Stocks To Buy: Where To Look

In today’s article I wanted to talk about where to find stocks to buy. In my last article, I talked about the myth of buying and holding stocks for the long term and how even Wall Street doesn’t even follow their own advice. It’s because of this that myself and others, maybe you as well, have decided to take a more active role in their day to day investment activities. After all, any idiot can lose half of our money for us, why not just take over and make our own decisions. I personally think I can do as good as they did.

My first step then in learning how to buy stocks is where to look. While there are many stock exchanges around the world, the two you really need to know are the New York Stock Exchange and the NASDAQ. It’s on these exchanges that people buy and sell stock to their stock to each other. In order to trade shares on the exchange, you’ll need to work through a brokerage account, like Etrade, Optionsxpress, TDAmeritrade or the many other online brokers currently available.

It’s at this point that many people start going through the litany of how to choose an online broker and open a brokerage account. I am not going to do that because I have a different plan in store for you. For the most part, I am going to assume that you are a rookie investor and you are just learning the ropes. If that’s the case, you can feel free to open an account and hack away. I’m going to suggest that you don’t.

The first thing that I am going to suggest is that you develop a system first before you put out any money. So, what we are going to do here, is lay the groundwork. Once you have your system set up and ready to go, then we’ll talk more about getting a brokerage account.

You see, finding the best stocks to buy is going to take a plan. You are going to need to know exactly what each step in the process is. This is going to involve four steps:

1. Developing your investment philosophy

2. A way to identify the stocks you are looking for – a stock screener

3. A place to practice your craft – a stock simulator

4. Developing your own investing checklist – a stock system

The first stop in my journey to learn more about stocks was figuring out what kind of investor suited my personality? What types of investment styles are there anyway? In my opinion there are two basic types here. The first one is a value investor. A value investor tries to find stocks that are undervalued or on sale. Typically, they are a good stock, there price is just lower than it should be.

The second style and the one that we will focus on, is the growth investor. The most famous growth investor is William O’Neil. He is also author of the book How To Make Money In Stocks and the Investors Business Daily.

There are other methods. Some try and get you to find good penny stocks to buy. Others try and get you to do currency trading, options. There are all sorts of ways to do go about it. The best method for a beginner, is to be a long investor – or one that buys shares of a stock and then sells them at a later time.

That’s what we are going to focus on here and more specifically being a growth investor. What we are going to do is look for the stocks that are most likely to grow based on strong earnings and sales. That is the heart of O’Neil’s system. The key is making it your own. You must read and re-read his book until you are an expert of his system until it becomes yours. If his investment style doesn’t suit you, then you’ll want to look into some of the other icons in the history of the stock market such as – Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, or Bill Miller.

This is important and is my rule number two in investing: Pick an investing style and stick to it, don’t flip flop around.

The next step then is figuring out good stocks to buy. There are so many stocks in the marketplace. It’s easy to become overwhelmed. You need a method to reduce the number of stocks you need to review. Look at it like a stock inbox that needs to be processed. Stocks go in and they are reviewed. It’s not necessary to review every stock because many can be weeded out. There are many criteria that can be used to reduce the scope of the hunt for winning stocks. I’ll explore the screening method I’ve adopted in an article in the near future.

Once you’ve figured out step one and two, the next step is to start buying and selling stocks in a simulator to get the hang of the mechanics behind the decisions you’ll need to make and the when you’ll need to make them. While a stock simulator is not “real-money”, it can provide a strong framework on how to break down the steps without wasting money.

Let me move on to my last point and then, I’ll give you an example or two.

After you’ve set up a place to paper trade, you’ll want to start writing down the steps you take and put them in the form of a checklist. You’ll need checklist like, when to buy a stock and when to sell a stock. What steps do you take to follow the market each day. Getting a system in place like that does two things. First, it puts you in a position of doing the exact steps over and over and you won’t forget anything and second, helps you fine tune your strategy and increase the speed of your decision making.

Many people think that paper trading or using a stock simulator is not beneficial. But this is something you have to do. I recommend that you go through 100 trades in a simulator before you start investing your own cash. You’ll be glad that you did.

Some of the best professionals in the world use simulators and practice. Commercial pilots use simulators to create scenarios that put their decision making to the test. They are trained to pull out their checklist to see what to do in some of the most precarious situations. People live and die based on the split second decisions they have to make.

Putting the IBD 200 Strategy to the Test

OK. So let’s get serious about this now that I’ve babbled on about nothing in particular. Let’s review Pradeep’s steps here and start seeing where it takes us.

Step one is to buy the Investor’s Business Daily on Thursday to get a list of the IBD Top 200 Composite Stocks. I have a subscription to the IBD which includes investors.com but am going to make use of one of their services called eTables to compile my information since I am going to be using it every day for this challenge.

The Top 200 Composite Stocks are the ones that have a composite rating (an IBD proprietary rating) of 96 or better. If you happen to use eTables this will sometimes give you just over 200 stocks but that’s ok.

So, I’ve got the 200 stocks that this screen produces. One thing I like about the possibility of using one screen is that I can keep my focus simple. What the screen also does is keep what I’ve got to look at each week is a few hundred stocks and not thousands.

Step two in his strategy was to put these stocks in watch list. While he uses Telechart or something like that, I just used the My Stocks Lists feature on investors.com. You can use it to review these stocks and don’t need anything extra. I copied the stock symbols into this stock list. Just an FYI that there are only 50 slots, so what I did was take 50 at a time and search through and then copy the next 50 in.

After that, the next step was to see which stocks increased in price by more than 2% that day. Also, he is looking for stocks that traded on higher volume than the previous day. (I took the liberty to put a threshold of the amount of volume I wanted to see it increase and that was a 100% increase in volume.) He also wanted to see stocks that had at least 100,000 shares traded daily.

I also took the option of adding some additional CANSLIM requirements to reduce the number of stocks further. I wanted to be sure that EPS Rating and RS Rating were over 80 and the SMR, the Accumulation/Distribution and the Industry Group Rating were either A or B.

Finally, I decided that I only wanted stocks driven by earnings and sales that were over a 25% increase over the last quarter’s results.

It still amazes me that stocks don’t have to have great fundamentals to go up in price. So just because we screen for stocks they don’t necessarily go up.

Here are the results from the first day.

Stocks up 2% in price, 100% in volume and over 100,000 in volume:

AMCF, CHBT, LPSN, SXCI, BRKR, CISG, CFSG, LLEN, GIL, CSR, DEER, KIRK, NUTR, HSNI, HTRN, LINTA, ISLN, SPU

Stocks that pass the Smart Select Ratings:

GIL , LPSN, SXCI, BRKR, CHBT, NUTR , CSR, KIRK

Stocks that have greater than a 25% increase in quarterly earnings and sales:

CHBT, LPSN, SXCI

In my next article, I’ll talk more about the screenings above under my stock tips.