My Stategy - Part II

As I have mentioned, I like to keep things simple. That's why I like blogs like Stockbee, Alpha Trends and Stockcoach as I have mentioned here. They all keep things simple but achieve excellent results.

Now back to my strategy,

I can screen for a bunch of stocks that are going up, say 20-30% in a quarter, 100-200-300% in a year, making 52 week highs, all time highs. These are mostly small or mid-cap low float stocks. These are the momentum stocks, trending upwards, I would like to buy them in the hope that they will keep going further up, that there are even greater fools than me who are ready to pay more than me! But how do I know tomorrow these stocks will not reverse and nose dive maybe 20-50%. I don't! I have no idea! Maybe I was the greatest fool who bought right at the peak and is left holding the bag.

But what if someone told me a subset of these stocks have historically proven record that they have a higher probability of keeping on going up than the rest, they share an unique characteristics - exploding earnings growth (and also for the ones that are followed by analysts, their ability to show earnings surprises quarter after quarter).

That brings us to the title of this blog - earnings/eps growth + momentum

So, I have reduced the number of candidates that I have to deal with and in the process also ensured that my candidates have much higher probability to keep on going up. Most of the past huge winners had these characteristics - NTRI, TASR, HANS, FRPT, CROX etc

Two issues:
1. Am I choosing such great stocks that they can never reverse and go down 50% as soon as I buy them, on the contrary they can,these are low float, high beta volatile stocks, any bad news, negative earnings surprise will butcher them, downward momentum will be much greater. So, what to do? Use strict stops, be very disciplined in that area of trading. Not all will go up, some will hit the stops - but on the long run those losses are minimal compared to the winners. As William O'Neil says, it is like insurance.
2. Won't I miss some huge winners that are not in my subset of stocks. You bet! Biotech companies getting FDA approvals, stocks moving on hope, anticipation, big news etc. I will miss them, and lose some great opportunities but tell me, who is able to catch all the great opportunities anyway. I might actually trade some, but they will be outside my core trading strategy. (Another way of looking at it is, if it is such a great news, that should lead to earnings momentum in the future, then they will become part of my universe of potential candidates :) )

As I am a great fan of Stockbee, maybe I should use his analogy - my strategy is a cross of his earnings momentum + double trouble strategies. Even if I get in a bit late, (as I am waiting for trend to be fully established) I am happy if I can catch the major earnings momentum related price appreciation.

In another post, I will give more sources and books that have helped me derive my strategy over the years.

Details on when to buy and when to sell in later posts.

Cheers!
Lazy