How does The Momentum Investor pick the winning shares?
Experienced punters at the racecourse obviously understand the odds of winning and losing. They're far more likely to back favourites than rank outsiders because of the simple fact that favourites have a much better chance of coming in ahead of the field.
Odd then, that such sound common sense is largely abandoned when it comes to the stockmarket.
Research by William O'Neill, a fund manager who's been running private investor seminars for the past 30 years, reveals that over 98% of those attending his seminars are inclined to buy stocks when they hit all-time lows in the mistaken belief that they must be ready to surge upwards. In most instances, this is simply not the case.
O'Neill's studies show that if investors had instead sunk their funds into stocks that were hitting new highs, they would have made much greater returns over the same period. In short, strong stocks are far more likely to climb higher, while weaker stocks are more likely to fall lower still.
Readers of The Momentum Investor won't have to fret over selecting the gems from the duds. We look at the best stocks to buy and describe in detail their merits.
The Momentum Investor looks at when to buy...
All that concerns The Momentum Investor is they meet the criteria necessary to be considered a good momentum investment. First and foremost, we need to discover if the share has relative strength i.e. is the share already performing better than the overall stockmarket in a specified timeframe?
Relative strength is the single most reliable indicator of likely future growth. Usually, therefore, this filter means we concentrate on 'leading' sectors (the top performing industries over the last 6 months or one of the sectors with the highest percentage of stocks making new highs).
Once we've pinpointed stocks with strong price charts and strong sectors, we'll check the earnings-momentum side of the equation. Fast growth is the name of the game, so there must be broker forecasts and 15% year-over-year EPS growth is usually about the minimum to qualify a momentum stock. We don't just look at the annual growth rates but also the quarterly ones.
The final sieve we occasionally apply is to look at the trading volume to see if this has been rising recently.
If these three criteria are met, we'll visit the companies, talk to their directors, review annual reports and analyse broker research. We'll crunch numbers, run projections, and talk to fellow professionals via our well-established market contacts.
If after that exhaustive process we're still satisfied that the stock is going to be a winner, then and only then will we include coverage of the shares in The Momentum Investor. To sum it up, we are looking for the strongest stocks in the market, in terms of both earnings and the technical picture (momentum investing). You can view a list of the companies we've recently covered.
...And also when to sell
Equally important to the investment decision is knowing when to sell. Frequently, that time is when the company has reached a natural break in its growth cycle and the share price has topped. Usually, the onset of share price weakness has begun to manifest itself through early signs of relative weakness, which allows you to take profits before the shares start to disappoint. We like to cut losers before they become too damaging.
Whatever the reasons, you'll want to know when to get out of the stock. Rest assured, The Momentum Investor tells you just that and operates with continuous reviews and a stoploss system.