Back to top

3 Killer Criteria for Super Swing Trades

Read MoreHide Full Article

How do you find good stocks for great short-term trading opportunities? Do you hunt for value, growth or price momentum?

I look for all three, but with a twist that gives me an added "edge". I want to buy solid growth stocks after the market has "temporarily" and irrationally thrown them out with the bath water. If I am right that the selling insanity is temporary, I am also getting value that is about to resume a momentum price trajectory.

The exaggerated reports of a great stock's death are often terrific "one shot, one kill" trading opportunities. Here are my essential screening gauntlet for "killer" swing trades with an edge:

1) Industry Dominator, Moat Optional
2) Earnings Machine with Institutional Sponsorship
3) Juicy Price Collapse that makes me say: "This stock is on sale!"

The first criterion is pretty straight forward. I want to be looking at a well-run business with an established niche, if not industry domination. Obviously, a competitive moat is ideal. It’s hard to get excited about price momentum if the company doesn't have other kinds of momentum going for it.

The second criterion is all about growth. And when steady earnings momentum is confirmed by institutional investors accumulating and holding shares over long periods, you know you are in good company for higher prices in early to mid-stage growth.

The third criterion is all about relative value. Sometimes good stocks get trashed for some of the following unwarranted reasons:

  • Missed EPS or revenue target
  • Warned about a soft patch in business or economy
  • Made an acquisition the Street didn't like
  • New competitor is knocking on their niche
  • Concerns about the economy that cause a correction and sink all stocks with the market tide
  • Management change or a legal/regulatory/environmental battle cry from some assailant

The assault could be any one of a dozen things that drive the price of a good company down 20% or more. In all cases, if you can confirm that criterion #1 and #2 are still intact, you may have just found a juicy bargain.


Only Hours to Go for Hidden Bulls

Saturday, February 18 is your last chance to target quick bull market swings that few are seeing. Time's running out to take advantage of the irrational behavior of other investors. The door must close to Zacks' new short-term investor group because if too many members were accepted, it would be harder for everyone to profit fully.

Don't miss four powerful investment opportunities that are emerging...

See them now >>


3 Stocks That Screamed "Buy Me!"

1) CME Group (CME - Free Report)

The most dominant derivatives exchange in the world saw a slow drift lower in its shares for all of 2011. Falling from above $325 to support at $240 in the fall, the stock met strong resistance at its 200-day moving average in November at $280. And then things really got scary when one of its largest clearing members filed for bankruptcy on Halloween.

The implosion of MF Global sent institutional investors running for the hills, and sent the stock to lows not seen since April of 2009. When I saw the stock trading at $225 in early January, I decided to take a closer look at the earnings picture. Estimates had definitely come down after the Corzine debacle, but the core business was intact, still dominant and still growing.

Plus, the company was poised for potentially outstanding growth as trillions in the OTC interest rate derivatives business was destined to move to the exchange "mark-to-market" model. Sensing a fantastic opportunity, I bought March 260 calls for under $2.50. After CME's strong earnings report in February, the stock exploded from $240 to $290, handing my Tactical Trader subscribers at least a triple (200% gain) in those options, while some held on to see ten times their money!

2) Coinstar (CSTR - Free Report)

Remember when Netflix (NFLX) shot themselves in the foot by making their subscriber service more complicated and costly? Customers said "who needs this?" And investors punished the stock because they saw the company headed in all the wrong directions.

Well a tiny little competitor for movie entertainment appeared to be headed down the same path after its October earnings report. Coinstar, owner of the Redbox DVD rental kiosks, raised their price by a whole 20 cents! The stock fell nearly 20% as investors thought it was another NFLX debacle.

I said this was crazy! This price bump should only make CSTR earnings estimates go up. And everybody I knew who rented movies the Redbox way would gladly pay another 20 cents. Heck, most people I know would pay another buck and not think twice. Why? Because it's fun to go pick a flick that way – even if you are "streaming" video at home, which most consumers are not.

I was so convinced about CSTR being a bargain, I told everyone to "buy it with both hands" under $45. The company was not only executing its core strategy, it was brewing the content distribution deal with Verizon for potential streaming opportunities. As you can see from the chart, CSTR caught a lot of bears by surprise on their last earnings report in early February. I made 24% on my shares.

3) Vertex Pharmaceuticals (VRTX - Free Report)

Vertex is not exactly a "dominator" in biotech when compared to Amgen or Celgene. But it did create something incredible last year that surprised lots of pharma experts and investors. They produced the first incredibly successful drug treatment for the hepatitis-C virus (HCV). Their drug Incivek topped sales of over $400 million in the third quarter of 2011, while pharma giant Merck could only do about $80 million in sales with their HCV treatment.

Based on this success, the earnings estimates for Vertex soared to above $4 per share for 2012 with projected sales of over $2.5 billion. But the stock was already in a curious collapse before and after those results came out, getting cut in half from $52 to $26 in only two months. I decided to take a closer look at the catalysts.

What I found was that the analyst community and large biotech investors were looking at all kinds of new competition for Incivek coming to market. The VRTX drug used an interferon cocktail regime with nasty side effects and lots of competitors were creating next-generation oral treatments that didn’t need interferon. The biggest threat came from Gilead Sciences who had just paid $10 billion for Pharmasett to get their hands on that young biotech's HCV treatment.

The problem was that none of these competitors would have their drugs ready for market until 2014. So with 170 million people worldwide exposed to HCV, and VRTX estimates not coming down, I thought that Incivek still would win in 2012. Plus, VRTX had a cystic fibrosis drug very close to FDA approval.

On the very first day of the Tactical Trader service in early December, we opened the books by buying the VRTX April 30 calls for under $4. We just sold them for a 100% gain last week. Too bad we didn't keep them a little longer as the stock launched above my $40 price target Friday morning.

Catching Falling Knives, or Scooping Fallen Gems?

There's an old adage in trading and investing that one can get really hurt trying to catch a falling knife. But if you do your homework, and you develop sound screening criteria that give you a very favorable risk/reward edge, you can bank sizable profits off the irrationality of other investors.

I may not have the deep pocket and time horizon of a Warren Buffett, but my approach fully capitalizes on the idea to "be greedy when others are fearful."

No Need to Pursue These Profits on Your Own

If you'd like some help, my private trading group has been re-opened until Saturday to new investors. Its purpose is to go long or short with stock, ETF, and options moves to catch small market swings that others rarely spot and ride them for substantial one to 12-week gains.

The number of investors who share the moves from our Zacks Tactical Trader must be limited, and demand to get into the service was so intense that it had to be closed early when introduced last December. Now it's open to you again, but only until 11:59 pm Saturday, February 18. There will be no extensions so I strongly encourage you to look into it now.

Click now for details about Tactical Trader >>

Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets. A former market-maker in the $4-trillion-dollar-a-day world of interbank trading, he developed the ability to track the movement of money, and trained his reflexes to take advantage of it. Today he directs the new Zacks Tactical Trader, providing commentary and recommendations.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

CME Group Inc. (CME) - free report >>

Capstar Financial Holdings Inc. (CSTR) - free report >>

Vertex Pharmaceuticals Incorporated (VRTX) - free report >>

More from Zacks Weekend Wisdom

You May Like