Ex-Engineer Mike Scott Seeks Big Stock Gap-Ups

Investor's Business Daily

Mike Scott bounced back from the Californian defense industry slump in the 1990s.

How? Using IBD, he became a full-time investor and learned to spot great stocks with radarlike accuracy.

He's picked and profited from some nice winners along the way, including Green Mountain Coffee Roasters (GMCR) during its more-than-3,300% rise from a November 2006 to its peak at 115.98 in September 2011.

The Los Angeles resident also excels at teaching the system at a monthly IBD Meetup group in Thousand Oaks, Calif.

"Most beginning traders tend to overtrade; I did too," Scott told IBD. "I got rid of the five-minute intraday charts.

He keeps his daily stock charts a small size on his computer screen and his weekly charts big.

Why? "You can trade more calmly," Scott said.

The former nuclear submarine engineer for the U.S. Navy launched a consulting business after a successful stint at what was then called Rockwell International. But the business "slowly dried up as the industry left California," he told IBD.

Scott looked set to go back to work for a company, then remembered about a book he received years earlier — the hardcover first edition of IBD founder William O'Neil's ".

With the help of Lee Tanner, a friend and fellow colleague in the Navy and at Rockwell, Scott became immersed in the IBD method of picking stocks and following the market's trend.

Scott — who is featured in the recent book "How to Make Money in Stocks Success Stories: New and Advanced Investors Share Their Winning Secrets" — became an IBD subscriber sometime between late 2000 and 2001. Then he attended a full-day IBD workshop in Los Angeles.

After that, he decided to invest seriously in his education. He's attended every level of IBD workshop since, from the introductory one to Market School.

Through these workshops, and by chatting with IBD founder Bill O'Neil, Scott was struck by the fact "that he always used weekly charts to make his points.

Scott also learned not to fear buying top-rated stocks that gap up right at the breakout.

Sometimes, a powerful market leader will gap up in price and automatically surge more than 5% or 10% past the proper base entry on good news.

In a poor market, such price gaps tend to get filled. But if the market is in a solid uptrend, Scott has found that the companies with the fastest growth in sales and earnings become a magnet for institutional investors.

On March 10, 2011, Green Mountain Coffee blasted 41% to 61.71. (1) shot up to 42 million shares, the heaviest amount in more than a year. (2) The excellent action followed the Keurig system maker's breakout — also on a gap up — from a two-month base in February.

In the March 11 newspaper, Green Mountain was featured right at the top of the Stocks On The Move table for Nasdaq issues. It boasted a 97 Composite Rating, a 99 EPS, a 98 RS, and a B for Accumulation-Distribution.

Scott said he did not buy on that day because the market was in a correction. Over the next several sessions, though, Green Mountain refused to budge lower. Scott began buying shares four sessions later on March 16.

Scott bought more shares when the stock gapped up again, this time vaulting more than 18% on May 4. Like in March, Green Mountain did not even come close to filling the upward gap.

He fashioned a gain of nearly 50% on his initial shares in the position by using the 10-week moving average as a strength gauge.

During the run, the stock held nicely above this key support level. But by summer's end, Scott noticed the action got choppy. He sold the stock at 90.62 when Green Mountain sliced through the 10-week line (3) and closed below it for the first time since the early 2011 breakout.

"It seemed to be trading a little looser," the U.C. Berkeley physics grad said. "It used to respect the 10-week line, then it stopped.

Google (GOOG) was another solid winner in Scott's portfolio, although he says he got "only 50% of the Google move, where there was a lot more money to make.

The big-cap tech roared out of a narrow consolidation on Sept. 15, 2004, not long after a key market follow-through and after its market debut at 85 on Aug. 19. (4)

Scott didn't buy at the IPO-base entry point of 113.58, though, because he didn't know how to interpret such unusually narrow patterns. Indeed, Google's IPO base was too short to be a or a cup base. But the company had superior fundamentals. Its Web search engine represented the N in CAN SLIM.

"I now use it as the quintessential IPO base. It's the model," said Scott. He grabbed shares as Google broke out again in April 2005.

Scott sharpened his knowledge in buying, holding and selling by attending the Santa Monica, Calif., Meetup group from 2003. But he got tired of the heavy traffic to and from his home.

Today, Scott heads the monthly gatherings in Thousand Oaks, a community northwest of Los Angeles .

This Meetup was launched in 2010. As many as 60 readers show up on a monthly basis. To his surprise, O'Neil stopped by one day to listen in.

"At the Santa Monica Meetup, one-third of the people were new IBD readers every month," Scott noted. "In Thousand Oaks, most people who attend are the same; two or three are new."

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