The most excellent way to pick great stocks

Discussion in 'Trading' started by mrmarket, Jan 31, 2003.

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  1. I developed a stock-picking model when I was in graduate school to take advantage of the bullishness the market was exhibiting at the time. The premise was to invest in high beta stocks while trying to limit my downside exposure in the event of a stall or downturn. By using the quantitative steps in the model, stocks are selected that are experiencing sustainable price momentum. The model is a multistep screening and high-grade process that goes something like this:

    First, create a universe of about 200 stocks that have demonstrated strong price appreciation and earnings growth in the last 12 months. You can find some pretty good easy to use screening tools on the Internet such as I use the following screening criteria to build my universe of stocks:
    Screen #1: Stocks making new highs with IBD EPS rating of 90 or higher

    Screen #2: Stocks within 2% of their 52 week high with a 52 week price appreciation > 300%

    Screen #3: Stocks within 5% of their 52 week high with a 52 week price appreciation > 150% and EPS growth of 25%

    Screen #4: Stocks within 5% of their 52 week high with a 52 week price appreciation > 125% and P/E < 50

    Screen #5: Stocks within 5% of their 52 week high with a 52 week price appreciation > 50% and P/E < 15

    Screen #6: Stocks within 10% of their 52 week high with a 52 week price appreciation >100% and P/E < 100 and 3 year earnings growth of 50% and 5 year sales growth of 25%

    Screen #7: Stocks with Investors Business Daily Ratings greater than 95 EPS and 95 RS.

    Screen #8: Stocks with Investors Business Daily Ratings greater than 90 RS and PE less than 20.

    Each screen will yield about 20 – 25 stocks. Rank these stocks on the following criteria: Price Appreciation, Price Appreciation divided by trailing 12 month P/E, Price Appreciation divided by forward 12 month P/E. Weight each criterion equally and rerank the database. This process favors stocks with more reasonable valuations and weeds out those with no earnings.
    Take the top 20 stocks and rank by 12-month revenue growth.
    Take the top 10 stocks and run a time series regression analysis on the daily prices for the last 12 months and rank by the highest r-squared correlation coefficient.
    Take the top three stocks in order and perform due diligence to determine if there were any one time non – operating factors that affected the data just analyzed (asset sales, lawsuits, financing, etc.) or if there is any pending news of significance that could upset the applecart. Select the highest ranked stock that clears this hurdle.
    Buy this stock. In a typical bull market, the stock will, on average, achieve a 15% gain within 4 to 6 weeks. Sell the stock and repeat the process. Why sell so soon? Well there are ever changing phenomena going on in the market that could make your selection criteria quite different a month after the signals told you to buy this stock. The theory here is that you are selling a potentially "tired" stock and trading it for a "fresh" one.
    What this process is trying to do is to select a hot growth stock that has a little more juice left in it to get you that last 15% without being so hideously overvalued that it could drop like a rock. I don’t think I need to buy stocks with extended valuations to make a quick profit. There are stocks out there with good momentum that aren’t bad to hold if I make a wrong decision. I think my model finds them. My model has been successful in protecting me from real lemons. Preservation of capital is always important. Buying companies with real earnings protects me in the down markets. We all work hard for our money. It makes no sense to give it away. That’s why I believe it’s important to buy stock in companies with real earnings.

    Tell me what you think of my model. I’d be happy to answer any questions about this process if you send me an E-mail.
  2. man


    I appreciate reading your strategic thoughts on trading and it was fun to follow some of the fun stuff that took place on various threads.
    I would like to humbly ask to stick with trading if that is possible. I think there is potential in your way of looking at things but I feel for myself that some parts of your presence so far make it difficult for me to communicate with you. I do value self confidence as a crucial part in this business. But you for yourself know the difficulties of arguments on your track record.

    I do not want to offend you. If this post does not fit in your thinking I will stay away. It's your thread.

  3. Trading / investing...I think we are all trying to find a way to make a little extra pocket change. You say tomatoe, I say tomahtoe.
  4. Mr Market, you have portrayed yourself in such an idiotic manner
    in another thread that I find it impossible to give you any creditability irrespective whatever you say now or in the future.

    Even if you had found the holy grail and Jesus Christ was standing next to you with his arm around you, I would be most surprised if most people didn't have similar feelings.

    I wouldn't have bothered to look at this thread had I known you started it.

    As far as I am concerned you can have this present thread all to yourself.

  5. man


    No offense happened here so far why start with it?

    I am interested in what you would think about making your approach market neutral by either selling futures on a beta neutral basis, or try to work out a short selling approach on single stock basis. maybe using short interest as one main variable.

    what do you think.

  6. Mr Market

    I hope all the previous antics can be kept out of this thread and there can at least be some discussion of the method.

    You've acknowledged that this method was designed to take advantage of the bull market conditions that existed at the time, and as we all know, market conditions are now far from that.

    Perhaps you could describe both your entry and exit criteria in more detail and how you time your purchases and subsequent sales. What measures you use to limit your losses and cull non/bad performers from your list/portfolio.

    This could go on to talk about many more aspects, but that is a start. Hopefully this can remain on-topic.

  7. man


    sorry if I missed it. what about stock liquidity. you said take the top 200 performers, but which universe from.

    I have the feeling that this approach could be enhanced by widening the portfolio in order to protect against higher default risk in small cap stocks. why not trade one hundred stocks on a quarterly basis and betting a big cap future against it. by means of this one could capture the momentum and the small cap effect at the same time. why not test it on historic data.

    girlpower. thanks for being here.

  8. Vishnu


    What happened to your system since March, 2000. My guess is buying stocks at their 52 week highs hasn't worked out so well since then.
  9. ALICE


    Good then that means we won't be seeing any more of you on this thread, right?

    Your ignore list must be quite full, freealways, because there were many others acting irresponsibly there the least of which was mrmarket (if at all) so their "credibility" must also be shot with you.

    Now, let's move on to what I hope will be a very productive and enlightening thread. :)

  10. Hide the meats and cheeses!
    #10     Jan 31, 2003
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