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Red Pen And IBD 50 Can Help Investors Find Winning Stocks

When ordinary people talk about investing legends, they often see success as either genius or luck.

Both labels are distancing mechanisms. Such talk dismisses the chances of an ordinary person winning in stocks because most people are neither geniuses nor lucky.

So, how does the ordinary investor find winning stocks

The IBD 50 is a good starting point. However, it is not a buy list. The stocks need to be researched.

Some people start with the chart, finding stocks that are shaping attractive bullish patterns and then checking the fundamentals. Others prefer to look at the fundamentals and then the chart.

It doesn't matter which you start with because the conclusion will be the same.

The key is to check both. IBD investors are not momentum investors who look solely at the chart, and they are not fundamental investors who ignore the chart. Both approaches are valuable.

Let's study the Nov. 21 IBD 50 and see how an investor might have culled the list. We chose this date because the market delivered a follow-through (a confirmation of a new uptrend) Nov. 23.

One way to cull the list is to take a red pen, look at the data listed in the chart and mark the negatives.

What deserves a red mark? Earnings and of less than 25%; a return on equity of less than 17%; low average ; a weak Accumulation/Distribution Rating; and a lagging .

A run through the IBD 50 with a red pen turned up a handful or two of stocks. But the charts also showed that three — Sturm Ruger (RGR), Ocwen Financial (OCN) and Lululemon Athletica (LULU) were either working on or had emerged from risky fourth-stage patterns. That left four stocks to consider.

Biotech Celgene (CELG) had one red mark — 14% sales growth in the then-most recent quarter. On Nov. 23, Celgene was still basing. An investor who put it on a watch list eventually found a chance to buy. The stock broke out in early January, clearing an 81.34 and advancing as much as 46% in less than four months.

Valeant Pharmaceuticals (VRX) had one red mark — its laggard industry group. When the market uptrend was confirmed, the stock was working on a base. The stock broke out in December, clearing a 59.10 entry. Valeant advanced 29% in less than four months.

ARM Holdings (ARMH) had no red marks — unless you consider 24% quarterly sales growth too low. The stock, however, was already extended on Nov. 23. It did not offer a new entry.

3D Systems (DDD) had no red marks. The stock was buyable Nov. 23: It had bounced off the 50-day line in strong volume Nov. 19. The most recent base was third stage, which can be bought but is more prone to fail. In this case, it worked: 3D rose more than 70% in two months.