How to Spot A Winner Everyone who invests in the market wants to find the big winner. The problem is they are super hard to spot, much less know ahead of time to hold it for the big run versus trade out of it for a smaller profit and move on. Too many people think EVERY trade is going to be the big winner and just hold everything, ignoring smaller profits that should be taken. The more volatile the market is, the more people should consider taking the smaller profits. After all, six 2 point winners is the same as one 12 point winner. With not every trade going to work out as a profit, you need some of these scalper plays to mitigate the inevitable losses that will happen over time. The key is to find a big winner now and again to really supercharge your returns.
Stocks that have a potential to be a big winner are not really found by doing fundamental research. Do you actually believe that you are more astute than the hedge funds and mutual funds who travel all over the world and pay analysts millions of dollars to find them big winners? Probably not. Now I am talking about finding big winners in real companies, not penny stocks. So a little research is ok, but don't expect to outsmart these big guys. Besides, these big guys are the only ones that can make a stock move. What is the point of buying something that is so under the radar that no one cares. Remember, half of investing, if not more, is efficient use of capital. If you tie up all your money in under the radar plays that might take years and years before they do anything, you are giving up return potential of other things in the meantime. So even if they do double in price, you are still net behind because you earned nothing for 4 years basically.
Most big moves happen in a short time frame, 6 months or so for the majority of a run. Sometimes it can last a year or more, but I am talking about a fast, sharp rally where funds are stepping all over themselves to get in. That is why you see stocks that have meandered in a 5 point range for years all a sudden shoot up 250% in a matter of months. Why? The funds decided its super undervalued and all want in like a herd of cattle. What we want to do is to get in on the first 1/3 of this move, not tie up our money for years WAITING for the move or trying to anticipate the move. Most of these types move so much higher that you have no fear of "missing" it by waiting for it to start.
Here are a 10 rules to use that can signal a big move is about to happen and what to do when one starts:
1. Look for an out of the ordinary earnings report. Meaning something that is at least 30% above consensus or more. The main thing here is revenues HAVE to be above estimates also by a decent amount. A third thing is you want profit margins to expand - not critical but it does help. This is where it pays to do a bit of digging. Under no circumstances do you want anything to do with a stock if the earnings/revenue are a result of a 1 time gain, no matter where it comes from. This company also should have had 2 quarters prior where earnings were o.k. (in line basically, but no big deal). Earnings is a catalyst to act.
2. Stock sector overall is in expansion mode. Expansion means the market for goods and services in this sector is in growth mode, not contraction mode. International expansion is best, but sometimes U.S. only is totally fine if its smaller niche sector. Mutual funds usually will not buy into companies in a contracting sector. Sometimes as players leave, the ones that are left will start to grow earnings nicely by grabbing market share, however the pie they are grabbing is shrinking, so longer term earnings will shrink as there is less of a market to capitalize on. These types might move up, but its easier to just find the bigger potential rather than gamble on this type.
3. Look for an out of the ordinary gain day versus normal. By normal I mean go on a price chart for the last 3 months, and look for an average move up, open to close (approximate only). What we don't want is a large gap for the gain - we want gain as open to close only. By gap, I mean a stock closes at 40 and the next day it opens at 44, creating at 10% gap. So if a stock on an average decent gain day goes up 1 point, and we see that today (or a few days ago) it ran up 3 points, that should go on the radar to watch. We want the stock to TRADE up, because that shows buyers are super aggressive to own stock. The best ones here are ones that do this when the market is pretty much flat or lower on the day of the rally. This again shows out performance.
4. The stock recovers from sell off attempts (meaning it gets knocked down but recovers at least 3/4 of the loss either that day or the next day. In addition look for big down days on the market in the last 2 weeks or so. Big winners do not usually get sold much. For example, the Dow Jones 30 is down 130 points for the day and the stock is up 20c type thing. The more repeated a pattern is like this, the better. This shows accumulation by funds who have resting bids to buy stock.
5. On days where it has big gains, in the next 3 days it holds or pushes more. Usually you do not want to see it give up more than about 1/3 of that gain at the close of each day maximum. So if the stock was at 40 and rallies up to 43 in 1 day, in general over the next 3 days you want it to always close over 42, holding most of the gains. This shows funds are not interested in selling into the big gain.
Ideally you want the market to have a decent sell day in one of these 3 days so you can see if the big guys are still trying to accumulate the stock or not.
6. If the big earnings beat is the first that has occurred in a long time, often times the stock will not go really big because it might be viewed as a one time event and might not repeat. If the company comes around in 3 months time and does a similar feat, it is almost assured that the funds will take notice and start accumulating more aggressively. This kind of depends on the sector/industry and overall macro events whether a one time beat is enough to start launching it higher. This also depends on how well known the company is. Smaller, unknown companies will take a longer time to react to earnings as funds must do some due diligence research before deciding to act or not.
7. Watch the daily chart on your issue, and put a 13 period simple moving average on the chart. Stocks that get into a nice uptrend usually will almost always close above the 13 period average. When they do dip below, they try to quickly push higher and re-establish a position above the 13 period average. In addition, put up a 200 day average. Most big winner types will not be below the 200 period average for long periods of time prior to starting a move up. Sure there are exceptions, but in general stocks that have been in a really sharp downtrend will have a much harder time turning around and holding gains, as there will be sellers all the way up. Just because it is below the 200 average and its a candidate based on other things does not mean its out as an idea. What you do not want is a sharply down sloping 200 day average - those I would ignore and find a better candidate.
8. Once you have found a candidate and are in for the big gain potential, remember to still use money management and common sense. If the stock should be moving up but instead all a sudden starts showing a pattern of doing the opposite, odds are something is off. I am not talking about a few days down, I am talking about repeated underperformance vs the market and other stocks in its group. If you truly have a potential big winner, this is not how they act. Remember, if you are worried about a position, the best case is to always just sell it. Its just a stock, and if you think that was a mistake to get out, you can always re-enter the name again.
9. If you catch a good one, any time you have a 100% gain ALWAYS sell half your position or put a stop loss at the 100% gain level and then trail it up on this remaining half. Why? Well if you have a 100% gain and sell half, you have all of your original risk money out. No no matter what, even if the stock goes to 0, you cannot lose ever. Once you have sold half, look to sell another 1/4 at 150-200% gain from entry. This will lock in a decent profit. Let the rest ride, as you never know when you might get a 500-1000% winner. These are rare but do happen, but also take some time to materialize (9-18+ months usually). Just remember to not let greed cloud your judgment.
10. Stocks are an investment to make money, not get attached to. Odds are if a gain is making you feel excited and you see yourself thinking what if this runs another 50% and figuring out how much money you are going to make - its time to sell. Usually this is a result of large gains in a short period of time and others are thinking the same thing - the excitement usually peaks and the stock takes profits. You should anticipate this happening. In addition, if the stock has dropped back some and you are fearful or anxious about whether you should sell, generally the answer is yes. There are plenty of other ideas, get out and move on.
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Contributor's Note
I am an expert in trading and the stock market with over 15 years experience. Everyone should consult a qualified investment professional prior to engaging in any type of activity in the stock market, as each persons risk tolerance and goals are different and unique.
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