Page 475 - How to Make Money in Stocks Trilogy

How I Use IBD to Find Potential Winning Stocks 345

Of course, there’s no guarantee that a company’s terrific past or current
record won’t suddenly turn sour in the future. That’s why you must always
use a loss-cutting strategy, such as the sell rules discussed in Chapters 10
and 11. It’s also prudent and essential to check the stock’s daily or weekly
chart to see if it’s in a proper base or if it’s extended in price too far above its
most recent area of consolidation. (For a review of common chart patterns
to watch for, refer back to Chapter 2.)
As previously discussed, models of the best-performing companies over
the last century showed that earnings growth for the last three years and
percent increase in earnings per share for the latest two or three quarters
were the two most common fundamental characteristics.
Having hard data like these available to you naturally begs the question,
why would you ever invest your hard-earned dollars in a sluggish stock that
sports a 30 EPS rating or a 40 RS rating when there are literally thousands
of companies with higher ratings, including hundreds with superlative
numbers?
It’s not that companies with poor ratings can’t perform. It’s just that a
greater percentage of them turn out to be disappointments. Even when a
low-rated company has a decent price move, you’ll find that the better-rated
stocks in the same industry have probably done much better.
In a way, the combination of the EPS rating and the RS rating is similar
to A. C. Nielsen’s viewer ratings for TV shows. Who wants to continue spon-
soring a TV show that gets poor ratings?
Now, pretend for a minute you’re the manager of the New York Yankees.
It’s off-season, and you’re going to pick new players for next year’s team.
Would you trade for, recruit, or sign only .200 hitters? Or would you select
as many .300 hitters as possible? The .300 hitters cost you more money;
their P/Es are higher, and they sell nearer to their price high. It’s true the
.200 hitters are available at a cheaper price, but how many games will you
win with nine players in your lineup averaging .200? When the bases are
loaded in the ninth inning and the score is tied, who would you rather see
step up to the plate: a .200 hitter or a .300 hitter? How often does an estab-
lished .200 hitter blossom into a batting champion?
Selecting and managing a portfolio of stocks is no different from baseball
when it comes to performance. To win consistently and finish first in your
division, you need a roster of the very best players available—those with
proven records of excellence. You won’t do as well in your investing if you
insist on buying poorer performers and “cheaper stocks,” or those with
some positive features but three or four little-noticed defects, in the hope of
“discovering” a winner. Every little detail separates winners from losers.
Hope never works in the market unless you start with a high-quality stock