Pick Leaders, Avoid Laggards

By Vinayak on Monday, September 9, 2013 with 0 comments

It's crucial to concentrate your efforts on industry leaders as they are the ones who will produce the greatest gains. This is the "L" in the CAN SLIM method.

L = Leader or Laggard: Which is Your Stock?
  • Buy among the best two or three stocks in the industry group.
  • You should buy the really great companies – those that lead their industries and are number one in their particular field.
  • Buy number one, this company will have the best quarterly and annual earnings growth, the highest return on equity, the widest profit margins, the strongest sales growth, and the most dynamic stock-price action.
  • AVOID sympathy stocks moves.
  • A sympathy play is a stock in the same industry group with a leading company that is bought in the hope that the luster of the real leader will rub off on it.
  • The stocks will eventually try to move up in "sympathy" with the leader, but they never do as well.
  • Always sell your mistakes while the loss is still small, and watch your better selections to see if they progress into your big winners.
  • Find new leaders during market corrections.
  • Better growth stocks normally move 1.5 to 2.5 times the general market averages.
  • However, during bull market correction, the growth stocks that decline the least are usually better selections and those that drop the most are normally the weakest.
  • Once the general market decline is definitely over, the first stocks that bounce back to new price highs are almost always authentic leaders.
  • These chart breakouts continue week by week for about 13 weeks.
  • The best ones usually come out in the first 3-4 weeks.
  • This is the ideal period to buy stocks.
  • Look for abnormal strength on a weak market day
  • If a stock is trading up on heavy volume while the market averages are down, it could be the next big winner.
SUMMARY: It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders. Get out of your laggard losers if you're down 8% below the price you paid so that you won't risk getting badly hurt.

Category: Analysis

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