Reblog: Find a Monster Stock in 15 steps
Monster stocks are those wonderful beasts that make you look like a genius trader.
Shorts think that they are way too expensive and will crash, so they go short and have to cover en-mass after another 10 point run; they create even more buying pressure. Traders that short monster stocks do not understand the momentum that earnings expectations and growth cause for a stock’s price. They do not understand supply and demand. A stock that is $300, $400, or $500 based on earnings per share, could still be fundamentally cheaper than a $10 junk stock that has billions of shares floating around with tiny earnings per share.
Sounds great, but where do we find these beasts?
Many times, they are right under our noses. What about your new favorite energy drink, your favorite store at the mall, a new drug you are using with amazing results, your favorite restaurant, or the fact that you love everything Apple? Choosing a company you love is just the start of the process. Next you have to find out if it is a growth story, or if it is in decline. A stock’s price can only increase in conjunction with earnings growth or future earnings expectations. An old, giant, low growth big cap stock can only grow through innovation and not size.
“Buy the best, forget the rest.”
How to Find a Monster Stock
- Review the IBD 50 each week for the best stocks in the market. The list is in the Monday edition of Investor’s Business Daily and available by subscription to www.Investors.com
- Look for higher priced stocks, with a minimum above $20. The best are often times the most expensive before splitting: $200, $300, $500 and up.
- Earnings should be greater than 25% for the past few quarters, and growing steadily.
- Sales should be close to equal with earnings and growing at +25%.
- The best stocks should have a return on equity between 25% and 50%.
- Look for growing industries where profits are expanding.
- Monster stocks are the #1 company in its industry. Buy the best, forget the rest.
- The stock should trade at least 500,000 shares a day, preferably a million.
- Monster stocks are currently loved by mutual funds, and there are holders and buyers.
- Monster stocks are special. They have a new product, service, innovation, or business model that is hard to copy or compete with.
- Monster stocks have their best price action in bull markets with their key moving averages price supports at the 5 day ema or 10 day sma.
- Even in bear markets or corrections, monster stocks bounce at the 50 day or 200 day sma creating a high probability entry point.
- The majority of monster stocks have high volume options traded on them, creating liquidity that can be traded with little bid/ask spreads.
- The majority of monster stocks are household names or most people know about their product.
- Find and trade the very best monster stocks. You only need 5 to watch and trade.
Recommended reading: Monster stocks book by John Boik.
(Never risk more than 1% of your total trading capital on any one trade, always plan your position sizing carefully and have a planned stop loss along with a trailing stop to lock in profits.)
The original post is written by Steve for newtraderu.com and can be found here.