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June 30, 2012 - Review This Before Your Next Trade - By Zacks Investment Research
By: Kevin Matras
Whether you're bullish on the market or bearish; whether you believe the bottom is in, or not; it's now more important than ever to make sure you're doing everything you can to get the most out of your trades.
Regardless of which camp you put yourself in, there will be distinct winners and losers as we move forward. So before you make your next trade, please read this first to learn how to put the probabilities of success on your side.
Knowledge Is Power
We've all heard the old adage: knowledge is power.
It's a great saying because it's true.
And that saying couldn't be truer than when it comes to investing.
Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that - 'had you known that, you never would have gotten into it in the first place'.
I'm not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.
I'm talking about things that you could have known about or SHOULD have known about before you got in.
Did You Know? . . .
• Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?
• Did you also know that often times a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?
• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?
• And did you also know that the top 10% of industries outperformed the most?
Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.
That's what is meant by knowledge is power. Knowable things that you need to know.
That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.
But more stocks go up in the top industries, and more stocks go down in the bottom industries.
And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making any money?
Did You Know? . . .
• Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that the companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
Did You Know? . . .
• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 x as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they're for you or against you.
• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than those levels? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn't mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.
• Do you know what an R-Squared Growth rate is? What if you did? We have a screen that utilizes this seldom looked at item that has handily beaten the market over the last 10 years and was even up 14.2% in 2008's bear market, while the S&P 500 was down -37%. That screen is aptly called the R-Squared EPS Growth screen.
Do you know how well your stock picking strategies have performed?
Whether good or bad - do you know why?
Do you know if your favorite item to look for is helping you or hurting you?
Get the answers to these questions and more. And discover what works and what doesn't before your next trade. Learn how to take full advantage of today's volatile market.
I discovered all the above with the Research Wizard (including a strategy that has averaged gains of +67.4% per year). And you can too. If you have a question, plug it in and get your answer. Find winning strategies. Or create your own. And test virtually any idea you can think of. Now you can.
Thanks and good trading, Kevin
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He also personally developed many of the built-in market-beating strategies that come with the Research Wizard.