http://www.meetup.com/northridgeIBD/

LETS MEETUP TO DISCUSS HOW TO PICK WINNING STOCKS

NOVEMBER 9, 2013

SURE FIRE STOCK PICKING•Everywhere, someone claims to have a sure-fire stock picking system....Guaranteed & these systems will cost $$$.•Book stores have shelves upon shelves of Stock Market books. How does one sift and sort through all the info?•"Do they work?" Some-yes. Most-no. There is no such thing as a do-all system that works in any and all situations.• Everything must be done according to the climate and conditions of the market taking into account the many variables that exist.•Good judgment is a must and requires knowledge. • A good system takes into account all these various conditions and provides a foundation of knowledge necessary to choose the best stock.

COMMON SENSEStock Picking Principles [There are some simple, common sense principles that can be utilized to improve anyone's stock picking skills. ]Check them out below:•1. Keep it Simple: So often and unknowingly, we make things more difficult then they need to be. •2. Determine the Direction of the Market: Buy long and Sell short based on the market direction. •3. Determine the Overall Trend of the Market [as with #2.] Is the trend UP, DOWN, or SIDEWAYS?– Specifically, in a Bull Market, buy LONG– Keep in mind, you need to make sure the proper conditions exist before buying any stock. •4. Look for Volatile Stocks: Wide price fluctuations create many opportunities for taking profits....and losses. Consider Options.•5. Look for Stocks Rising in Price: Stocks rising higher tend to keep rising higher.•6. Do not Bottom Fish: Look for the rising trend in which the highs are higher and the lows are higher.•7. Find Stocks Hitting NEW 52-week Highs: Again, stocks rising in price have an affinity to keep rising.

TECHNICAL ANALYSIS RESOURCES•1. Nasdaq.com - Look at the Heat Map - -Start each day looking over pre-market activity

•2. Stockcharts.com -click on "Stock Scans“ - -Choose Nasdaq 52-week highs --Sort Volume from highest to lowest - **Now choose stocks priced no lower than $10-$15 with a volume of at least 1 million shares traded daily. **Next, analyze each stock by viewing it's performance chart.

•3. E-Signal: esignal.com One of the best live professional charting platforms available. Every Investor needs to have a live trading platform.

•4. Keep Learning, Analyzing, and Following the Market.

RESEARCH IS KEY

o 1 Research the fundamentals of a business -earnings reports, the amount of debt , consumer demand and how it compares to other companies in the same industry. o Has the company produced more and more income annually for a

consecutive number of years, has a minimal amount of debt, has created a brand that consumers have come to know and appreciate, and offers dividends to its shareholders.

o 2 Perform fundamental due diligence on the actual stock. o Winning stocks tend to have price to earning ratios (PE) that may be similar

to the top companies in their niche. However, stocks with a low PE ratio could indicate a potential goldmine. Look at the PEG Ratio.

o 3 Determine the strength of the stock’s industry.o Research how the industry where your stock is trading is doing by looking at

news reports, going to popular stock market sites such as Morningstar.com.o Pick a stock in a segment of the overall market that is doing well and has not

recently had any negative news stories.

GOLDEN RULE

•Cut your losses when a stock drops 7-10%. All big losses start out as small ones.

• Investing should not be ”buy, hold, and keep your fingers crossed”.

• Invest the right way and you won’t have to worry about your investments.

• You want to sleep at night.

HOW TO PICK WINNING STOCKS

• Stock prices are driven by large institutional investors (like mutual funds, banks, brokerage houses, insurance companies, etc.) – who buy large blocks of top quality stocks.– Who will pay premiums for stocks with strong

earnings – Who seek the potential for future earnings growth.

• It pays to invest in the same kinds of quality companies they do.

Step One

• 75%+ of all stocks follow the price action of the overall market.– Your first step is to make sure that the major market

indexes, (namely the S&P 500, the Dow Industrials, and the Nasdaq Composite) indicate the market is in a confirmed uptrend. • Plot on a single chart $SPX, $INDU and $COMPQ • Below Price Action, you can put in 20-day, 50-day and 200-

day simple moving average overlays.• All of these moving averages should be rising, and layered

from the smallest moving average (the 20-day) to the largest (the 200-day)

–Or you can go to IBD’s The Big Picture / Market Pulse

3 MAJOR MARKET INDEXES

THE BIG PICTURE

Step Two

• Obtain a copy of a Monday edition of Investors Business Daily. It comes out each week on Saturday. – In the second half of the publications you will see the

"IBD 50" list. • This is a listing of the market's top-performing stocks in terms

of earnings, relative price strength, industry group, and that all-important institutional accumulation mentioned earlier.

• You will note that on the left-hand side of each page, there is a list of the companies. To the right of this list is a lot of detailed information on each company and its stock, including a chart of the stock's price action.

IGD50

Step Three• Read through the comments on

each stock and find those stocks that either indicate a buy point, or is in "buying range.“– These sometimes have a black

box around them. – A buy point is simply a price level

which represents the point of least resistance to a stock's moving higher.

– Traders and IBD refer to "cup and handle," "flat base," "double bottom," and other similar terms.

TOP INDUSTRY GROUPS•Pick Stocks Within Top Industry Groups -

•Industry groups are more specific groups within an overall sector, i.e. media sector then industry group would be"television" or "radio."

•Buy Leading Stocks in The Top Industry Groups at the right time!

•If you are only buying stocks within the top industry groups then you are already reaching into the bag with the most possible prizes. However, if you pick the very best stock out of the very best group you have given yourself the best odds.

•Buy Stocks With Strong Perform Strong "Sister Stocks"– Indication of strength in the industry group.•Buy Stocks Gaining Institutional Sponsorship– A stock being heavily bought by Wall Street institutions.

It can take an institution weeks or even months before they have finished buying the amount they wish to buy. Jump right in and watch your stock increase in price as these institutions purchase millions of dollars worth of stock.

•Follow The Market Trend, Don't Fight The Wind!– This is simple. Don't buy a long position in the middle

of a bear market, and don't sell short in the middle of a bull market. Go with the overall trend.

KEYS TO INVESTING IN SIDEWAYS MARKET

Focus on Dividend YieldYield is a consistent source of return and can act as a floor for a stock's price in volatile times.Select Low Multiple StocksLow multiple stocks tend to offer better capital protection – high multiple stocks have much more room to collapse.Defensive and Down-Market Protection in Sideways MarketsWear bear-colored glasses, be pessimistic in nature and judge investment return against investment risk.

Step Four• If there is a buy point indicated, begin to follow the

stock in real time on a daily basis. Once you see it move beyond the indicated buy point on strong, well above-average volume, you may want to consider buying it.

• If the comments say the stock is in "buying range," consider buying the stock as long it is no higher than 5% above any buy point mentioned.

• Stocks that are breaking out will often show two, three or four or more times their daily average volume early in the trading day, so it is usually pretty obvious when a stock is in breakout mode.

Step Five

• Monitor the stock and chart on a daily basis ensuring it is above buy point. • Check IBD each week (or daily) to see if the stock is "overextended" • Check stock's chart at free charts, or use MarketSmith (see below)• Consider selling stock after it has moved 7% to 10% above its buy point..

IBD NEWSPAPER

• A newspaper designed to give professional level stock data– Main selling point is that it compiles and sorts stock

market research and data for you to save time.• Main features:– General Market Direction [Jesse Livermore said all you

need to make money is to appraise conditions of market.

• What’s The Market Trend? B2– Charts for the major market indexes, with price and volume

activity, plus relative strength, moving averages and other metrics.• Not ordinary stock tables– Sorted into industry sectors then sorted by strength– Five proprietary ratings

• Earnings-per-Share Rating - growth ability based on last 3 years of earnings.• Relative Price Strength Rating -- price performance over the prior 12

months.• Sales + profit margin + return on equity (SMR) rating - measure a

company's sales growth and profitability. • Accumulation/Distribution Rating -- daily price and volume action and if

stock is being bought heavily (accumulated) or sold heavily (distributed). • Composite rating -- first column in the stock tables combines all of the

ratings; a summary rating for a quick review of performance.

IBD NEWSPAPER

Investment Routine with IBD Newspaper or eIBD.1. Big Picture2. Weekly Featured Stocks

a. IBD 50 (Monday & Wednesday) b. Big Cap 20 (Tuesday) c. Top/Bottom 200 Composite Stocks (Thursday) d. Weekly Review (Friday)

3. Sector Leaders Charts4. Stock Spotlight5. 52 Week Highs/Lows6. Stocks on the Move7. Investors Corner8. Timesaver Table

This will require 15-30 minutes daily but will reap big dividends.

HOW TO WIN IN A LOSER’S GAME

•So what's the secret to winning in a loser's game? That's simple: You lose less than others lose. •That advice comes from Charlie Ellis, one of the greatest investment managers ever. Ellis wrote "Winning the Loser's Game: Timeless Strategies for Successful Investing," a book that Peter Drucker, America's No. 1 management guru, called "the best book on investment policy and management." Ellis says the amateur investor is no match for the professionals. Period.

•Simply Focus On What Works. •Since there are over 10,000 stocks out there, you need a way to find the good ones. – By focusing on what works vs. guesswork (or worse), you'll pick winning

stocks consistently.– Go thru a checklist on all of your candidates before you get in. •Checklist

Look to see if a stock is in the top 20% of industries since half of a stock's price movement can be attributed to the group that it's in.

Earnings Estimate Revisions: See the estimates rising (or at least not falling) for Q1, Q2, FY1 and FY2, over the last 1, 4 and 12 weeks.

Positive EPS and Sales surprises: Since a company that has surprised in the past has a tendency to surprise again in the future.

Positive Growth Rates: Nothing extreme, but want the current year's growth rate to be positive and want next year's to be even better.

Valuations: In ranges most optimal for producing profitable results. i.e. the Price to Sales ratio being less than or equal to 1, or less than or equal to 2 also. And compare it to its industry.

Return on Equity: A Return on Equity or ROE above the median for its industry, increasing from the previous year or 5 year average. Margins increasing shows more profits are being made from sales.– Look at the charts for the weekly price and volume increasing .

A rising price accompanied by rising volume could show institutional buying. Increased demand means higher price.

Moving Averages: Stocks trading above the 50-day and 200-day moving average. Above the 10- and 20-day is a bonus. Being above the 50- and 200-day, is a bullish sign.

Chart pattern: Is the chart pattern bullish or bearish or both the daily and weekly chart?

CURRENT MARKET – CONFIRMED UPTREND

4th QUARTER

• Typically Strongest• Follow Market Averages and not ‘Mantras.’– i.e. “Sell in May and Go Away.”– You would have missed a good Summer in 2013

• Never decide you know where the Market is going.– Just watch the Charts and Trend Lines.– Let the Market tell you where its going.

PLAN AHEAD

• Build a Watch List.– Start with a population of 100+ Stocks– Use conditional scans to narrow the list to 5-10

stocks– Have the best stock in at least 5-6 Industry Groups– Look at the Fundamentals of these stocks• You want the biggest earners with good price and

volume action• You want a high Return on Equity

LOOK FOR ENTRY POINTS

• Proper identification of price consolidations• An O’Neil favorite is Cup with Handle

After Identifying CUP, do your Fundamental Analysis before buying.

FOLLOW THE MONEY

• Look for patterns of accumulation – Institution buying.

• Properly identify price consolidations and Pivot Points

• Only buy within a proper 5% of pivot point – don’t chase.

• Wade in – Don’t invest all dollars at Buy Point but increase holdings after stock has proven.– i.e. pullbacks that get support at the moving average– Stocks that have strong sister stocks.

LETS GO ONLINE

• We want to build a watch list of stocks.

• Lets pool our talents to describe the watch list that would be effective in the current Market