Finding the best stocks to buy can be a challenge…
For the past few years, economic growth has been lackluster at best.
But we may finally be picking up speed…
During the third quarter, the U.S. economy grew 2.1%. That’s right on pace with the 2% growth we saw during the second quarter. What’s more, it beats the 1.9% estimate we were striving toward.
According to Chief Investment Strategist Alexander Green, it’s creating the perfect opportunity for momentum investors…
“Strong economic growth is improving momentum… And the sharp cut in taxes and federal regulations implemented by Trump has driven it,” Alex says. “Anything that makes it easier to start or expand a business is good for business, good for sales, good for earnings.”
And subscribers to Alex’s VIP Trading Service The Momentum Alert are reaping the benefits.
Momentum Alert subscribers have had the opportunity to land big winners, including a 1,024% gain on Chipotle Mexican Grill Inc. (NYSE: CMG) and a 1,121%% gain on Skyworks Solutions Inc. (Nasdaq: SWKS).
A Winning Checklist for Finding the Best Stocks to Buy
Here’s Alex’s foolproof checklist for identifying high-flying momentum companies like Chipotle and Skyworks:
✓ Double-digit sales growth. “You have to see robust top-line growth in order to get really dramatic bottom-line growth.”
✓ Earnings growth of 20% or better for at least three years. “It’s natural for people to think that after three years of 20% growth, the big move is already behind the company.
“But companies tend to get in a profitable niche, find an industry where they’ve got a competitive advantage and exploit it… and they have several years of extraordinary growth. That’s why we want at least three years of 20% or better earnings growth.”
✓ Earnings growth of 25% or better in the most recent quarter. “We want those earnings to even be accelerating in the most recent quarter, so for the most recent earnings, we want to see 25% or better growth in net income.”
✓ Return on equity of 17% or better. “Even though this is a growth methodology and Warren Buffett uses a value methodology… he says the single most important criterion when he’s evaluating companies for purchase is whether they have a high return on equity; that’s how important it is. So we insist on that as well.”
✓ Level of innovation. “A perfect example of this is Apple (Nasdaq: AAPL). It came out with the iMac, iPod, iTunes music store, iPhone and iPad, and new iterations of all these products…
“And because it was a great innovator, that led to strong sales growth, which led to strong earnings growth, which led to the stock making a dramatic move upward.”
✓ High-quality management. “Just as every great sports franchise needs a Vince Lombardi or Bear Bryant or Phil Jackson or who-have-you to get the maximum out of the team, so do you have to have world-class management to get the best performance out of a stock.”
✓ Timeline (within eight years of IPO). “Most of the companies that we buy are within eight years of their IPOs. They tend to be young, entrepreneurial companies and midcap stocks.”
✓ Share buybacks. “When a company announces a big buyback, management is essentially betting their careers that the stock is undervalued; that’s a very strong indicator.
“The other reason stock buybacks are so positive is simply mathematical. If you’re buying back stock, you’re reducing the number of shares outstanding.
“If you’re growing the company’s earnings and you’re declining the number of shares outstanding, you get stronger growth and earnings per share, which are the primary short-term drivers of stock prices.”
✓ Technical factors. “You never want to buy into a company that goes through what I call a ‘waterfall drop.’ That’s when the stock’s trading up and all of a sudden it goes down due to a bad piece of news.
“Studies show that stocks that have a waterfall drop, six months later they’re significantly lower than they were the day they dropped. So you never want to fight the technicals on the stock, and what you want to see is a stock rising on good volume.”
✓ Institutional support. “The vast majority of the volume that takes place in the New York Stock Exchange and the Nasdaq is not individual investors like you and me…
“It’s big pension plans and mutual funds and hedge funds and endowments, and you don’t want to be buying the stocks that these companies, these huge investors, are selling.”
Alex already goes through this checklist for subscribers to his Momentum Alert.
But if you’re looking to add more momentum stocks that aren’t in Alex’s portfolio, print out the above checklist and keep it by your computer.
The next time you buy a stock, go through Alex’s 10 parameters and check them off yourself.
It’s one of the best ways to ensure that your returns are growing as rapidly as the economy.