are just stories unless they translate into meaningful sales. Most publicly traded companies generate annual sales (revenues) measured in the hundreds of millions, if not billions, of dollars. At the very least, a real company with real products ought to generate sales of $10 million per quarter or $40 million per year.
Catch them on the rise I know its not fair, but many times, in-the-know players hear bad news before the company gets around to telling the public. When price charts start a downtrend, its often your first clue that big investors -- who often are more plugged-in at a company -- are aware that something is amiss. Whatever, the reason, a downtrending price chart warns you that the share price is likely headed lower before it recovers. A stock trading above its 200-day moving average is in an uptrend, which is what you want, and one trading below its 200-day average is in a downtrend.
Chart your course As a fundamentalist investor by nature, it pains me to tell you that stocks that have outperformed the market over the past year are likely to continue their winning ways, while weak stocks usually continue to disappoint shareholders. But thats a fact supported by many research studies. Relative strength (RS) measures how a stock has performed compared to the overall market over a particular period. For instance, an 80 RS means the stock has outperformed 80% of all stocks. MSN Moneys Company Report lists each stock's RS for the last 3, 6, and 12-months. In my experience, the 12-month figure is the most reliable. Setting a minimum acceptable relative strength is somewhat arbitrary, but at the very least, all of your candidates should show a minimum 50 RS, which means that their shares performed as well as 50% of all stocks over the past year. You wont go wrong if you increase the minimum to 60 or even 70.
What the pros know Institutional owners are mutual funds, pension plans, banks, and other big holders. Institutional ownership is the percentage of a companys shares held by these big players. Institutional ownership for in-favor growth stocks typically runs 50% to 95% of shares outstanding, and rarely below 40%. If institutions dont own a stock, it usually means they dont think they can make money holding it. It doesnt pay to try to outguess the big boys.
Those who cannot learn from history . . . Most growth investors look for stocks growing sales and earnings at least 15% annually. While historical performance doesnt guarantee the future, its a good place to start. With that in mind, I required a history of at least 15% average annual sales and earnings growth over the past five years.
Follow the StockScouter MSN Moneys StockScouter evaluates all stocks using a proprietary formula that evaluates a host of fundamental and technical (stock chart) factors. StockScouter scores range from 1 to 10, where higher is better. Stocks with scores in the 8-to-10 range are expected to outperform the market over the next few months and those with scores below 4 are expected to underperform. MSN Money has offered StockScouter for several years now and evidence is accumulating showing it works.
Go for growth Growth stocks usually trade down when earnings growth slows. The last test confirms that analysts expect earnings growth to continue at a minimum 15% annual clip, for at least the current and next fiscal year. Click on More Analyst Estimates (under the Earnings Estimates section on the Company Report page) to check those numbers.
The survivors Four stocks cleared our tests:
At the time of publication, Harry Domash did not own or control shares of companies mentioned in this column. | |||||||||||||||||||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.