Page 478 - How to Make Money in Stocks Trilogy

348 INVESTING LIKE A PROFESSIONAL

When a stock receives an A or B rating in Investor’s Business Daily, it
means that the stock is being bought on balance. However, this does not
guarantee that it will go up. The buying activity is being picked up, but
maybe the funds are buying into a questionable position, and what they are
doing could be wrong. In some cases, stocks rated as D should be avoided.
I would not buy a stock with an E rating. Later, however, if and when the
market improves, it could change. C-rated stocks may be OK.
You needn’t feel you’ve missed out on the trading action if you spot heavy
buying or selling. Many funds take weeks or even months to complete their
positions in a stock or rid themselves of those positions, which gives you
time to capitalize on that action. However, be sure to check a daily or weekly
stock chart to see if the stock is in the early, beginning stage of a move or if
it is overextended in price and too risky or late to more safely buy.
Composite Rating: An Overview
The rating in the first column of the IBD stock tables is the SmartSelect
Composite Rating, which combines all four SmartSelect ratings into a sum-
mary rating for quick review of overall performance. Look at the column
labeled 5 (page 342). The SmartSelect Composite Rating formula is simple:
• Because of the impact of earnings and previous price performance on
stock price, double weighting is given to both the Earnings per Share and
the Relative Price Strength ratings. This weighting may change some-
what in the future as we continue to improve our ratings. Normal weight
is given to the Industry Group Relative Strength, SMR, and Accumula-
tion/Distribution ratings.
• The percent off the stock’s 52-week high is also used in the SmartSelect
Composite Rating.
• The results are then compared to the entire database, and a 1 to 99 rating
(with 99 being best) summarizes the five most predictive measurements
we’ve just discussed.
For some stocks, the SmartSelect Composite Rating may be higher than
the four individual SmartSelect ratings. This is because the formula is
weighted and includes the stock’s percent off its 52-week high.
When you review the stock tables, this simple rating gives you an enor-
mous time-saving edge. Work your way down the columns and look for
SmartSelect Composite Ratings of 80 or better to spot the potential strong
opportunities when you are in an uptrending general market.
The next step is to review all four individual SmartSelect ratings: EPS, RS,
SMR and Accumulation/Distribution. With a quick scan of the stock tables,
you’re now that much closer to being sure you are selecting better stocks.