I always wanted to be able to pick the best stocks.
The whoppers that everyone talks about at cocktail parties and golf courses.
And most importantly, the ones that significantly impact your wealth.
We all want to know the winners before they are massive winners.
I had a slight problem, though. When I started investing, I knew only vaguely what a stock even was. Why prices went up – and down – was another matter altogether.
Still, even as a complete noob, I always envisioned having a system to analyze stocks and tell me whether they were good buys or not.
But I didn’t know where to begin – beyond learning what a stock actually was.
I started reading and studying anyone and anything I could find.
I stayed tuned to CNBC, which was a mixed blessing, and I searched for interviews of investing masters like Peter Lynch.
I even managed to find a pirated copy of the PBS documentary about Paul Tudor Jones simply called “Trader.” He supposedly bought every copy and tried his hardest to have it erased from public access. Clearly, some secrets are worth keeping.
Initially, I was more confused than ever. The news didn’t match what investment masters said. The masters didn’t match what my Wall Street clients said. And my clients didn’t match what my fellow traders said.
And what most of them said didn’t match what I was seeing with my own eyes.
I learned early on what did not work – my gut. When I started investing my own money, I traded more on gut feelings and emotions. I lost on 19 of 21 trading days, blew up my account, and decided it wasn’t for me.
I could only resist the challenge for so long, though. I wanted to succeed where so many others had failed – including me.
So, I got back on the long road of discovery. It was hard, taxing, and expensive.
And I am writing this so you don’t have to travel the same road, hit the same potholes, and pay the same tolls.
In the end, I arrived at my desired destination with a proven system for picking winning stocks. I have nearly 35 years of history, data, testing, and back testing that shows it works with statistical significance –a fancy data scientist term for “meaningful.”
That system powers my stock recommendations in The TradeSmith Investment Report and other research publications I produce.
I use it for myself and my family. I would never buy or recommend a stock without it.
I sell the results to hedge funds, institutions, and professional traders.
And I want to share a summary of how it works… how you can pick the big winners that people talk about. The stocks that make you money.
The Basics
My system would never have ended up as effective as it is if I hadn’t been fortunate enough to sit in a seat few others occupy. As Head of Equity Derivatives North America for Cantor Fitzgerald, I literally sat – okay, sometimes I paced – at the epicenter of Wall Street’s biggest stock traders.
They were my clients.
I studied the ones I respected… the ones who always seemed to be right. I spent years poking, prodding, and inquiring, eventually prying out of them the keys to their success. A drink or two along the way may or may not have helped.
I tested everything they told me, throwing out what didn’t work and keeping what did.
I found that winning stocks share crucial characteristics.
I divided those essential characteristics into three main categories:
- Fundamentals
- Technicals
- Big Money inflows
By focusing on those three main criteria and following certain steps, you can eliminate most stocks out there and be left with a select list of great candidates for future profits.
Today, I’ll break down the first step.
Step 1: Look Closely at the Business
It all starts with finding the highest-quality businesses around. We begin by analyzing the business itself – the fundamentals.
You have the highest probability of making money if you invest in profitable businesses that are growing.
And fortunately, strong growth is measurable. The data doesn’t lie.
Fundamental analysis tells a company’s financial muscle, sales and profits, growth rate, valuation, and more.
We want to invest in companies that are growing, and there are several key growth factors to look for:
- 1-year and 3-year sales growth of 10% or more
- 1-year and 3-year earnings growth of 10% or more
- 1-year estimated sales growth of 10% or more
- 1-year estimated earnings growth at 10% or more
- Profit margin of 10% or more
Those aren’t super high thresholds, but you would be surprised at the number of businesses that don’t quality.
I also analyze debt levels, preferring a debt-to-equity ratio of 25% or less so as not to be a drag on profits. And I like businesses with plenty of free cash flow. That gives them the ability to invest in growth as well as reserves if they are ever in a crunch.
You can find a lot of this information in quarterly earnings reports, which is why they’re a big deal in the investing world. Wall Street analysts crunch the numbers, and investors cheer or jeer, based on whether the numbers meet, exceed, or fall short of forecasts.
I look for companies that consistently beat sales and earnings forecasts and raise forward guidance. This often triggers big price jumps.
There are other fundamental yardsticks I analyze as well, but the above eliminates much of the noise and gets us down to about 3.5% of the 6,000 stocks that I run through my system. Or stated in reverse, our targeted fundamental metrics remove 96.5% of stocks that everyone else is looking at.
That gets us a long way to finding the best of the best, but we’re not done yet. In part two, I’ll talk about the next step in picking those money-making stocks. Stay tuned.
I hope an overview of my system and methodology helps you in your investing journey, whether you do it all on your own or with some help. If you’d like my help, click here to learn how you can start receiving my TradeSmith Investment Report stock recommendations – all powered by my Quantum Edge system and backed by years of data and testing.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
