Question/Comment:
Thanks, Tate, for being so responsive. I also appreciate the feedback you give me to help continue the never-ending learning process. It is helpful to know that you have a watch list from which you take stocks for the database. Would you be willing to share the criteria for making the cut to your database? One of my ongoing questions is how to make this transition from my Scratch Pad to my Watch List. What I do now is look at the Breakout List and the 50-Day list and look for high scoring stocks from each list. These go into my Scratch Pad. After the market closes, I check out the stocks in my SP to see if they are close to a buy. These go into my Watch List for the next day with the appropriate alerts set.
My Response:
You’re very welcome. The criteria I use is quite simple for the most part… im looking for sales and earnings growth first and foremost (usually above 20% quarter over quarter for both for at least 2 consecutive quarters). A big part of my decision also goes into future estimates (for ’06 and ’07). So if a stock has never been profitable but rapidly moving towards profitability with future estimates predicting big growth I’ll add it. This is the power of using the human eyeball for adding stocks the database… this kind of stock would most likely be poorly rated by most computer generated databases. I believe I catch many stocks that are off the radar.. but admittedly miss them at times too. You will begin to see me catch more and more of these BEFORE the breakout as my tracking system improves and I add research help. Also very important is ROE and profit margins – companies that are seeing accelerating growth in these areas will often be your big winners.
Thats it for the most part.. sales/earnings growth, margins, ROE.. of course the overall ranking will take in other factors too, but if the company isn’t growing substantially it will never make it to the database. It really is a database of the worlds fastest growing companies.
You have the process down.. stick to researching the stocks in the first one to 2 pages of the breakout watch, hot stocks and 50 day screens. Pick the best, put into a "hot list" or scratch pad as you call it and set alerts if appropriate. Check your charts after the market each day and create another watch list for each morning. So when you get up you might have 4 or 5 stocks that you will watch closely for entry. Thats it really. Gosh this game is easy right ?! : )
As a reminder, here is how I calculate the fundamental score of each stock (this is also listed in the Breakout Tracker help file) Typically stocks scoring 20 or below would never be included in the database unless the technicals are outstanding:
FUNDAMENTAL: based on 30 points
- 15 points (Earnings/Sales Growth): I look at consistency, history, amount of growth, acceleration and future growth estimates (future growth is very important something I noticed IBD wasn’t factoring in to their ranking system). I give it more weight in my system.
- 10 points (Profit Margins/ROE): I look at relation to industry average and if it’s rising or declining. (ie. if both margins & ROE are well above the industry average and have been rising the last couple years, the stock will recieve a score of 10)
- 5 points (Management Ownership/Institutional Positions): If management owns a large portion (say 20% or more) and institutions are initiating many new positions, the stock receives a score of 5.