Ranked by 28-Period Williams %R as of 06/28/08 *

Key

Growth Momentum Stock Screening Criteria

        The approach focuses on companies with proven records of earnings growth while still in a stage of earnings acceleration.  It was developed by a well know author.

     When screening for quarterly earning increases, it is important to compare a quarter to the same quarter last year--i.e., this year's second quarter compared to last year's second quarter. As a confirmation of the quarterly earnings screen, you should check the industry group and locate at least one other noteworthy stock. Strong industry fundamentals should show up for a number of companies.

     Winning stocks had a steady and significant record of annual earnings in addition to a strong record of current earnings. The system tries to identify the strong companies leading the current market cycle.  The screen specifies a minimum annual growth rate of 25% in earnings per share from continuing operations over the last five years. This criterion proved to be the second most restrictive screen when used independently.

     A stock needs a catalyst to start a strong price advance. In his study of winning stocks, it was found that 95% of the winning stocks had some sort of fundamental spark to push the company ahead of the pack. This catalyst can be a new product or service, a new management team after a period of lackluster performance, or even a structural change in a company's industry, such as a new technology.  These are very qualitative factors that do not lend themselves to screening easily, however it is possible to study the companies passing the preliminary screens to see if any catalysts exist.  A second consideration that the author emphasizes is that investors should pursue stocks showing strong upward price movements. The author says that stocks that seem too high-priced and risky most often go even higher, while stocks that seem cheap often go even lower. Stocks that are making the new high list while accompanied by a big increase in volume might be prospects worth checking. A stock making a new high after undergoing a period of price correction and consolidation is especially interesting. The author feels that decisive investors should have sold a stock long before it hits the new low list.  The author's newspaper highlights stocks within 10% of their 52-week high and this was the criterion established for this screen. Used independently the screen allows about one-third of the companies to pass the filter.

     As the catalyst starts pushing the price of a company's stock up, those firms with a smaller number of shares outstanding should increase more quickly than those with a large number of outstanding shares. The author found that 95% of the winning stocks had fewer than 25 million shares outstanding, while the median for the group was 4.6 million.  We used a screen for stocks to have fewer then 20 million shares outstanding.  The author warns against selecting low-priced stocks with small capitalization and no institutional ownership, because these stocks have poor liquidity and often carry a lower-grade rating.

     The author is not like the patient value investor looking for out-of-favor companies and willing to wait for the market to come around to his viewpoint. Rather, he prefers to scan for rapidly growing companies that are market leaders in rapidly expanding industries.  After identifying a strong industry, the author warns against avoiding the market leaders by purchasing "sympathy" stocks that are similar but significantly cheaper when examined by factors such as price-earnings ratios and weaker price performance. These stocks often continue to languish while the market leaders continue their strong rise.

     The author suggests using relative strength to identify market leaders. Relative strength compares the performance of a stock relative to the market as a whole.  The author recommends only looking for stocks with a percentage rank of 70% or better—stocks that have performed better than 70% of all stocks.   If you wish to make the market leader screen more stringent, he suggests only considering stocks that have relative strength rankings of 80% or 90% with a chart base pattern.  When monitoring your portfolio, he recommends that you sell off your worst performing stocks and keep your best-performing stocks a little longer. You should try to avoid letting your ego dictate your actions. It is best to recognize a mistake early, before it becomes a major problem.

     The author feels that a stock needs a few institutional sponsors for it to show above-market performance. Three to 10 institutional owners are suggested as a reasonable minimum number.  He warns that while some institutional sponsorship is required, once everyone has jumped on the stock it may be too late to buy into it.

     The final aspect of the system looks at the overall market direction. While it does not impact the selection of specific stocks, the trend of the overall market will have a tremendous impact on the performance of your portfolio.  The author finds it difficult to fight the trend, so it is important to determine if you are in a bull or bear market. If you are selecting your own stocks, he feels that it is important to follow and understand what the general market averages are doing every day. When the market peaks and begins a major reversal, he emphasizes that you should try to put 25% of your portfolio into cash. It is important that you act quickly, especially if you have purchased your stocks on margin.

     If the last four or five stocks you purchased after a careful analysis are not showing a profit, it may signal a negative shift in the general market. Other items to look for at a market top include heavy volume without significant price progress and the divergence of key averages. At market tops you will often find stocks that were past market leaders faltering, while poor-quality stocks are showing up on the most active lists.  When the market starts down, it sometimes takes time for the volume to build. The author warns that market can be slow to acknowledge the downtrend.  As a useful fundamental confirmation of the market action, he suggests following the actions of the Federal Reserve. A series of increases to the discount rate is often a precursor to both a economic and market decline.

     Information is provided by the American Association of Individual Investors.