Page 1087 - How to Make Money in Stocks Trilogy

Buying Checklist 73

■ ✔ Relative Strength Rating of 80 or higher

You’re not looking for just good stocks. You’re looking for the best ones—
those that are clearly outperforming the rest of the pack. The Relative
Strength (RS) Rating is yet one more way to separate the cream from the
rest of the crop.
The RS Rating tracks a stock’s share price performance over the last 52
weeks and compares it to that of the S&P 500, which is often used as a bell-
wether for the general market. To see how that compares to every other
stock, a rating from 1 (worst) to 99 (best) is given.
An RS Rating of 80 means the stock’s share price performance is outpac-
ing 80% of all other stocks.

Look for a Strong Relative Strength and EPS Rating
The RS Rating focuses on the strength of the stock as valued by the market
(i.e., the “technicals”). The EPS Rating gauges the strength of the company
(i.e., the “fundamentals”).
Think of it as the yin and yang of investing: By insisting that your stock has
strong ratings for both, you’re looking at the whole picture, not just half of it.
As Bill O’Neil has said, if you look at the stocks that have made enormous
runs over the last several decades, “The vast majority of superior stocks
will rank 80 or higher on both the EPS and the RS ratings before
their major moves.” And 80 is the minimum. The top stocks often rate
much higher for both EPS and RS.

85-85: A Profitable Combination
®
The IBD 85-85 Index tracks the performance of stocks that score 85 or
higher for both the EPS and RS Ratings. These are the stocks included in
IBD’s Your Weekly Review.
While hindsight is 20-20, you could say foresight is 85-85: From inception
on November 13, 2000, through February 5, 2013, the IBD 85-85 Index
rose 275% compared to the S&P 500’s 12% gain. While that does not mean
every stock with 85 or higher EPS and RS ratings will make a big run, it does
show how this powerful combination of solid earnings growth and relative
price strength can lead to substantial profits—and why you want to focus
your research on stocks with similar ratings.