Your watch list is bursting with 30, 40, even 50 names. None of them have weak IBD ratings.
How do you whittle that down to a much more manageable list
Here are a few suggestions. Most are mechanical steps. They might help you identify the true diamonds within the bunch.
• Ask: How many bases? Prefer those stocks that have built early-stage bases. Of course, a few exceptional stocks may still cruise higher after forming third- or fourth-stage bases. Yet in most cases, even if a member of your watch list is in the IBD 50, you may want to skip it if it's already quadrupled in price and has just formed a fourth-stage cup.
Remember: After a stock has broken out, it must rise 20% or more from the proper buy point before a new base can be counted. Base-on-base patterns count as one base.
• Ask: Is it truly the No. 1 company in its field? Divide the stocks on your watch list by broad sector or even industry group. Do you have half a dozen apparel retail stocks? Or four or five software firms? If yes, you need to prune.
Compare head to head via EPS Rating, SMR and Accumulation-Distribution Rating. Use IBD Stock Checkup. Highlight the ones with sharply accelerating quarterly growth; they may be your best candidates.
• What's the average volume? Once in a while, a few fantastic stocks begin their big runs while trading fewer than 400,000 shares a day. But in general, you want to see high liquidity at the breakout. When Infosys (INFY) broke out of a base in July 2009, it traded 2.7 million shares a day on average. Higher average share volume can also mean lower volatility and more sleep at night.
• What is the share float? The float, seen in the second line of every IBD mini chart, can be thinner than 30 million shares (think Panera (PNRA) or as bloated as 5 billion (think Cisco (CSCO). When all things are equal, favor the stock with the smaller float. The firm has likely never split its shares, or done so minimally. (See the March 7 and May 31 Corner columns for more on this topic.) • When was its IPO? Preferred is 1997 or later. Some turnarounds can be great stock plays, even after being in the market for decades or more.
• Study the stock charts well. Seek evidence of heavy buying on a daily chart. Look at price-volume action on a week-to-week basis. Dump those names with too many wild swings (say, 10% from high to low or more) and those with too many big down weeks in price in big volume.