Hitting Home Runs & Grand Slams, Not Loud Outs
The feeling of a fastball hitting the sweet spot of the bat, watching the ball go over the fence and disappear off the field of play. It's probably something like hitting the perfect drive on the golf course.
This is a feeling I rarely, if ever, get on the field or at the tee box, but when it comes to investing, hitting home runs is a constant goal. I often hear of investors that have hit home runs that turn into ground rule doubles, and sometimes worse than that. But there are also times when a home run can turn into a grand slam!
How can you protect the big gains you have made in stocks like BBY, NFLX or TSLA? Which one is most likely to turn into a grand slam?
Wait For Your Pitch
Before you have your big return, you have to be able to locate the stocks that are in the sweet spot for a potential double. Too often I have seen investors swing at stocks that are restructuring and end up fouling the ball off their foot. Even worse are the times when investors look to catch a falling knife and ground into a double or triple play.
Experience has shown that the stocks with the best chance to become home runs are the smaller companies. A company having a market capitalization less than $7 billion gives you the best chance to see the value of your initial investment double.
Avoiding the stocks that are falling knives gives you added insurance against the risk of that stock continuing to move lower. The same can be said of restructuring stories that rarely give home run returns.
More . . .
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Only a few companies have great potential to increase their earnings and stock prices far 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 for 6, even 18 months to realize their exceptional upsides. Our home run strategy is already riding more than a dozen double-digit-plus gains, including one company that shot up +135% in just 3 months.
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Run It Out
It's inevitable that some stocks will just be grounders to short. Learning why your stock didn't get out of the infield is an important lesson to learn. Sometimes it's a CEO scandal or a deal gone bad, but most of the time it's all due to earnings. Give the stocks the chance to be homers by letting the winners win, and don't be discouraged by the occasional soft grounder that goes back to the pitcher. Make sure the earnings picture continues to not only be good, but look for stocks that are seeing improving earnings potential.
Don't Let Them Throw It Back
A homer hit by the opposing team in Wrigley Field generally ends up with the ball being thrown back by the fans. In baseball the homer still counts, but we know that sometimes stocks that seem to be hit out of the park can fly back in even faster.
One method to capture large gains is to use stops, which will ensure that positions don't turn into 'loud outs' instead of the homers they are. The use of stops need to carry its own word of caution, as often times stocks will pull back just enough to hit stops before moving even higher.
Keeping an eye on the earnings prospects of the stocks that have become home runs is one of the best ways to ensure that the ball stays in the seats. The difficulty comes into play when you manage a portfolio of 25 stocks and you focus too much on one stock and allow the others to be thrown out while leading off at first. A balance of focus across the entire market, portfolio as whole and individual stocks is necessary.
Grand Slams
There are a few times when a home run is more than just a home run. The grand slam is what we all look for, and I am not talking about a breakfast special. The problem is how can you tell when it's time to take profits or let it ride to potentially be a grand slam?
A key to a home run that can keep going is knowing where the company is in its life cycle. A retailer that is still experiencing growth in the number of stores, margins and sales indicates a company that is still expanding. This means it has a higher chance of continuing its run. A technology company with little or no new technology that was once out of favor might be a good candidate to sell and take profits. The younger (more expansion potential) the company is, the more likely it is to continue to grow.
Box Score
Grand Slams are rare, and to uncover them takes serious dedication to research, lots of patience and of course the willingness to strike out every once in a while. Looking for smaller companies that have great earnings potential and are relatively young in their life cycle can give you a head start to helping your portfolio not only hit more singles, doubles and triples, but also home runs.
Step Up To The Plate
You can build a portfolio of great names that have a Zacks Rank #1 and Zacks Rank #2 and watch them daily. You can monitor research reports from the big brokerages to get some deeper insights into the industries you have invested in. You can then stay even closer to your investments by listening to earnings conference calls to hear for yourself what the prospects are. You can do all of that on your own.
Or, you can look into our Zacks Home Run Investor. service that will help you find stocks with the potential to rack up impressive gains.
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.
Since 2011, our strategy has substantially outperformed the market and currently is riding 14 stocks well into the double digits. One has boomed +135% in just 3 months.
In the next few days, I am preparing to add a stock with that kind of potential upside. Check below for more details:
Learn more about Home Run Investor now >>
All the best,
Brian Bolan
Brian is our aggressive growth expert and one of the hottest hands at Zacks who specializes in double-digit stock gains. He is the editor of the Zacks Home Run Investor.
