Checklist for Picking Winning Stocks

Zacks

I'm regularly asked how I go about picking winning stocks, especially now with the market's recent pullback.

The short answer is: I simply focus on what works.

Since there are over 10,000 stocks out there, you need a way to find the good ones.

And by focusing on what works vs. guesswork (or worse), you'll not only be able to pick winning stocks, but you'll be able to do so consistently. And that's really the key to success; having a repeatable way to find profitable stocks, again and again and again.

I run a lot of individual strategies. But I will often go thru a checklist on all of my candidates before I get in.

Checklist

  • Almost every screen I run nowadays (if I'm looking for long candidates) begins with a Zacks Rank of less than or equal to 3. Zacks #1 Ranks and Zacks #2 Ranks are Strong Buys and Buys, respectively, and have consistently outperformed the market over the last 23 years. The Zacks #3 Ranks are market performs, but you'll find plenty of great candidates in this position. And when the market is in a confirmed uptrend, this is a fine group to pick from. (Zacks #4 Ranks and Zacks #5 Ranks, i.e., Sells and Strong Sells, are excluded of course.)

  • I also look to see if a stock is in the top 50% of industries, based on either the average Zacks Rank or the percentage of stocks trading within 10% of their 52-week highs. Since half of a stock's price movement can be attributed to the group that it's in, this put the odds of success in my favor.

  • Earnings Estimate Revisions: While the Zacks Rank takes care of much of this, I still look at these items separately as well. And I like to see the estimates rising (or at least not falling) for Q1, Q2, F1 and F2, over the last 1, 4 and 12 weeks.

  • Positive EPS and Sales surprises: Since a company that has surprised in the past has a tendency to surprise again in the future, these are two good measures that a company is on the right track.

  • Positive Growth Rates: Nothing extreme, but I want the current year's growth rate to be positive and I want next year's to be even better. As a stock picker, ask yourself: Do I want my stocks to have increasing growth or decreasing growth? Since it's my right to choose, I'd prefer my stocks to have increasing growth.

  • Valuations: I like my valuations in ranges that have proven to be the most optimal for producing profitable results. My favorite is the Price to Sales ratio being less than or equal to 1. Less than or equal to 2 also produces market beating results. And often I'll compare it to its industry as well (less than or equal to the median for its respective industry). But I'll typically avoid Price to Sales ratios above 4, as, historically, stocks above that number usually underperform or go down.

    Return on Equity: I like to see the Return on Equity or ROE above the median for its industry, and preferably increasing from the previous year or 5 year average. This shows good management and efficiencies.

  • Additionally, as an extra measure, I'd like to see margins increasing as well. This shows more profits are being made for each dollar of sales the company makes.

I'll also look at the charts:

  • I'd like to see the weekly price and volume increasing. A rising price accompanied by rising volume is a great sign of strength. And it could show institutional buying. These are great indicators of increased demand, which usually means higher price.

  • Moving Averages: Ideally, I want my stocks trading above the 50-day and 200-day moving average. Being above the 10- and 20-day is a bonus. But being above the long-term and medium-term moving averages, i.e., the 50- and 200-day, is a bullish sign.

  • Chart pattern: Is the chart pattern bullish or bearish or both the daily and weekly chart? I will not get into a stock with a bearish chart pattern. If it's bullish, yes. If it's neutral, ok -- assuming it's hitting on the other items above. If it is bearish, it's a no go.

By sticking with this basic set of proven criteria, I know I have a high probability of success in picking winning stocks. And if it doesn't work out, I don't have to panic and wonder if my system works or scurry to change these up. That's the kiss of death.

Picking winning stocks consistently comes down to a set of rules. And these are my basic building blocks. I look at plenty of others as well. But this is my basic checklist.

And here are five stocks that passed the checklist this week:

CLW - Clearwater Paper Corp.
CAG - ConAgra Foods, Inc.
FMFC - First M&F Corp.
FAF - First American Financial corp.
JRN - Journal Communications Inc.

If you consistently do what works over and over again, you too will find yourself picking winning stocks, beating the market and accomplishing your trading goals.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: http://www.zacks.com/performance.

FIRST AMER FINL (FAF): Free Stock Analysis Report

FIRST M & F CRP (FMFC): Free Stock Analysis Report

JOURNAL COMM-A (JRN): Free Stock Analysis Report

CONAGRA FOODS (CAG): Free Stock Analysis Report

CLEARWATER PAPR (CLW): Free Stock Analysis Report

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