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Buying Leaders, Not Laggards, Is Crucial To Big Stock Gains

IBD's system is designed to help investors find the best stocks in the highest-rated industry groups, because those stocks have the best chance of becoming big winners.

In fact, the L in CAN SLIM stands for Leaders, or stocks that possess superior fundamentals and are part of a leading or sector. The strong growth is driven by innovative products and services that are either unique or far superior to what the competition offers.

"The top one, two or three stocks in a strong industry group can have unbelievable growth, while others in the pack may hardly stir," wrote IBD founder William O'Neil in ".

Take, for example, Biogen Idec (BIIB), Celgene (CELG) and Immunogen (IMGN). All three are in the Medical-Biomedical/Biotech industry group, which was ranked No. 2 out of IBD's 197 industries when the market followed through in December 2011. Yet Celgene and Biogen easily outperformed Immunogen.

Celgene, the maker of cancer drug Revlimid, boasted a best-possible 99 Composite Rating when it cleared a 68.35 in early January 2012. It climbed 18% in just three months before correcting to form another base, from which it rose even higher.

Biogen broke out above a 117.65 flat-base buy point in early January 2012 and ran up along its 10-week line to a high of 157.18 in late September for a gain of 34%. The developer of treatments for multiple sclerosis and cancer sported a 98 Composite Rating and a 96 Relative Strength Rating, which indicated that the stock had outperformed 96% of all listed companies over the past 52 weeks. Leaders should generally have an RS rank of at least 85.

Immunogen's RS Rating was 93 when it cleared a 14.73 buy point in a cup base in early February 2012. But its Composite Rating was a dismal 69; the EPS rank of 16 was even worse .

The stock never got much traction, clearing a couple of bases in early 2012 but quickly faltering. It triggered IBD's 8% sell rule in early March. Immunogen is up just 22% since that , compared to Celgene's 121% gain and Biogen's 101% increase.

Note that Celgene and Biogen broke out early in the market's new uptrend, which is a characteristic of leading stocks. Laggards break out later, when much of the market's gains have already been made.