Lesson 12 How to Profit by Picking Leading Stocks in Leading Sectors & Industry Groups

Transcription

1 Investor Education Series Lesson 12 How to Profit by Picking Leading Stocks in Leading Sectors & Industry Groups The comments expressed here are based upon study and interpretation of available data as it relates to our historical models of the best-performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date, the officers, directors and/or shareholders of Investor s Business Daily, Inc. or their affiliates own securities or buy or sell securities listed in the following pages, or those not mentioned. Investor s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor s Business Daily, Inc. 1

2 Why is sector and industry group strength so important? How IBD ranks sectors, industry groups and group leaders Where to find leading sectors and industry groups? What is a leading stock? Always check for sector rotation Cousin Stock Theory & Follow-On Effect How to quickly find today s leaders in top-ranked sectors and groups 2

3 Why is sector and industry group strength so important? Almost half of a stock s move depends on the strength of its sector and industry group: Sector = 12% Industry Group = 37% TOTAL = 49% Why put yourself at a disadvantage by buying stocks in a weak group or sector? 3

4 You cannot overstate the importance of being aware of new group movements. - William J. O Neil, IBD Chairman and Founder You can spot and profit from those movements by checking IBD s ranking of sectors, industry groups and group leaders. (See simulation from March 2009 on slide 18) 4

5 How IBD Ranks Sectors, Industry Groups & Group Leaders 33 Sectors Ranked daily in IBD s NYSE + Nasdaq Research Tables (See slide 6) 197 Industry Groups Ranked daily in IBD s 197 Industry Sub-Group Rankings (See slide 7) Top 5 Group Leaders within each industry group Ranked daily in IBD Stock Checkup (See slide 13) 5

6 Where to find leading sectors? IBD ranks 33 sectors (e.g., retail, medical, energy, etc.) based on price performance of stocks in each sector. Sectors ranked in IBD s NYSE + Nasdaq Research Tables (In B section of IBD & eibd) 6

7 Where to find leading industry groups? IBD ranks 197 industry groups based on 6-month price performance of the stocks in each group. Groups ranked in IBD s 197 Industry Sub-Group Rankings (In B section of IBD & eibd) Note: Industry sub-group and group can be used interchangeably. 7

8 For best results, focus on stocks in top 20 groups History shows, on average, stocks in top 50 groups outperform those in bottom 50. Further increase your odds of success by focusing on top 20 and avoid bottom 20. 8

9 Example Breakdown of Sector Industry Groups Stocks Industry Groups within Computer Software Sector Computer Software - Database Computer Software - Gaming Computer Software - Specialty Enterprise Computer Software - Design Computer Software - Desktop Computer Software - Enterprise Computer Software - Financial Computer Software - Medical Computer Software - Security Stocks within an Industry Group: Computer Software Database (20 stocks in group) Oracle (ORCL) BMC Software (BMC) Informatica (INFA) Tibco Software (TIBX) OpenText (OTEX) etc. 9

10 Why does IBD divide industries into 197 industry groups? Because stocks within a given industry perform at very different rates. Other firms divide stocks into far fewer groups. Doesn t allow you to zero in on the real leadership within an industry. 10

11 Example The Retail sector may be ranked #1, but which specific group is leading that growth? Which groups lag? Internet Retailers? Consumer Electronics? Apparel/Shoes/Accessories? Home Furnishings? Discount & Variety Stores? Wholesale Jewelers? Apparel/Shoes/Accessories may be rising rapidly, while Home Furnishings underperforms. To find the best stocks, it can help to find the strongest groups. 11

12 What is a leading stock? One with outstanding, accelerating earnings & sales, big return on equity, etc. (See Lessons 7-9) Check ratings in IBD Stock Checkup (On Investors.com) Pass/Neutral/Fail ratings show you if your stock has CAN SLIM traits i i i Pass Neutral Fail 12

13 One that is a leader within a leading industry group See group leaders in IBD Stock Checkup (On Investors.com) Shows top 5 stocks in a group Focus on top 1 or 2 leaders 13

14 One that is a leader within a leading industry group Not necessarily best-known stock in group EX: Men s Wearhouse was a household name in 2009, but lesser-known Lululemon Athletica had group-leading earnings and sales growth A true group leader has best: - Fundamental performance (earnings, sales, return on equity, etc.) - Technical facts (sound chart action, relative price strength and volume demand, etc.) 14

15 What is a leading stock? High Relative Strength Rating (ideally, 90 or higher) RS Rating can spot true market leaders - Compares stock s price action in last 52 weeks to S&P Then compares that to all other stocks on the market 15

16 What is a leading stock? High Relative Strength Rating (ideally, 90 or higher) RS Rating: 1 99 (99 is best) 99 RS Rating means stock s price performance outperformed 99% of all other stocks 16

17 Did you know? From the early 1950s through 2008, average RS Rating of the best-performing stocks BEFORE their major run-ups was 87. In other words, the best stocks were already acting better than nearly 9 out of 10 others BEFORE they made their most explosive advances. Don t bargain hunt for underperformers. Make sure your stock is a leader BEFORE you buy! 17

18 Historical Simulation: Impact of Sector & Group Strength Computer Software Medical Stocks in 2009 Strength of medical and computer software sectors propelled industry leaders to big gains when new bull market began in March How could you spot that trend early? How could you know which stocks were driving that move? 18

19 Step 1 Market Pulse in The Big Picture column alerted you to start of new market uptrend on March 12,

20 3/12/09 follow-through day marked start of new bull market Showed it was time to start buying again after the financial crisis See Lesson 2 for more on market bottoms and follow-through days 20

21 Step 2 IBD s sector rankings alerted you to strength of #1 Medical and #2 Computer Software sectors 21

22 From IBD s NYSE + Nasdaq Research Tables at time of follow-through day on March 12, 2009 Now you know the top sectors But what are the top-ranked industry groups within those sectors? 22

23 Step 3 IBD s 197 industry group rankings alerted you to top groups, including Computer Software Medical 23

24 From 3/13/09 Issue 24

25 From 3/13/09 Issue Healthy Industry Computer Software Medical group ranked #4 out of 197 groups Up from #38 seven months ago 25

26 Did you notice 6 of Top 20 groups were from the broad Medical and Computer Software sectors? From 3/13/09 Issue Doesn t it make sense to track stocks in those groups? 26

27 From 3/13/09 Issue Now you know the top sectors & industry groups But which stocks are the group leaders? 27

28 Step 4 IBD Stock Checkup alerted you to leading stocks within the top-ranked industry groups, including Computer Software Medical 28

29 Example Leaders in Computer Software Medical Group in March Cerner Corp. (CERN) - Quality Systems Inc. (QSII) Follow the Leaders IBD Stock Checkup shows the Top 5 stocks in each group (See slide 57) 29

30 Example Leaders in Computer Software Medical Group - Cerner Corp. (CERN) - Quality Systems Inc. (QSII) Let s see Cerner s subsequent move 30

31 Cerner (CERN) Weekly Chart 5/1/09 Big move on huge volume on 3/12/09 follow-through day But still forming base 31

32 Cerner (CERN) Weekly Chart 5/1/09 Broke out of cup-with-handle 4/17/09 Ideal buy point = (10 cents above peak in handle) If you were building your watch list before and after the 3/12/09 follow-through day, you had time to: Track Cerner s base pattern Buy at ideal buy point Profit from its big move 32

33 Cerner (CERN) Weekly Chart 7/29/11 4/17/09 Breakout 180% Gain in 27 months Would you find stocks like Cerner if you did NOT focus on top-ranked sectors, groups and group leaders? 33

34 Always Watch for Sector Rotation Sectors (and industry groups) get weaker or stronger depending on: Economic conditions Technological changes Regulatory issues etc. Tracking sector rotation helps spot emerging winners Regularly watching changes in rankings of Sectors, Industry Groups and Group Leaders helps you get in early on the next market leaders. 34

35 To spot sector rotation and identify the industry groups and stocks driving it, regularly check: Sector Rankings & Sector Leaders in NYSE + Nasdaq Research Tables (See slides 6 & 44 ) 35

36 To spot sector rotation and identify the industry groups and stocks driving it, regularly check: 52-Week New Highs & Lows (See slide 55) Shows which sectors have the most stocks hitting new highs 36

37 To spot sector rotation and identify the industry groups and stocks driving it, regularly check: IBD s 197 Sub-Group Rankings (See slide 7) 37

38 Cousin Stock Theory If an industry group and its group leaders are doing exceptionally well, there may be a supplier company cousin stock that s also benefitting. Example In 2004, Apple s stock took off as sales of the ipod surged. 2 cousin stocks also made nice runs: Synaptics (SYNA) Supplied touch wheels for ipod Rose over 180% in just 12 months Marvell Technology Group (MRVL) Made microchips for ipod hard drive Gained over 200% from

39 Follow-On Effect Look for clusters of industries that tend to move in tandem. When one key group begins to move, other industries with ties to it will likely follow. Homebuilders moving? Flooring companies may also build profits. Video game companies hot? Makers of graphics chips may also score points. 39

40 Example of Follow-On Effect In 2007, subsidies for corn-based ethanol drove up stock price of seed-strain developer Monsanto (MON). Follow-on Effect: More corn means more fertilizer. That caused the Chemical Fertilizer group* to rocket more than 220% in Group Leader Gains in 2007 Mosaic (MOS) 488% CF Industries (CF) 347% *Now called Chemical Agriculture group. 40

41 IBD columns to help you spot Cousin and Follow-On Effect stocks The New America Profile of new and innovative companies Daily in IBD and eibd 41

42 IBD columns to help you spot Cousin and Follow-On Effect stocks IBD Industry Themes Reviews sectors, groups & the stocks driving them Daily in IBD and eibd 42

43 How IBD Can Help You Find Today s Leading Stocks in Leading Sectors & Industry Groups - Sector Leaders - Your Weekly Review - IBD 50 - IBD Stock Checkup - 52-Week New Highs & Lows - IBD Leaderboard - MarketSmith 43

44 IBD Sector Leaders (Daily in B section in IBD & eibd) Highlighted at top of sectors in IBD s NYSE + Nasdaq Research Tables Great source for stock ideas: Sector leaders must have market-leading fundamental and technical strength to get highlighted 44

45 Past IBD Sector Leaders in an Uptrending Market Baidu (BIDU) Weekly Chart 4/29/11 Listed as Sector Leader 5/29/09 492% Gain in 23 months 45

46 Past IBD Sector Leaders in an Uptrending Market HMS Holdings (HMSY) Weekly Chart 4/8/11 Listed as Sector Leader 5/14/09 141% Gain in 23 months 46

47 Past IBD Sector Leaders in an Uptrending Market Riverbed Technology (RVBD) Weekly Chart 3/4/11 Listed as Sector Leader 7/26/10 149% Gain in 7 months All historical data for All illustrative historical purposes data for only illustrative purposes only 47

48 Past IBD Sector Leaders in an Uptrending Market Riverbed Technology (RVBD) Weekly Chart 3/4/11 Listed as Sector Leader 7/26/10 Are you checking the Sector Leaders regularly in an uptrending market? All historical data for All illustrative historical purposes data for only illustrative purposes only 48

49 Your Weekly Review (Fridays in B section of IBD & eibd) Highlights stocks with 85 or higher EPS and RS Ratings Stocks sorted by industry group ranking, from strongest to weakest 49

50 Your Weekly Review (Fridays in B section of IBD & eibd) Why 85 or Higher Rating Matters The best stocks tend to have EPS and RS Ratings of 85 or higher BEFORE they make their biggest moves. Your Weekly Review shows you which stocks meet that criteria right now. 50

51 Chart for each Your Weekly Review stock shows: Industry group ranking 51

52 Chart for each Your Weekly Review stock shows: IBD SmartSelect Ratings 52

53 Chart for each Your Weekly Review stock shows: Quick chart analysis, including alerts to bases & buy points 53

54 IBD 50 (Mondays in B section in IBD & eibd) Top 50 companies based on recent profit growth, Composite Rating and relative price performance in last 12 months. Includes charts & analysis for every IBD 50 stock (Same as Your Weekly Review see slides 51 53) 54

55 52-Week New Highs & Lows (Daily in B section in IBD & eibd) Which sectors have the most stocks hitting new highs? Find out instantly with this daily list: Sorted by sector 55

56 52-Week New Highs & Lows (Daily in B section in IBD & eibd) Find the Real Leaders Check regularly, since this list usually picks up the majority of stocks that go on to become the biggest winners in an uptrending market 56

57 IBD Stock Checkup (on Investors.com) Is your stock the leader in a leading industry group? Group Leaders Is it the #1 or #2 stock in the group, based on Composite Rating and other IBD SmartSelect Ratings? 57

58 IBD Stock Checkup (on Investors.com) Is your stock a leading stock in a leading industry group? Group Ranking Is it a top 20 group? 58

59 NEW! IBD Leaderboard Finding Winning Stocks Just Got Easier! - New premium product on Investors.com - Does most of the work for you Scans all IBD lists, then alerts you to the best of the best Provides timely chart markups that pinpoint the best time to buy and sell Highlights must-know facts about each Leader and its products 59

60 NEW! IBD Leaderboard Leaders List - Exclusive list of best of the best stocks - Each Leader stock actively tracked by IBD experts throughout trading day - Includes timely chart markups & analysis for every stock (See next slide) 60

61 IBD Leaderboard Timely Chart Markups - Alerts to bases & buy points - Explanation of current base count - Early warning signs & sell signals and other insight into the chart 61

62 NEW! IBD Leaderboard Cut List - When leading stocks flash sell signals, they move to Cut List - Helps you lock in gains and protect against losses - Includes timely chart markups & analysis for every Cut List stock 62

63 NEW! IBD Leaderboard Plus, IBD Leaderboard gives you easy, online access to: IBD s intraday, daily and weekly market analysis Exclusive IBD stock lists Take a trial of IBD Leaderboard at 63

64 MarketSmith Run custom screens to instantly identify top-rated stocks in top-ranked industry groups Screen by: - IBD SmartSelect Ratings - Industry group ranking - Sector and much more Example Screen 95 or higher Composite Rating 90 or higher EPS Rating 90 or higher Relative Strength Rating A, B, or C Accumulation/Distribution Rating A or B SMR Rating Top 20 Industry Group Ranking Learn more at 64

65 Lesson 12 Key Points Almost half of a stock s move depends on strength of its sector and industry group Industry group = 37% Sector = 12% For best results, focus on leading stocks in leading industry groups & sectors: Top 20 groups among the 197 groups IBD tracks Top 1 2 stocks within the group (using IBD Stock Checkup) Leading stocks aren t necessarily the best-known brands or companies Real leaders have strongest fundamentals (earnings & sales growth, etc.) and stock price performance To spot the next big winners, track changes in ranking of sectors, groups & group leaders Use IBD stock lists and features to identify top-rated stocks in top-ranked groups and sectors Find today s leaders with: Sector Leaders, Your Weekly Review, IBD 50, Stock Checkup, Leaderboard, MarketSmith 65

66 Where to Learn More About Finding the Real Leaders NEW! How to Make Money in Stocks Complete Investing System Includes How to Make Money in Stocks, Action Plan DVD, one month eibd subscription. Plus, a free Level I seminar in city of your choice. See Ch. 7: Leader or Laggard: Which is Your Stock? Ch. 15: Picking the Best Market Themes, Sectors, and Industry Groups Free Online Courses: Investor s Corner: IBD Workshops: The L in the CAN SLIM System (See Education tab on Investors.com) Daily investing lessons (See Education tab on Investors.com) Beginning to advanced workshops on chart-reading, buy & sell rules, portfolio management and more. (See See how to analyze a stock s fundamentals, group strength, and chart action with the Market Wrap and Daily Stock Analysis videos. Go to investors.com/ibdtv 66

67 Coming Next Month Bonus Lesson: Putting It All Together See how to put the investing strategy of the previous 12 lessons to work for you! You ll leave with: aeasy-to-use routine to help you stay on top of market trends and your stocks abuy and sell checklists that help take the guesswork out of investing atips on how to get the most out of IBD s features and tools and more! Stay in Touch! Get the latest updates from IBD on Twitter and Facebook!

68 The comments expressed here are based upon study and interpretation of available data as it relates to our historical models of the best-performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date, the officers, directors and/or shareholders of Investor s Business Daily, Inc. or their affiliates own securities or buy or sell securities listed in the following pages, or those not mentioned. Investor s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor s Business Daily, Inc. 68