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Tips For Finding Tomorrow's Winning Stocks

11/18/11 09:50:17 AM
by Billy Williams

The high-performance stocks you hear about today usually means that you missed the big money. So instead of jumping in like everyone else, use these tips to find tomorrow's new stock leaders.

Security:   LULU, FOSL
Position:   Hold

There is a lot to be said about the spectacular growth of some stocks that end up being flashed across the financial news on TV or the blogosphere. Often, these runaway stocks come seemingly out of nowhere and jump into the consciousness of both traders and speculators and soon, everyone wants a piece of this new and exciting company. It's a tendency of human beings to want to profit by the next greatest thing but more often than not, you can end up being either too late or gain very little by the time you hear about a stock making a big move. (See Figure 1.)

The reason is that if you are hearing about a stock making a big move by the time Jim Cramer is screaming about it and making wild gyrations, the harsh reality is that the big money has been made and/or you may be too, too late. By the time we realize a stock has outperformed its peers and the market, it's only natural that your "greed glands" begin to excrete thoughts of huge profits and you salivate at the prospect of cashing out a big winner.

FIGURE 1: FOSL. In early 2010, FOSL, an apparel accessory chain, was mentioned in "The Wall Street Journal" for finding a niche in the clothing market by producing high-class retail stores that sell clothing accessories to women. Later, as the market discovered the stock, it broke higher for a return of several hundred percent return after that story.
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It's at this point that you are at your most vulnerable because the fear/greed principle is in danger of being violated. The principle simply states that if you make a decision based largely on either fear or greed, then you are making a poor decision influenced by two of the most destructive emotions to an intelligent speculator.

How this cycle plays out is an article in and of itself, but for now, let's explore how to avoid joining the johnny-come-lately crowd and begin to look at the ways to spot tomorrow's leaders before they are well-known names, which is, incidentally, where the largest portion of the profits await a trader or investor.

Looking for diamonds in the rough is a bit like the gold speculators of 1849 in California. During the gold rush, prospectors rushed in at the announcement that gold had been found in large quantities in the state and everybody with a shovel felt their greed glands excrete thoughts of large profits. Soon everyone picked up and ran to the Golden State to try their luck and find their fortune.

>b>FIGURE 2: LULU. LULU was featured in the "New America" section of "Investor's Business Daily." A retail chain that sells yoga-inspired apparel proved a big hit and found a profitable niche. Later, the stock went on to more than triple in share price.
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Ironically, by the time most of them got there, all the gold was gone. However, for those with the skill, will, and patience, they staked a claim and panned for gold, with some finding success. Huge success, in fact.

That is the model for you, as the trader, when looking for stocks. With the traits of skill, will, and patience, you must begin to look for sources where finding gold is likely.

The most common sources are "The Wall Street Journal" or, better yet, "Investor's Business Daily." Both periodicals have an excellent track record of profiling up-and-coming companies with innovative products and services that are shaking up their industries and, at the same time, giving themselves huge competitive advantages in their respective marketplace. Think Apple Inc. with its graphics software, iPad and iPod, as well as Core Labs, whose technology and expertise allows them to drill offshore for oil deposits in some of the most inhospitable spots on Earth.

"Investor's Business Daily" does have an edge, in that its "New America" edition spotlights such companies that allow you to get a leg up on the market and add those stocks to a watchlist. By the time everyone else figures out that it's a good company, you've already staked a claim.

This section has spotted stocks like Fossil, Buffalo Wild Wings, Coach, TemperPedic, and other emerging stock leaders before the rest of the investing public was aware that they even existed. See Figure 2.

Finding these stocks early gives you a huge advantage over the institutional traders and mutual fund managers who are often restricted to investing in stocks of a particular share price and/or market cap. As the company's stock begins to rise, it is likely to attract the interest of these major investors whose buying power can accelerate the stock value to stratospheric levels.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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