In baseball, the home run hitters get all the press and all the praise. They also get monster contracts worth millions of dollars. It's hard to hit a ball over 400 feet that's traveling 90 miles per hour, but there are athletes that do it regularly.
In the stock market, home runs happen much more frequently. They don't even require steroids or amazing eye-hand coordination. What they do require is research and patience. When solid research points to stocks that have consistent growth in earnings, and is then combined with patience, the result is often a home run.
Finding stocks that have a good history of growing earnings and beating estimates is somewhat easy. All we have to do is look at historical results. Looking forward is another story. The Zacks Rank is a helpful tool that will guide you to the stocks that are most likely to outperform over the next one to three months. Maintenance of the research and an added dose of patience can uncover stocks that generate returns of 25% to 50%, and many will even be home runs of 100% or more.
1.000% Batting Average?
They can't all be home runs. Companies like Tractor Supply (TSCO) generated home run-type numbers, but weakness in the retail space sent that stock lower by more than 20% from recent highs. Our stop limits protected a 50% gain that took a little more than a year to amass. Another example would be Liquidity Services (LQDT), which was purchased in January 2012 and had rounded second base and was headed for third. Seeing the stock behave erratically was all we needed to put a stop on the stock in the mid $50s to protect a large gain of 40% in just five months.
Only a few companies have great potential to increase their earnings beyond the normal 1 to 3-month Zacks Rank profit zone. These under-the-radar small and mid caps are primed to rack up positive earnings surprises quarter after quarter.
We'll ride them past today's erratic market for 12, even 24 months to realize their exceptional upsides. Gains could reach +50%, +100%, and more. Rare opportunity ends this weekend.
Simply put, we buy stocks with the best chances of near and long term outperformance. We then watch these stocks for indications of estimates moving lower. When that happens, we sell the stock and cut our losses or take a gain. We saw estimates contracting for Sourcefire (FIRE), an Internet security company, and decided that a 5% gain was better than a 5% loss, so we took a short gain and moved on. Similarly we had some bad timing in a purchase of Elizabeth Arden (RDEN) that led to a small loss. The point is, we cut our losses before they became too big to overcome.
Home Runs We Have Hit
Akron Inc. (AKRX) is a great example of a home run we have hit. When it was added in August of 2011, the markets were in turmoil and valuations were depressed. The company had just reported in line earnings for the second quarter of 2011, but had given indications that earnings were going to increase. The third quarter of 2011 had increased expectations and the company delivered on their promise. Earnings were up 100% from the prior quarter and 60% ahead of expectations. The next two quarters saw beats of 42% and 33%. All the while, the stock moved higher and is now up more than 100%!
Another stock that is 'rounding second base' is Smith & Wesson (SWHC). It is up about 50% after only a few months. In late May the stock was purchased due to numerous reports of the high demand for guns and an improvement in EPS estimates. Valuations were getting crushed in May, as investors were 'selling in May and going away', so we got in at a great time. Add on a positive earnings surprise of 11% and the stock is well on its way to being hit out of the park.
Keep Your Eye on the Ball
Hitting home runs happens more often than you think. You just need the right mixture. Good research to find the stocks that are likely to outperform is key. Consistent monitoring of the earnings estimates of those stocks also helps. Finally, a decent amount of patience will help increase the chances of hitting more home runs.
Tomorrow's Big Hits
If you would like assistance for finding such stocks, you are welcome to look into our Zacks Home Run Investor service. This long-term investment approach narrows down strong Zacks Rank stocks to the few that have exceptional potential to blast through our normal 1 to 3-month profit zones. These are companies that could continue to generate positive earnings surprises quarter after quarter.
In pursuit of gains amounting to +50%, +100, and more, we are prepared to ride stocks for 12, even 24 months. Be sure to check into this service now. Today's market worries present us with a great entry point, and there is a special opportunity to save money that ends this weekend.
All the best,
Brian is our aggressive growth expert and one of the hottest hands at Zacks with several double-digit gains already on the board. He is the editor of the Zacks Home Run Investor.