Of course you do.

Everyone, no matter how good or bad they are as a trader or investor right now, would like to be better.

The million dollar question of course is how – how do you become a better trader?

One thing is for sure, it will take some work.

But you can start making improvements right away.

3 Steps to Becoming a More Successful Trader

Let's go over the three key things that you can start doing today to become a more successful trader or investor.

1. Identify

The first step is to identify what kind of trader you are (or want to be).

So let's define what the four main fundamental trading styles are: Momentum, Aggressive Growth, Value, and Growth & Income:

• Momentum:
  Momentum traders look to take advantage of upward trends (or downward trends) in a stock's prices or earnings. They believe that these stocks will continue to head in the same direction because of the momentum that is already behind them.

  And there's a lot of evidence to support the idea that stocks making new highs have a tendency of making even higher highs. This style of trade will likely carry with it a higher degree of volatility.

• Aggressive Growth:
  Aggressive Growth traders are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth).

  You'll often find smaller-cap stocks in this category. Expect volatility in this style as well.

• Value:
  Value investors and traders favor good stocks at great prices over great stocks at good prices. However, this does not mean they have to be cheap stocks in price. The key is the belief that they're undervalued. That they are, for some reason, trading under what their true value or potential really is. The value investor hopes to get in before the market 'discovers' this and moves higher.

  The value investor will typically need to have a longer time horizon because if that stock has been undervalued, i.e., 'ignored' for a while, it may take a bit of time before that stock gets noticed and makes a move.

• Growth and Income:
  Growth and Income investors and traders are looking for good companies with solid revenue that pay a good dividend. Often times these are more mature, larger-cap companies that generate solid revenue. These companies then pass that revenue along to their shareholders in the form of a dividend.

  This kind on investor will also have a longer time horizon, especially since you'll want to hang onto your stocks long enough to receive the dividend.

The identification process also includes determining what you want your stocks to do for you. And what your goals are as a trader:

• Are you looking to make fast money by getting in and getting out quickly?
• Or are you looking to find long-term core holdings?
• Or are you somewhere in between?
• Is this for your retirement?
• Your kid's education?
• Will this supplement your income or completely replace it altogether?

Because then you'll be able to find the stocks that are in alignment with who you are and your risk tolerance.

If you find yourself getting into stocks that are not in alignment with your style or beliefs, you'll find yourself dropping those stocks the moment the market hits a rough patch.

2. Analyze

The second step is to analyze.

No, you don't have to turn yourself into an analyst.

But you do have to search for stocks and analyze which ones fit into your style above.

This is actually the easiest of the three steps. Because once you've identified what kind of trader you are, it's easy to find stocks with those types of characteristics.

Think about the last car you bought. Once you decided what kind of car you wanted, you probably saw them everywhere. They didn't just magically appear on the road. They were always there. You just became aware of them.

In short, once you know what you're looking for, it becomes easier to find. You know what you want. And you also know what you don't want.

This helps cut thru the clutter and frustration of finding the right stocks.

Even the staunchest of value investors might get sucked into buying a high-flying momentum stock with over-priced valuations once in a while. Maybe it's being hyped on TV or one of your friends is in it. But if you know what kinds of stocks are acceptable for you and your style of trade, you can avoid those pitfalls and follow your plan.

The easiest way to search for and analyze stocks is with a stock screener. I personally use the Research Wizard stock-picking and backtesting software. But you can accomplish this with many other products.

The point is: if you use the right tools, you can quickly and easily find just the right stocks you're looking for.

You might also want to look at some proven, profitable trading strategies specifically designed for a particular style. Whether you decide to trade them as a trading strategy or use them as a guide to find the right stocks, you'll be one step closer to becoming a better trader.

3. Manage

The third and last step is to manage your investments.

Manage my investments? I don't have the time!

Sure you do.

Your investments are probably the largest, most important chunk of money you'll ever be responsible for in your entire life.

Keeping track of your investments doesn't have to be difficult or time consuming. In fact, it shouldn't be. The more difficult something is, the less prone we are to do it.

You just need to know 'how' to manage your investments.

You can stay on top of your portfolio in literally 5-10 minutes a day. Even 5-10 minutes a week if that all you want it to be.

And everyone has at least 5-10 minutes for virtually anything. Especially your investments.

I know in the last year, a lot of people couldn't bear to open up their account statements. 2008 was a brutal year.

But not looking at it didn't make the losses go away. In fact, it likely made it worse.

Think of it this way; if there was a particularly hot summer or drought, your lawn would likely suffer. But if you committed to watering it more than you usually do, it would likely do ok and make it thru that rough patch.

Likewise, during easy summers, you may not think you need to pay attention to your lawn or landscaping. But you do, even in good times. Weeds can quickly overtake your garden, leaving you wondering what happened.

Same thing with your investments.

Managing your investments means getting rid of losers before they ruin your portfolio. Taking profits before you give them back. Making sure the reasons you bought a stock in the first place still apply. If the stocks you're in now have characteristics that never would have gotten you into that stock in the first place, then it’s time to get out and replace it with a new stock that does.

Managing your portfolio is really just about paying attention. That goes for your open positions and stocks you're considering.

Practice, Practice, Practice

No, this is not a Carnegie Hall joke: ('How do you get to Carnegie Hall? Practice, practice, practice').

But the saying holds true.

Whatever you practice consistently, you'll get better at.

Even if it's just a little every day. Or just a little bit every week.

And remember the 3 steps:

Identify, Analyze and Manage.

And soon you'll be able to say:

I AM a better trader.

To get started, you may want to look into our Zacks Method for Trading: Home Study Course. It's a DVD/workbook set that guides you to better trading step by step. In it, we go over in detail how to identify what kind of trader you are, how to analyze stocks for the proper style characteristics and how to better manage your portfolio. It also goes over some of our best performing strategies and shows you how to create your own.

If you're interested, be sure to check it out now. We're making it available to you at our cost, but only until Saturday night, November 21. Click here to learn more.

Thanks and good trading.

Kevin

Zacks VP Kevin Matras is our chart patterns and stock screening expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies. He also directs the Zacks Method for Trading: Home Study Course.

Granted these stocks have always been available on our website by sifting through the Zacks #1 Rank list. Unfortunately it's been difficult to provide these recommendations in any of our subscription services because each one had too many members on board. If they all bought or sold the same stock at the same time, then the price would move too much and the potential for great returns would be eroded. So for years we stewed over this problem, wondering what to do with all of these profitable picks.

The "Ah Ha!" Moment

Sometimes the answer is right in front of your face. Such was the case here. In fact the answer is so simple that it's almost embarrassing to mention it now.

If the problem is that these small cap picks can't be shared with too many investors at the same time, then the solution is to have an exclusive service with fewer subscribers on board. This solution got the wheels turning on what we believe will be our most profitable service yet, the Zacks Small Cap Trader.

Below I will share with you some of the findings from the research study that went into the creation of this new service. This information will help you pick more profitable stocks even if you never subscribe to the Small Cap Trader.

4 Factors All in Your Favor

Hopefully by now you know that our Zacks Rank stock picking system is based upon 4 factors. Let's quickly run down the 4 factors and explain how small caps garner the lion's share of the benefit.

1. Agreement: This is about the percentage of analysts who are in "agreement" that the earnings outlook for the company has improved. The greater the agreement of the analysts that future earnings will be moving higher, the more comfortable investors feel about getting on board. Small caps have fewer analysts covering the stocks. Thus, it's much easier to get 100% agreement from 2 to 4 analysts than 10+ analysts who would normally cover larger stocks. This leads to more investors buying up shares pushing prices higher.

2. Magnitude: Here we are talking about the size of the percentage change in earnings estimates. If estimates increase from $1.00 to $1.02 that's nice. If they increase to $1.20 that is a whole lot better and will attract more investor attention. As you might imagine small cap stocks can grow much faster than their larger counter parts. Thus, much more likely to have significant changes in their earnings outlook which is a sirens song that attracts growth investors to the shares.

3. Upside: This factor concentrates on the most accurate estimates versus the consensus which shows the upside potential going into the next earnings announcement. Meaning it's a leading indicator of potential earnings surprises. Small caps quite often have the biggest potential for earnings surprises. And this factor allows you to get on board these stocks BEFORE the announcement and before the stock jumps on the news.

4. Surprise: Stocks that had a positive surprise in the past are more likely to do it again in the future. Further, the bigger the surprise in the past, the bigger the potential surprise the next time around. By now it's getting kind of obvious. If you guessed that small caps generate the biggest earnings surprises and subsequent gains…then you are correct.

The data for each of these 4 factors is available for free on Zacks.com. Just go to the Estimates page for your stocks and you will discover the information there. Note that each of these factors individually helps investors pick better stocks. But when you blend them together in the Zacks Rank it puts an almost unfair advantage in the hands of investors…apply it to small cap stocks and the advantage could be called "obscene".

Good. Better. Best

Our research study covers the period from January 2000 through end of September 2009. That means we have two bear markets and only one bull market in that time frame. Certainly not the most lucrative time for stock investors as the S&P 500 actually fell on average of -2.8% per year over that stretch.

Things got going in the right direction when we narrowed our focus to just Zacks #1 Ranked stocks which rose +17.6% during that same time. When we turned our gaze to just the small cap #1 Ranked stocks the returns came up a bit more. Then with more fine tuning on parameters we ended up with a group of #1 Ranked small caps with a +32.7% average annual return.

To be honest, the above paragraph does not do justice to the outperformance in play here. If you put $100,000 into these prime stocks then, you'd now be sitting on portfolio worth $1,473,400. Compare that to the losses most everyone endured in those trying years.

But it's important to note that not all small caps are created equal. However, through our rigorous testing, we believe we've come up with the right blend of metrics to help us pick the best of the best from the small cap universe.

How to Find the Best Small Cap Stocks

As noted earlier, we need to limit the number of subscribers who will receive these potent small cap picks. So we have created a Priority Waiting List for folks to join. There is no cost or obligation. Joining this list simply entitles you to receive further insight on this small cap trading strategy and how the stock picks it produces could help you greatly outperform the market in the years ahead. Note the Priority List closes Saturday November 14th @ midnight. So if you are interested, then follow the link below.

Just click here to learn more.

Best,

Steve Reitmeister

Steve is the Executive Vice President in charge of Zacks.com and all of its subscription services. He helped create the new Zacks Small Cap Trader service to help investors capture the biggest profits available from the proven Zacks Rank stock rating system. About Zacks Small Cap Trader.

Typically, the higher potential returns is what draws us to these smaller companies even though they carry higher risk. Research clearly shows that small caps outperform the rest of the market by a wide margin. Most investors would agree its worth bearing that extra risk.

Why do small caps outperform? And why should you consider putting even more of your money into these stocks? Read on for the answers.

Who Doesn't Want to Beat the Market?

As I said earlier, we are all in the market to make money, so why not be in stocks that outperform the S&P 500 by 20%? Yes, 20%. In a study conducted over the 80 years prior to 2007, small cap stocks beat the index 12% to 10%.

Don't make the mistake in believing that's only a 2% advantage. Its 20%, and I'll prove it. Let's say that Bill Gates gives each of us $100,000 to invest this year. At the end of the year we keep the profits and return the $100K to Bill with no interest cost (he's a very generous guy indeed).

So I make 10% on that money, which puts $10,000 in my pocket. Whereas your small cap picks rack up a 12% return, putting $12,000 in your pocket. Is that 2% or 20% better than me?

Now imagine that you kept doing 20% better every year. Through the power of compounded returns that 20% advantage grows and grows over time.

Case closed. Small caps soundly beat larger stocks.

3 Reasons Why Small Caps Outperform

1. Higher Growth Rates: Why is a cheetah faster than an elephant? It’s not the spotted fur. It's about size and agility. Smaller companies can simply move faster than bigger ones to take advantage of business opportunities. This gives them higher growth rates, which begets higher valuations and greater returns for investors.
2. Buyout Targets: Some big companies spend a lot of money on research and development to create next generation products and services. Other companies watch smaller competitors develop the new ideas and then buy them up before they get too big. Since most buyouts are done at a significant premium, it provides another key benefit for the ownership of small cap shares.
3. Flying Under the Radar…But Not for Long: There are over 10,000 stocks traded in the US alone. Not surprisingly a lot of small caps can go unnoticed by investors for a long time. But once they do take notice, then things get exciting in a hurry.

   Consider that Wall Street analysts hate being the first one to cover a stock because they don’t want to be wrong. But once a small company does get coverage, then usually the ball gets rolling. Each additional analyst report that the stock picks up is a super-charged marketing message enticing that firm’s clients to get on board. As the stock starts moving upwards, then even more investors take notice. It’s a virtuous cycle that plays out again and again. Not for every small cap, but certainly for those experiencing the best earnings growth and estimate revisions.

Not All Small Caps Are Created Equal

The investment study we noted above says that the average small cap produces a 12% return. Yet there are some that do 2 and 3 times better than that. Most people assume those would be the ones with the highest growth rates. If only it were that simple.

Our research has helped us isolate the small caps most likely to outperform. In fact, over the last 10 years these stocks have produced a +32.7% annual return versus a brutal -2.8% loss for the average S&P 500 stock.

Right now we are inviting investors to join our priority waiting list to get exclusive details on this research study. There is absolutely no obligation to buy anything. We just want to provide you insight on this small cap trading strategy and how the stock picks it produces could help you greatly outperform the market in the years ahead.

Just click here to learn more.

Best,

Bill Wilton

Bill is an expert on the Zacks Rank stock picking system. You may already know him from his growth stock articles on Zacks.com. He will also be the editor of the soon to be launched Zacks Small Cap Trader. 

And then, poof!

Before value investors could even blink, stocks moved higher and, so far, haven't looked back. Over the next 8 months, the valuation on the S&P 500 nearly doubled.

Make no mistake; the rally has been great. Every investor has benefitted. For value investors, current market conditions are both the best of times and the worst of times.

Who doesn't feel a tinge of jealousy as growth investors cash in on multi-decade highs for stocks like Amazon.com? If you're like me, sometimes it's tempting to just throw in the towel and follow the crowd into the growth stocks, even if they are trading with P/Es at 50 or higher.

But never fear. Value investing isn’t dead. Value stocks are still out there, even amidst this once-in-a-generation stock rally. It’s just a matter of digging deeper than usual to find them.

Look Beyond the P/E Ratio

Most value investors know to look at the price-to-earnings ratio (or P/E) to find stocks that are undervalued. To find true value remember that the lower the P/E, the more undervalued the stock.

Many value investors use a P/E under 20, which is a great starting point in normal markets. However, stocks are more expensive now.

So while you should start with the P/E ratio, don’t end there. You’re going to need some more tools in your arsenal to find the true value stocks.

3 Tools to Use to Dig for Value Stocks

1. Use Price-to-Sales
   Many value investors neglect the sales component, which is a mistake since sales, unlike earnings, cannot easily be manipulated. There are no "charges" or "exclusions" or other accounting hocus pocus with sales. They usually are what they are, which makes it easy to compare quarter over quarter and year over year. The lower the P/S ratio, the better. Look for a P/S ratio less than 1.
2. Growth is still your friend
   Growth? For value investors? Value investors can use the PEG ratio, which is the price-to-earnings ratio (P/E) divided by earnings growth. Once again, the more undervalued the stock, the lower the PEG ratio. Look for PEG ratios under 1 for undervalued stocks.
3. Look at the Industry Rank
   This is a little known factor that can give you powerful results when used with a value metric. Zacks ranks industries according to improving earnings prospects, so value investors can look at the Industry Rank lists to get an idea of which industries have rising earnings estimates. The Zacks Industry Rank is the average of the Zacks Rank for all companies in the industry. Just like with the Zacks Rank, the lower it is, the better. So a Zacks Industry Rank of 1.00 is better than one of 4.35.

Value Is King in Bull and Bear Markets

Numerous studies of bull and bear markets throughout the world come to one conclusion: it may not be glamorous, but value investing outperforms growth investing over the long term.

Is it any surprise that one of the greatest investors of all time, Warren Buffett, is a value investor?

Now is the time to stay the course. Don’t let the expensive stocks like Amazon blind you with their glamour. Value is still king.

Digging for Value Every Day

I know how frustrating it is to find value stocks as the markets continue to climb. I seek out value stocks every trading day with the Zacks Value Trader trading service, and some days there just isn't much to get excited about. But all it takes is finding a hidden gem here and there for a value investor to really profit.

Just a few days ago, for instance, I added an American generic drug company to the Value Trader portfolio. It has great "digging deep" value fundamentals, such as a price-to-sales ratio of just 0.9 and a low PEG ratio of 0.19. On top of that, analysts believe it has great earnings growth prospects of 52.26% over the next five years. Amazon, by comparison, is expected to grow at just 32.56% over the same time period. Take that Amazon!

The Value Trader has dug deep to find many other great stocks in 2009 and is up +38.5% over the first 9 months of the year. That is nearly double the S&P 500 over the same time period, proving that value hasn’t gone away; you just have to know where to look.

I invite you to see what stocks are in the portfolio and learn the secrets behind the Value Trader's success. Be sure to check it out before the special offer ends on Saturday October 31.

About Zacks Value Trader

All the Best,

Tracey Ryniec

Tracey, as Zacks Value Stock Strategist, helps Zacks.com customers find the best value stocks through her daily commentary. She is also the Editor in charge of the market-beating Zacks Value Trader.

It's a great saying because it's true.

And that saying couldn't be truer than when it comes to investing.

Take a look at your last big loser. After analyzing what went wrong, you probably discovered some piece of information that – 'had you known that, you never would have gotten into it in the first place'.

I'm not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.

I'm talking about things that you could have known about or SHOULD have known about before you got in.

Did You Know?...

• Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?
• Did you also know that often times a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?
• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of over 5 to 1. Five to one!!!
• And did you also know that the top 10% of industries outperformed the most?

Was your last loser in one of the top industries or in one of the bottom industries?

If it was in one of the bottom industries, you shouldn't have taken a chance on something with a reduced probability of success.

That's what is meant by 'knowledge is power'. Knowable things that you need to know.

That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.

But more stocks go up in the top industries and more stocks go down in the bottom industries.

And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making money?

Did You Know?...

• Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
• Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?

Did your last loser have a spectacular growth rate?

If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?

It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.

One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.

Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.

Did You Know?...

• Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
• Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
• And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?

If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.

Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.

So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.

Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.

For example: two popular industries right now are Gold and Energy. But did you know that the median P/E ratio for Gold Mining stocks is 53? Whereas the median P/E ratio for Oil & Gas Drillers is closer to 10? A P/E of 20 would keep most of the best Gold Miners from even showing up on your screen. And if you found an Oil & Gas Driller at 20, that P/E would be significantly more expensive than the norm for that group.

If you find yourself wondering why you never catch a big winner, or worse, why some promising stocks blow up on you – take note of their P/Es – you might be limiting your own success.

Did You Know?...

• Did you know that adding a simple valuation metric can turn a good Price Momentum screen into a great one? That's what we did with our Big Money Zacks screen, which is up over 200% this year.
• Did you know that by adding two additional filters to the Zacks #1 Rank stocks, you can narrow that list down from 200+ stocks to a more manageable 5 stocks? That's what we did with our Filtered Zacks Rank 2 screen, which is up over 84% this year.
• Do you know what an R-Squared Growth rate is? What if you did? We have a screen that utilizes this seldom-looked-at item that is not only up more than 36% this year, but was also up 15.9% in 2008's bear market while the S&P 500 was down -37%. That screen is aptly called the R-Squared EPS Growth screen.

Do you know how well your stock-picking strategies have performed?

Whether good or bad – do you know why?

Do you know if your favorite item to look for is helping you or hurting you?

Get the answers to these questions and more. And imagine what else you’ll find.

I discovered all of these things above with the Research Wizard (including the one that has averaged gains of +82.5% per year). If you have a question, plug it in and get your answer. Find winning strategies. Or create your own. And test virtually any idea you can think of. Now you can. Click here to learn more.

Thanks and good trading,

Kevin

Zacks VP Kevin Matras is our chart patterns and stock screening expert. He also personally developed many of the built-in market-beating strategies that come with the Research Wizard.

3 Reasons Stocks Can Drop After an Earnings Surprise

1. Estimates vs. Whisper Number: The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations based on sentiment, sometimes referred to as a “whisper number”. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease the market’s inflated expectations. This is the most common reason why some stocks fall after a supposed earnings beat.


2. Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way. However, far too much of the earnings being reported these days are generated from cost cutting and other "accounting gimmickry". The problem is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.


3. Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership position. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down…and go down fast.

So now that we have outlined things that can wrong after an earnings surprise, let's shift gears and talk about something even more important: how to turn a profit from earnings surprises. Here are two ways to go about it.

Good Way: Buy shares in any company that had an earnings surprise and then rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings number as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.

Best Way: Look for those rare opportunities where investors simply guessed wrong about a company's earnings prospects. Specifically, find companies with shares that were declining for about a week prior to the earnings report, yet amazingly produced a big earnings surprise. Sure, the price will jump at the open following the news, but our research clearly shows that the stock will continue to rise over the next couple weeks as investors play catch up.

Where to Find These Stocks

Most of the information to find these "Best Way" earnings surprisers is publically available and free. But I don't know of anyone that puts it together in an easy-to-use format that will help you consistently find these winners.

We created a service many years back for our professional clients that harnessed these stocks. And in 2006 we launched a service that brought these unique stock picks to individual investors.

It's called the Zacks Surprise Trader, which gained an amazing 29.6% since May 2006 through good markets and bad, while the S&P 500 descended -12.37%. In fact, because the service has been so popular, we've had to close it to new subscribers in the last few months. However, we have reopened the doors this earnings season until midnight on Saturday October 17th. If you would like to learn more about this Surprise Trader service and the stocks we are picking to be winners this earnings season, follow the link below:

Learn More About Zacks Surprise Trader

Wishing You a Very Profitable Earnings Season,

Mike Vodicka

Mike focuses on finding the best momentum stocks for Zacks.com customers. He is also the Editor in charge of the Zacks Surprise Trader service.

Nothing worse than waking up to an earnings miss and heavy losses in your portfolio.

Well, third-quarter earnings season is now kicking into full gear, and there are few things that move a stock faster, up or down, than an earnings announcement.

This is especially true now as investor expectations and stock prices are much higher. Companies that disappoint this earnings season will be crushed. This will lead to devastating losses for those unfortunate shareholders. However, the owners of stocks with positive surprises will be richly rewarded. Now is the perfect time to align your portfolio to profit in the month ahead.

As most of you already know, Zacks Investment Research specializes in the coverage of corporate earnings. And more importantly, how to profit from this information. So, today I'm going to share with you 3 proven strategies to profit from earnings announcements.

(Hint: Be sure to read to the end as the 3rd strategy is by far the most profitable.)

Strategy 1: Four Leading Indicators of Positive Earnings Surprises

I figured its best to get the most obvious strategy out of the way first. The 4 leading indicators I refer to are the 4 factors of the Zacks Rank. Before you skip this section, let me share some information that you may not have known.

In the mid-1970s Len Zacks took his mathematical skills to Wall Street where his job was to discover stock-picking strategies that would beat the market. He had a simple theory that was the precursor to what became the Zacks Rank.

Len focused his research on finding stocks that were more likely to have a positive earnings surprise and that would jump on the news. The journey led him to what we know as the 4 factors of the Zacks Rank. Individually, each increases the odds of owning stocks that will enjoy a positive earnings surprise. However, when you combine them together inside the Zacks Rank, it becomes an almost obscene advantage for investors. (Learn more is this video: 4 Factors of the Zacks Rank.)

Strategy 2: Stop the Bleeding

This second strategy is so simple, yet so hard for most investors to do. So, I'm going to beat it into your head...for your own good of course ;-)

Sell All Companies with a Negative Earnings Surprise

Yes, sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 10% to 20% loss in the short run than a 20% to 40% loss in the long run.

Keep in mind how earnings estimates are created. Both company executives and brokerage analysts are doing their best to create conservative estimates that the company should easily beat.

And when they fall short of those watered down estimates, it points to one of two serious problems:

• Industry conditions have deteriorated and thus they missed their forecasts. This problem will most likely not correct itself in the near-term, leading to further disappointment.
• Company leaders are incompetent. Meaning they are no good at estimating their own earnings. Or that their strategies for growth are ineffective.

Either reason should give you ample cause to abandon the stock now and move on to greener pastures.

Strategy 3: Buy High and Sell Higher - Most Profitable Strategy

I saved the best for last. This strategy has proven to be the most profitable way to harness earnings surprises. This proprietary metric is called the Price Response Indicator, or PRI.

The PRI is amazingly accurate at saying which stocks will rise in the days following an earnings announcement and which won't. Proving the truism: "Buy High and Sell Higher".

The scoring system for the PRI correlates the percent earnings surprise and short-term price reaction preceding the announcement. The model scores stocks from A to E, with A's and B's being the most likely to increase in price in the days following the surprise. These signals are produced by our systems within hours after the company reports earnings.

Stocks that are rated a PRI of A or B certainly had very strong positive earnings surprises. Even more importantly, most of them had declined in price in the days preceding the announcement. This is the key ingredient because it means that the investment community was wrong about the company's prospects.

These stocks will gap up on the news, yet still there are more gains to be made as the good earnings news spreads through the investment community. Our extensive research clearly shows that these stocks will receive extended buying pressure for about 2 weeks after the report. This gives traders ample opportunity to make consistent profits even after the stock has gapped up on the earnings surprise.

How to Profit from PRI

At this time the daily feed of PRI signals is only made available to our institutional clients. However, the Zacks Surprise Trader service filters down all the PRI signals with additional variables to find the 2% that have historically provided the best returns. From there we hand pick the signals, turning down 5 out of every 6 to provide our subscribers with a phenomenal opportunity to beat the market.

How phenomenal? Since inception in May 2006, Surprise Trader has generated a +29.6% return versus a devastating loss of -12.3% for the S&P 500. Just imagine how well it will perform in the future as we leave the bear market behind.

Today is the perfect time to learn more about the Surprise Trader. Why? First, because earnings season is coming into full swing. Second, because the service has grown so popular that it's closing to new members. It's being held open until midnight Saturday, October 17, 2009, to give Zacks.com members one more chance to join the service and also save money.

Learn more about Surprise Trader special offer.

I hope you take advantage of all three of these strategies to not just survive this earnings season…but thrive this earnings season.

Good Investing,
Stephen Reitmeister

Steve is in charge of Zacks.com and all of its subscription services. He created Zacks Surprise Trader in 2006 to help investors harness the combined power of the Price Response Indicator (PRI) and the Zacks Rank. About Zacks Surprise Trader.

(Ok, Dart Throwing isn't an 'official' style per se', but I'm sure there are a lot of people who would fit into that category if there was.)

But the above styles are just a few of the many different styles that people fit into. This also includes the 'All-Style Style', which is really just a combination of some or even all of the different styles put together.

Some of these are more conservative while others are more aggressive.

But which one works best?

Let's take a look at some.

Momentum Style

Momentum traders look to take advantage of upward trends (or downward trends) in a stock's price or earnings. They believe that these stocks will continue to head in the same direction because of the momentum that is already behind them.

And there's a lot of evidence to support the idea that stocks making new highs have a tendency of making even higher highs. Although this style of trade will likely carry with it a higher degree of volatility, it can be extremely rewarding.

For this momentum study we'll use one of our strategies called Big Money Zacks.

This method, of course, finds stocks on the move. And aside from focusing on the best Zacks Rank stocks, along with a few other fundamental filters, the main drivers to this particular screen (once we've narrowed down the list) are as follows:

1. First it selects the top 20 Price Performers over the last 24 weeks.  
2. Next, from those 20 above, it selects the top 10 Price Performers over the last 12 weeks.
3. Then, from those remaining 10, it selects the top 3 Price Performers over the last 4 weeks.

How Did It Do?

• In 2007, this Momentum Style strategy gained 36.8% vs. the S&P 500's 4.1%.
• In 2008 (with the bear market in full swing), this strategy was up 19.7% while the S&P plummeted -36.4%.
• And so far in 2009 (thru the last full week of September), it's up over 215% to the S&P's 14.2%. (That's right, 215%. As the market was rebounding more than 50% off of the lows, this strategy capitalized on that by getting in on some of the top performers.)

Wow!

So is this the best style?

Maybe for some. But maybe not for others.

The Momentum Style is typically a short-term trading strategy. And this method was designed to be rebalanced once a week, which means you'll be buying and selling new stocks every week. That's great if you're an active trader. Not so much if you aren't.

You'll also find yourself getting in on stocks that have already made big moves or that are making new 52-week highs. And it works. But for some, high flyers and fast movers aren't the kinds of stocks they want to get into.

Maybe getting into stocks that are low in their price recognition cycles or finding undiscovered gems is more to your liking.

So let's take a look at the Value Style.

Value Style

Value investors and traders favor good stocks at great prices over great stocks at good prices. This does not mean they have to be cheap stocks in price though. The key is the belief that they're undervalued; that they are, for some reason, trading under what their true value or potential really is. The value investor hopes to get in before the market 'discovers' this and moves higher.

The value investor will typically need to have a longer time horizon because if that stock has been undervalued for a while (i.e., 'ignored'), it may take a bit of time before that stock gets noticed and makes a move.

For the Value Style study, let's use our strategy called R-Squared EPS Growth.

This one too uses the Zacks Rank, along with a unique way of finding trendline growth rates. (That's where the name R-Squared Growth came from.) But don't let the name fool you, this is a straight up value screen that keys in on different classical valuation metrics.

How Did This One Do?

• In 2007, this Value Style strategy increased by 11.2%.
• In 2008 (raging bear market), this strategy was up 14.2%.
• And in 2009 (thru the last full week of September), it's up 36.2%.

This strategy was designed to have a longer holding period of 4 weeks, which means this strategy would be rebalanced essentially once a month rather than once a week.

Moreover, the very nature of the screen (and the Value Style) tries to reduce volatility and minimize risk, while at the same time outperforming the market.

And while this more conservative style may not produce the kinds of triple-digit returns that a Momentum Style or an Aggressive Growth Style can, the smoother ride, while still outperforming the market, may be just what you're looking for.

Or maybe a Growth & Income Style approach with core holdings that pay nice income producing dividends is what you're really after.

This kind of strategy will tend to focus on the more mature companies with solid revenue and consistent payouts.

You'll also have a longer time horizon with this style (at least 12 weeks), especially since you'll want to hang onto your stocks long enough to receive the dividend.

Then again, the allure of getting in on a newer company and watching it blaze a trail of success as an Aggressive Growth Style will try and find, may be your goal instead.

Aggressive Growth traders are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth).

You'll often find smaller-cap stocks in this category. And you should expect some volatility in this style as well.

This kind of style will require a more hands on approach to monitor how these companies are doing. But, like the Momentum Style, the additional activity can be well worth it when the method is hitting its stride.

And the Winner Is…

All of them.

No one style is better than the other. They're just different from each other.

And that's fine.

The 'best' style is the style that fits the kind of trader you are or want to be.

And this is important because then you'll be able to find the stocks that are in alignment with who you are and your risk tolerance.

If you're an active trader looking for aggressive picks, don't try and fit yourself into a Value Style or Growth & Income Style. You'll quickly grow impatient and feel like you’re missing out, regardless of how good you do.

Likewise, if you're more conservative and don't want to trade quite so often, do not try and make a Momentum Style or an Aggressive Growth Style work for you. It won't.

Why? Because if you are getting into stocks that are not in alignment with your style or beliefs, you'll find yourself dropping those stocks the moment the market hits a rough patch. Or you might talk yourself out of winning trades altogether, because you're uncomfortable being in stocks that don't fit your style.

The Strategies Work Best When You Use Them

The best trading strategy in the world won't make you any money if you don’t use it.

Part of the formula for success is to just do it.

And the more confident you are in your strategy, the more apt you will be to use it.

To build confidence in your trading, remember to first:

1. Identify what kind of trader you are or want to become. This will help you find the style(s) right for you. And don't worry about fitting perfectly into one style or another. Many people will be a combination of several styles rolled into one.
2. Once you understand the different styles and where you fit in, you can then concentrate on what kinds of items will help you pick the stocks that have those characteristics so you'll always get into the right ones.
3. Don't give up. As mentioned above, the most successful trading strategies work best when you use them. One you've indentified your style and the method to pick those stocks, make sure to follow a proven profitable trading strategy to increase your odds of success. This will give you the confidence to stick with it and to maximize your returns.

You can do it. And to help you get started, you may want to look into our Zacks Method for Trading: Home Study Course. It's a DVD/workbook set that guides you to better trading step by step. In it, we go over in detail how to identify what kind of trader you are, how to find those stocks with the right style characteristics, and how to trade them so you can consistently beat the market. It also goes over some of our best performing strategies from all of the different trading styles and shows you how to create your own.

If you're interested, be sure to check it out now. We're making it available to you at our cost, but only until Saturday night, October 3rd. Click here to learn more.

Thanks and good trading.

Kevin

Kevin Matras
Vice President, Zacks Investment Research

Zacks VP Kevin Matras is our chart patterns and stock screening expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies. He also directs the Zacks Method for Trading: Home Study Course. 

The key to successful long-term investing is getting the big picture right. You need to figure out how the economy is going to evolve and what sectors and industries will benefit from these changes.

Though you could buy funds to take advantage of these big trends, you'll make more money by focusing on individual stocks. This is what the most successful investors do, and the strategy I follow for our new Zacks service, Strategic Investor.

How do I know which stock to buy? There are 3 specific characteristics that allow to identify the companies with the most upside.

1. Valuation is Paramount

Once I've identified a company that looks poised to benefit from a big trend, I immediately look at the P/E ratio to if matches 3 key criteria:

• The current price is attractive relative to future earnings. After all, I'm not investing on what the company has done in the past, but on the assumption it will be profitable in the future.
• Future earnings will be higher than current earnings. A stock that is growing earnings at 15% per year is cheaper relative to future earnings than one that is forecast to grow slowly (e.g. 5% per year).
• As low as valuation as possible, all else being equal.

• The expected growth rates are very high, because they have a nasty habit of not coming through. (I always ask myself if the long-term growth rate expected is reasonable or not.)
• Both the long-term growth rate and the P/E are both very high. This goes double if almost all the companies in the industry have high expected long-term growth rates and high valuations.

• Ratio of Long term Debt to Equity
• Current Ratio
• Fixed Charge Coverage

• This timing indicator alerts me to when it is a good time to buy a stock, allowing me to focus on stocks that are both attractive from a long and short-term perspective - a win-win situation.
• The Zacks Rank also alerts me when the future is no longer as a bright as it once was, taking the emotion out of sell decisions.