How the Other Half Lives
by Kevin MatrasDecember 07, 2012 | Comments : 0 Recommended this article: (0)
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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 the recent run-up.) But you probably have some laggards in there as well as some outright losers.
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 theyd hoped to see in their own stock investments is because they dont 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 more than half of the stocks in the S&P 500 are underperforming the Index? Some quite spectacularly.
Which half are you in?
Even 'good' companies like Caterpillar, they're down -5.1% compared to the market's 12.4% gain. Or Humana, down -25.6%. Or Best Buy, down -47.1%. So what gives?
If somebody asked you what your best stocks were, I doubt any of those would pop up in your answer. Not now at least.
I don't single these out so you can feel bad if you have them. But instead, 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.
More . . .
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How the Other Half Lives
Of course, there are a lot of big names beating the S&P too. Take Apple Computer (even after its recent pullback) or Amazon, or Disney for example. All are outperforming the S&P with gains of 35.1%, 46.4% and 30.8%, respectively.
But now let's move outside of the S&P.
Did you ever hear of a company called Dorman Products? What if you did? It has outperformed the market by gaining over 86.8% since the start of the year. Or Exterran Holdings? They're up 135.3%. Or Rentech Nitrogen? Up 136.1%.
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 Ranked Industries outperformed the bottom half of the Industries by a factor of more than 2 to 1.
2) Search for the top performers in those groups. Great stocks often have great peers. See what characteristics the winningest stocks have. Do they have 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.
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 finds 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 have shown 30%, 50% and even over 67% a year.
The key is to do what works.
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!"
Take a look at the latest stocks from some of our best-performing strategies loaded into our Research Wizard. I've arranged for you to try it for 14 days free. For example, you can see the top picks from the Filtered Zacks Rank, the R-Squared EPS Growth strategy, Momentum Method 1, or Big Money Zacks, which has been dubbed the Research Wizard's "Super Strategy". Since 2001, it has averaged a yearly gain of +67.4%.
Thanks and good trading.
Zacks VP Kevin Matras is our stock screening and chart patterns expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies.
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