Page 1071 - How to Make Money in Stocks Trilogy

Buying Checklist 57

SMR Ratings of Leaders in Q1 2012 Uptrend
These stocks broke out during a 4-month uptrend that began December 20, 2011.
Ratings are from the day of each stock’s breakout.

Company SMR Rating at Start of Run Subsequent % Gain

InvenSense A 87% in 11 weeks
Michael Kors A 84% in 8 weeks
Monster Beverage A 60% in 22 weeks
Sturm Ruger A 58% in 18 weeks
Tractor Supply A 34% in 15 weeks
■ ✔ Sales growth 25% or higher in most recent quarter

If sales growth is less than 25%, it should at least be accelerating over the
last three quarters.
For example, look at Netflix’s sales growth just before it rocketed 683%
from March 2009 to July 2011. It was under the 25% growth you prefer but
was accelerating.

Netflix’s Accelerating Sales Growth Before Launching 683% Run
Quarter Sales Growth
Jun-08 11%
Sep-08 16%
Dec-08 19%

Ideally, you’d see three quarters of acceleration in both sales and earnings.

■ ✔ Return on equity (ROE) of 17% or higher

Return on Equity separates the best-run companies from the also-rans.
I have to say, in my countless conversations with investors over the years,
return on equity is one of the most overlooked factors. (IBD calculates ROE
by dividing net income by average shareholder equity over the last two
years.) But it’s a critical clue to look for when picking a stock: A strong
return on equity identifies the best-run companies making the most efficient
use of their capital. Ultimately, that leads to higher profitability and earnings
growth.