Decisions, Decisions

If somebody were to ask you what your best stocks are, you would likely name the stocks moving up the most in your portfolio.

Your worst stocks? The ones going lower of course.

Simply put, the winners in your portfolio are the ones going up. Period.

You'll rarely single out one of your best stocks just because it has a low P/E ratio or just because it has a great return on equity. Yes, those things do matter! But if the stock is underperforming the market, or worse, going down, you'll quickly identify it as one of your worst holdings - and you would be right to do so.

Now take a look at your portfolio. You probably have some great winners in there. (You better after last month's run-up.) But, you probably have some laggards as well.

Hopefully, the mix is more winners than losers. And more leaders than laggards.

But if not, why?

Could it be that one of the reasons why so many people are not seeing the kinds of returns they'd hoped to see in their own stock investments is because they don't know of new stocks to get into? They find themselves in mediocre stocks because they don't know of anything better instead?

I think that for some, their knowledge or 'universe' of familiar stocks is relatively small and I think this limits their opportunity of getting into better stocks.

Which Half Are You In?

Did you know that nearly half of the stocks in the S&P 500 are underperforming the index? Some, quite spectacularly.

Which half are you in?

I'll stay away from the easy targets like Citigroup and AIG for example; 2 household-name stocks that are underperforming the market by more than -62% each. (I hope nobody reading this owns either of these.)

But what about the 'good' companies like Caterpillar, down -13.28% compared to the market. Or ConocoPhillips, down -19.96% versus the market. Or Wal-Mart? Wal-Mart is down -19.48% compared to the market. Wasn't Wal-Mart supposed to be recession proof?

If somebody asked you what your best stocks were, I doubt any of those would pop up in your answer.

I don't single these out so you can feel bad if you have them. But instead, to get you to stop and think about 'why' you have them.

Nobody invests so they can underperform the market. But if you are, why? You don't have to.

How the Other Half Lives

Of course, there are a lot of big names beating the S&P 500 too. Take Apple and Amazon.com for example. Both outperforming the S&P 500 by 72.90% and 55.57% respectively.

But now let's move outside of the S&P.

Did you ever hear of a company called Nve Corp.? What if you did? It has outperformed the market by over 99.34% since the start of the year. Or Wimm-Bill-Dann Foods (WBD)? It's up 127.88% versus the market. Or Stec, Inc.? It's outperformed the market by over 634%.  

There are hundreds and hundreds of stocks producing fantastic gains that many people may never have even heard of.

What about you? How many times have you heard about a stock or read about a stock that skyrocketed - only to think to yourself: "if only I knew about that stock ahead of time, I would have been in that".

Expand Your Universe

Increasing your stock knowledge and awareness of new and better stocks is easier than you think.

Start off with some screening.

It's easy to do. And it'll only take you 5-10 minutes a day. Or maybe 15-20 minutes a week if that's all you want.

1.    Start by scanning the top-ranked industries. Since 50% of a stock's price move can be directly tied to the group that it's in, this is a great way to put the odds of success in your favor of finding winning stocks.

In fact, the top 50% of the Zacks Rank industry groups outperformed the bottom half of the industry groups by a factor 4:1.

2.    Search for the top performers in those groups. Great stocks often have great peers. And see what characteristics the winningest stocks have. Do they have the similar valuations? Are their earnings estimates going up? Has their stock rating been upgraded?

This is called modeling. See what characteristics the best stocks have in common and then search for other stocks with similar characteristics in other groups.

So far this year, the Zacks #1 Rank stocks are up 31.5% versus the S&P's 3.2% return.

3.    Test your ideas. Not every stock picking idea you come up with will make it into the Stock Picking Hall of Fame. Test your ideas before you trade and see if your screen generally find stocks that go up once they've been identified, or if your screen picks stocks that go down once they've been identified.
 
This is important stuff to know.

With backtesting, you can quickly see how successful your stock picking strategy has performed in the past, so you'll have a better idea as to what your probability of success will be now and in the future.

And don't worry if you don't want to build your own. The Research Wizard program that I use, for example, has many different proven, profitable and tested strategies to pick and choose from. Long-term or short-term, growth or value, aggressive or conservative, strategies that are up over 50% and 60% so far this year.

The key is to do what works. 

Leadership

For most of us, our investments are the largest, most important chunk of money we'll ever be responsible for in our entire life.

And if it isn't now, it likely will be one day.

The leaders in the past (stock names we're all too familiar with) will likely not be the leaders in future.

But you can stay ahead of the pack by following those three simple steps above.

And don't be afraid to consider a stock you may never have heard of before. There was a time when some of the best stocks in your portfolio today were brand new to you before you bought them. And now they're one of your favorites.

Start screening for new and better stocks today. And the next time you read about or hear about a stock that's skyrocketed in price; instead of thinking, 'I could have been in that had I known about it' - wouldn't it be great to say, "I know, I'm in it!"

To get you started, you may want to take a look at the stocks that came through some of our top performing strategies in the Research Wizard, like Filtered Zacks Rank2 (up 62.8% so far this year) or Big Money Zacks, which has been dubbed the Research Wizard's "Super Strategy". Since 2001, it has averaged a yearly gain of +72.5%. 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.