Lessons On Buying Stocks.docx

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What emerged were seven common characteristics among the big winners with earnings

growth being the most significant factor. (The other winning factors from the study are

discussed in subsequent course lessons.)

Three out of four companies had average earnings increases of 70% or more in the quarter

right before they started to make huge price moves.

75% of these top stocks showed at least some positive annual growth rate over the five

years before their major price move.

What Are Earnings?

Earnings, also called net profits or net income, are what a company makes after paying allits obligations, including taxes. Companies often conclude their quarters at the end of March,

June, September and December, though some companies end their quarters in different

months.

Earning Per Share (EPS) is calculated by dividing the total earnings by the number of shares

outstanding.

Example: XYZ Corp., with 45 million shares, reports net earnings of Rs. 90 million will have

an EPS of Rs. 2.The EPS is most relevant for investors.

Acceleration Is Also Important

Many stocks that make major advances have another trait. Their earnings accelerate over

the previous three or four quarters. Acceleration represents an increase in the earnings

growth rate quarter over quarter.

Improving bottom-line growth nearly always precedes a burst in stock price. What's

important to realize about this is that it's not just rising earnings that make a good stock. The

key is to focus on companies whose earnings may be drawing professional investors'

attention -- the phase when a stock prepares to spring higher.

(For a detailed description of the importance of volume and institutional sponsorship, see

"Sponsorship: Catching The Stocks The Pros Are Buying.")



So, Here's What You Want To Look For When Researching Your Stocks:

Quarterly earnings-per-share growth of at least 25% over the same quarter the yearbefore.

Preferably, accelerating earnings in the three most recent quarters.

Annual earnings-per-share gains of at least 25% over the past three years.

Remember 25% is the least you should look for. Ideally higher the better 100%, 200%

or even more. Strong companies with good management teams, innovative products

and leadership in their industries boast the best earnings and reflect the best

investing potential.

Evaluating Earnings

Unless you have time to sift through endless earnings reports, odds are you'll miss out on

those companies announcing superior earnings. And how do you know the difference

between a one-hit wonder and a potential stock market winner when you are looking at raw

earnings numbers on thousands of companies?

StockAxis.com compares the earnings performance of all the traded stocks on the National

Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) using its proprietary

Earnings Per Share Rating. The EPS Rating measures each stock on a scale of 1 to 99 (99

being best) for a quick assessment. An 80 EPS Rating means that stock is outperforming 80%

of all other stocks based on earnings growth. Seen another way, a stock with an EPS Rating

of 80 is in the top 20% of all stocks in terms of recent quarterly and annual earnings growth.

Our research shows that the stocks that make powerful gains usually have an EPS Rating of

85 or higher.

Stocks don't live on strong earnings alone. We use a proprietary Corporate Ratings System

(CRS) which helps us round out for you the stock selection process. This set of tools also

compares other meaningful factors, such as sales growth, return on equity, profit margins,

industry vitality and a stock's price performance.

(Subsequent chapters will go into detail about each of these factors.)

The top 100 stocks that come up in the CRS are then analyzed and the ' top 5 stock picks '

are presented to you in the market analysis section.



Watching For Pitfalls

Investors can easily be misled by popular myths about earnings.

Myth: You should buy stocks with low price-to-earnings (P-E) ratios.

The P-E ratio is a comparison of the stock's price to its annual earnings per share. For

example, a stock quoted at Rs.50 a share with annual earnings of Rs.5 per share has a P-E

ratio of 10. In other words, the stock is selling at 10 times its annual earnings.

Conventional wisdom says stocks with higher P-E ratios are overpriced and should be

avoided. But the truth is that the best stocks often have high — some would say ridiculous —

P-E ratios when they start their big climbs. And they continue having high P-Es throughout

their advances.

Studies prove the percentage gain in earnings per share over the year-earlier period had a

greater impact on a stock's price.

Would you have purchased these "high" P/E stocks?

Stock:

P/E Ratio before advance

Unitech

:

108 (Up 920% in 20 months starting April 2006)

Educomp

:

93 (Up 1050% in 23 months starting January 2006)

Financial Technologies

:

235 (Up 500% in 24 months starting June 2005)

Pantaloon Retail



:

56 (Up 310% in 12 months starting August 1994)

If you weren't willing to pay the higher P-Es, you eliminated some of the best stocks of all

time.

And believe me the list is long. Have a look at the biggest winners in history, more often than

not they would seem 'overpriced' before their biggest price moves

Key Points to Remember

Insist on the best earnings performance, not just a promise of earnings. This way,

you will pick stocks with the best probability of making substantial gains. Look for companies reporting earnings growth of at least 25% in the most recent

quarter. Find companies with earnings that have accelerated in the three or four most recent

quarters. Identify stocks with annual earnings growth of at least 25% over each of the previous

three years Don't overemphasize the price/earnings ratio as a way to compare a company's

stock relative to its earnings

Sales, Margins & ROE

Key Fundamentals: Sales, Margins, Return On Equity

It All Starts With Sales

Watch For Pitfalls In Sales Figures

Profit Margins: Another Way To Assess Earnings Performance

Return On Equity: How Efficient A Company Is With Its Money

A Quick Way To Weigh Fundamentals

The Launch Pad

Key Points To Remember



Key Fundamentals: Sales, Margins, Return On Equity

Sales growth, profit margins and return on equity are vitally important in evaluating a

company's health. This lesson explains the significance of these financial gauges and how to

identify the companies with best numbers.

It All Starts With Sales

Sales figures are a key measure of a company's strength -- or lack of it. Perhaps no other

piece of financial information reflects growth better than sales: the money that comes into a

company from products sold or services rendered. If a company is run efficiently, sales

growth essentially drives earnings growth. Companies basically have two ways to increase

earnings. They either increase sales or reduce expenses or ideally do both.

When you search for the best stocks, you want a company to have strong sales growth to

support its earnings growth. Think of sales growth as the foundation under your house: if it is

loose, it's not as stable as one with all the structural elements in place. When you see a

company increasing its sales, it's telling you its business is drawing larger demand and is

structurally sound and prepared to expand and generate the earnings capable of boosting its

stock price.

Demand is driven by a number of factors, including larger numbers of customers, customers

increasing their purchase volume, introduction of new products, expansion into new markets

and the improvement of existing products.

The top performing companies show consistent double- or triple-digit sales growth. It's even

better when the percentage growth rate increases quarter after quarter. Such acceleration isthe hallmark of quality growth companies. They reflect a well-managed organization.

How high should sales growth be?

The three most recent quarters should each have strong sales growth of at least 25%

compared to their year earlier quarters. Otherwise, sales growth should be

accelerating in the last three consecutive quarters.



Watch For Pitfalls In Sales Figures

Sometimes sales numbers mask problems at companies. Companies may rely on just a

handful of customers, and losing any of them may mean big trouble. Other companies are

overly reliant on overseas markets, putting them at risk of bad economies or political strife

abroad. Also, fluctuations in foreign-exchange rates can seriously dilute sales figures. Some

companies, such as pharmaceuticals, get the bulk of their sales from a few flagship products.

If sales in these items falter, it could mean more trouble than if the overall sales drop. With

retailers, additions of new stores increase the sales figures, even if sales at existing stores

slow down. That's why retailers report total sales as well as same-store sales, to provide an

apples-to-apples comparison. Another pitfall happens when companies include sales that

haven't actually taken place. Orders that won't be shipped or paid until weeks or months

later sometimes are added to the sales total to inflate results. Also many a times the sales

increase because of the price inflation and not actual demand, typical in commodity

companies. Therefore price increase should be sustainable and not just a one time

temporary phenomena.

Profit Margins: Another Way To Assess Earnings Performance

Profit margins are the portion of a company's sales that end up as earnings. As an investor,look for companies that generate an increasing percentage of profit out of every dollar of

sales. The larger the margin, the better a company is at managing and leveraging its

business.

Studies of the greatest winning stocks revealed that most showed strong and even

expanding profit margins before they made huge price moves. The best small and

midcap stocks of the 2003-04 period had after-tax profit margins, on average, of 10% in the

two quarters right before they made their main price gains. For big-capitalization stocks, the

margins were 13%. Profit margins can be a major clue in finding the best stocks to buy,

although the numbers vary widely among industries. For example, retailers tend to have

smaller profit margins. Whatever the exact numbers, a company's margins should be among

the best in its industry.

Let's take profit margins one step further. There are two types of profit margins. One is

called the after-tax margin, and it calculates the percentage of earnings that come from sales

after taxes have been paid. Let's take one company that earned Rs.10 million from Rs.100

million in sales. This gives it a profit margin of 10%. What if this company had to pay Rs.2



The best stocks of the 2005-06 period had, on average, an ROE of 20%. For big-

capitalization stocks, the average ROE was 29%.

ROEs have been increasing over the past several decades, largely because high technology

has helped cut costs and boost productivity.

A Quick Way To Weigh Fundamentals

The Sales+Profit Margins+ROE (SMR) Rating -- part of the Corporate Ratings System (CRS)

-- saves you the arduous task of going over the financial reports of every company and helps

you find the best companies in terms of financial performance. The rating looks at a

company's sales growth over the last three quarters, its before- and after-tax margins and its

return on equity. These four fundamental factors are widely used by analysts.

The SMR Rating ranges from A to E, with "A" being the best and representing the top 20%

of all companies. The "B" stocks are in the next 20% and so on. The "E" stocks represent

the bottom 20% and the lesser-quality companies. The rating also assigns a greater value to

stocks in which any or all of these fundamental factors are accelerating. Look for stocks with

ratings of "A" or "B."

The Launch Pad

OK, let's say you've found a company with great sales growth, profit margins and return on

equity. What's next? As good as these indicators may be, don't ignore other critical factors,

such as a stock's earnings growth (the earnings lesson discusses how to evaluate earnings.),

institutional sponsorship (The amount of buying by mutual funds and other institutional

investors is important and is discussed in the sponsorship lesson) and relative price strength.

(Relative Price Strength Rating takes a stock's price performance over the past 12 months

and compares it to all other stocks. The rating is expressed on a scale of 1 to 99, with 99

being best. This is covered in the leaders lesson.) Also, studying a stock chart completes the

stock selection picture. (Charts are explained in detail in the charts lessons.)


Strong sales growth is one key indicator of a company's success. Quarterly salesgrowth should be up at least 25% in the most recent quarter. Otherwise, they shouldbe accelerating.

Profit margins tell you how much of a company's sales end up as earnings afterexpenses. Generally, the higher profit margins, the better.



Return on equity measures how well a growth company can produce earnings withshareholders' capital. Look for ROEs of at least 17%

Sponsorship

Catching The Stocks The Pros Are Buying

What Is Institutional Sponsorship?

Tracking What The Institutions Are Trading

Fundamentals, Not Just Funds


Catching The Stocks The Pros Are Buying

FIIs, Mutual funds and other professional investors represent the vast majority of trading

activity in the market. As such, they wield tremendous influence on stocks, capable of

sending their favorite stocks up significantly. Here, you'll learn how to spot the stocks

benefiting from "institutional sponsorship."

What Is Institutional Sponsorship?

There's a term on Wall Street everyone soon learns to appreciate: institutional investors.

These are the mutual funds, pension funds, banks and other financial institutions that do the

bulk of stock trading on any given day. It is estimated institutions account for massive chunk

of all trading activity. So when institutions target a stock for purchase, it's more likely to go

up in price thanks to the increased demand they create. This professional stock buying iscalled institutional sponsorship.

Institutions make a living buying and selling stocks. They employ analysts, researchers and

other specialists to gather comprehensive information about companies. They meet with

executives, evaluate industry conditions and study the outlook for every company they plan

to invest in.

Tracking What The Institutions Are Trading



Now, wouldn't it be great if you knew exactly which stocks the institutions are buying and

when? Actually, you can.

Although mutual funds and other institutions don't disclose their buys and sells frequently,

you can track their moves by watching for clues in trading activity.

One of the most useful ways to spot current institutional trading is to study volume percent

change figures, in other words, how much trading rose — or declined — in a day compared

to normal. (By normal, we mean the average daily trading volume over the past 50 trading

days.) Because this information is continually updated, it is the quickest way to detect

institutional trading in a stock. When volume spikes up 50% or more at the same time the

stock goes up in price, that's generally a clear sign that major investors are moving into the

stock with both feet. This usually precedes a significant rise in the stock price. But if a stock's

price drops on heavy volume, it's a sign large investors may be moving out of a stock. If a

stock's trading volume advances but the price goes nowhere, it could mean the stock is

reaching a peak. Information about volume changes can be studied on daily charts.

You can also log on to www.mutualfundsindia.com to see the portfolios and performances of

all the mutual funds

Fundamentals, Not Just Funds

A stock with strong buying by top-performing institutions has a greater probability of making

you money. But you shouldn't pick a stock on volume, accumulation or sponsorship numbers

alone. First, be sure the company's earnings, sales and other fundamentals are strong.

Other factors, such as the stock's Relative Price Strength, the industry group's performance

and the health of the overall market must be considered, too


Institutional investors represent the bulk of trading activity in the market. As such,their buying and selling power can move a stock's price up or down dramatically.

You can learn to spot which stocks institutions are buying and selling by watching forsurges in trading volume.

Look for stocks with an increasing total number of institutional owners in recentquarters. Look for those stocks that are owned by more funds each quarter.

Industry Groups



The Strongest Industries Often Produce The Best Stocks

Some Of The Leading Industries In History

Watch For A "Follow-On" Effect

Check Industry Performance

Industry Sectors: Another Great Way To Analyze Markets

Companies Making New Price Highs




Research shows that up to half of a stock's move is traced to the strength of its industry.

That's why it's important to track the performance of industry groups. In this lesson, you'll

learn how to do that, plus identify the stocks in the most attractive industry groups.

The majority of leading stocks are in leading industries. Being in the right industry group is

almost as important as investing in the right company. We lists down for you a list of top

performing industry group in the 'market analysis' section.

Each new market cycle is led by certain industries. In the late 1990s, for example,

telecommunications and Internet-related industries were the leaders. Economic conditions

and trends, in large part, determine which industries and sectors rise to lead the market.

Through much of 1993, generic-drug makers led the market by offering less expensive

medications to a cost-weary pharmaceutical market. In the more recent market cycle of 2004

construction and realty related industries led the market. Companies in the top-performing

industries usually enjoy strong demand for their products and services that can drive up their

stock's price.

Some Of The Leading Industries In History



Here are a few examples of historically successful industries and the factors that propelled

them to the top. As you can see, economic conditions and trends can play a huge role in

determining which industries lead the market.

Industry :

Fundamental Factors

Biotechnology

:

Breakthroughs in gene research.

Wireless

:

Growth of "anytime, anywhere" communication technology, such as

Internet Infrastructure

:

Demand for high-speed connections.

Watch For A "Follow-On" Effect

Sometimes, a major development happens in one industry and related industries later reap

follow-on benefits. For example, in the late 1960s in America the airline industry underwent a

renaissance with the introduction of jet airplanes. The increase in air travel a few years later

spilled over to the hotel industry, which was more than happy to expand to meet the rising

number of travelers.

But some industries and individual stocks don't ride the leaders' coattails. Don't assume that

just because it's the rainy season umbrella manufacturers will suddenly surge. You must still

look for quality companies capable of producing healthy earnings, sales, resulting from

exceptional products and services.

Check Industry Performance

You don't have to scan every single stock to find out which industries are leading the market.

Each day, StockAxis.com's top industry groups, found in the Market Analysis section, lists

the top 5 industry group out of over 250 different industry groups by analyzing the price



performance of all stocks in each group over the latest six months. This is a realistic period

in which to observe market trends.

Why over 250 industry groups? Because the Indian economy is fragmented, and industries

tend to spawn related businesses that become industries in their own right. Take the

computer sector, for instance. It's not just PC makers. There's also Computer-Graphics,

Computer-Education, Computer-Hardware, Computer-Peripheral Equipment, Computer-

Services, and Computer-Software, which itself is divided into large, medium and small

enterprises. More specific industry classifications make it easier to pinpoint specific areas

leading or falling behind.

Industry Sectors: Another Great Way To Analyze Markets

Reading sector movements helps judge the overall market because different sectors perk up

at different stages of the business cycle. For example, the defensive sector (This sector

includes supermarket chains, utilities, etc., which are sometimes viewed as havens during

market slumps. People don't change their spending much in such industries even when

times are tough.) rises during times of economic weakness or when investors think the

economy is headed down. The high-technology sector has been strong during expansion

phases.

Companies Making New Price Highs

Another excellent way to spot market leadership is look at stocks making new 52-week price

highs located. Look for sectors showing the most stocks making new price highs. These are

usually the leading market sectors.

Key Points To Remember Much of a stock's move is due to the strength of its industry. You want to own stocks

in industries that are displaying strength and market leadership. Different industries move to market leadership as economic conditions and

consumer trends change. You can identify the new leaders by watching the top fiveindustry sectors with stocks making the most new price highs.

Leaders

Leading Stocks Are Leaders For A Reason



How To Find The Leaders

Evaluating Potential Leaders

Another Useful Tool: The Relative Strength Line

"Sympathy Plays" Don't Play Well

Rounding Out Stock Selections


Leading Stocks Are Leaders For A Reason

The stocks outperforming the market tend to continue performing well, while lagging stocks

are likely to remain underperformers. Here, you'll see why this is an important lesson for

investors and how to identify the leading stocks.

The Best-Performing Stocks Continue Performing Well

How many times have you concluded a stock's best days are behind it, only to watch it soar

as you stand on the sidelines? This assumption has often come back to haunt investors. In

reality, the stocks that are doing best tend to keep doing well, while those slumping likely will

continue to do poorly. Why? The great companies manifest their strength through superior

performance in terms of earnings, sales, profit margins and, yes, even the performance of

their stock.

A study of the greatest stock market winners found that all-star stocks had, on average,

outperformed 87% of the market before they began their most dramatic price advances. In

other words, they were already in leadership positions. This concept is contrary to the

popular bargain-hunting mentality, but is based on historical facts.

How To Find The Leaders

If you want to find next year's winning stocks, look at the better-performing stocks today.

Remember, the biggest winning stocks historically have been, on average, in the top 13% of

stocks at the time they began their major advances. To help you identify today's leaders, we

have developed the Relative Price Strength Rating, or RS Rating. This rating compares the



price performance of each stock over the last 12 months, with extra emphasis on the three

most recent months. Stocks are rated on a scale of 1 to 99, with 99 representing the top 1%

in terms of price movement. So an RS Rating of 85 means that stock is outperforming 85%

of all stocks in terms of price performance. An RS Rating of 25 means the stock is being

outperformed by 75% of the market and should be avoided.

A good starting point for stock selection is identifying the top two or three stocks with the

highest RS Rating in an industry group that's leading the overall market.

Evaluating Potential Leaders

Any stock worth considering should have an RS Rating of 80 or higher. This way, you're

concentrating on the top 20% of price performers. In fact, the most successful stock

selections generally have RS Ratings of 90 or higher just before breaking out of their first or

second base structure.

Any stock below an RS Rating of 70 is not in leadership territory. If you consider any stock

with an RS Rating of less than 70, keep in mind that you're automatically ruling out the top

30% of the market. It's conceivable these stocks will still go up, but it's more likely they'll

have only lackluster performance. Bottom fishers, those investors looking for a bargain

among down-and-out stocks, are tempted to buy stocks with low RS Ratings. But history

proves the most powerful stocks have shown prior strength and aren't rebounding from last

place.

Many fund managers rely on the Relative Price Strength Rating to help make investment

decisions.

Another Useful Tool: The Relative Strength Line

It's best when the relative strength line moves up at a sharp angle, showing the stock

is outperforming the market. A line moving down indicates the opposite: a weakening

stock. The relative strength line offers other clues:

It's a positive sign when the line begins moving higher before the stock price itselfdoes. A rising line indicates underlying strength in a stock; frequently, it's just amatter of time until the price itself begins moving higher.

If a stock's line stays on an uptrend, that's positive. It shows the stock is keeping

ahead of the overall market, acting as a confirmation of the stock's uptrend.



If a stock's relative strength line fails to follow along with a new high in price, that's awarning signal. This shows the overall market is moving up faster than the stock.This may signal the stock is weakening, though the price may not reflect itimmediately.

RS lines that start drifting lower over a period of time, even if prices remain steady,

indicate the stock is weakening. This also shows the stock is slipping in comparisonwith the rest of the market.s

"Sympathy Plays" Don't Play Well

Another common temptation among investors is to seek out stocks that resemble leading

stocks in terms of having similar products or services, but are trading at lower prices than the

leaders. Usually, though, you're better off sticking with the leader of the industry, even if its

share price is higher. Take the IT industry. Wipro after 2000 crash fell about 90% from the

peak of Rs. 1700, the price of the stock was only about Rs.350 in early 2008 after 8 years ofthe crash. On the other hand infosys made a new high and rallied higher sending its stock up

during the same span of time. This is not a rare example, for any industry. The moral: stick

with the leading stocks in a leading industry group.

Rounding Out Stock Selections

No investor should pick stocks based on a single factor. You must weigh the full picture,

including a company's earnings, industry group performance, institutional sponsorship andchart patterns. (Institutional sponsorship, chart patterns and other important elements will be

explained in detail in subsequent lessons.)


Relative Price Strength Rating measures a stock's price move over the last 12months compared to all other stocks.

Look for stocks with high Relative Strength. The better-performing stocks tend to gohigher, while the lagging stocks tend to lag even more.

The Relative Strength line helps confirm a stock's upward price movement. You wantto see the RS line moving in a strong uptrend.

New Highs

New Price Highs Mean New Opportunities

Often, The Best Is Yet To Come

Overhead Obstacles



Avoid Cheap Stocks

Avoiding Pitfalls


New Price Highs Mean New Opportunities

Many investors have passed up great stocks because they had reached new price highs.

Yet, that's when many of the best stocks begin their major climbs, not when they've

bottomed out. That's why buying bargain-priced stocks is often a frustrating experience.

Buy High, Sell Higher

How many times have you heard the phrase, "buy low, sell high"? This is the conventional

wisdom in the investment world, but research shows you shouldn't be concerned with that

part about buying low. Let's walk through this one step at a time. Research shows that the

best-performing stocks make new highs before they make their major leaps in price.

Moreover, stocks at new highs tend to continue moving higher, while stocks making new

lows tend to continue to move even lower.

This is a concept many investors find difficult to accept. They assume it's too late to buy a

stock that's reached an all-time high. But the great paradox of the stock market is "What

seems too high and risky to most investors is likely to continue rising. And what seems low

and cheap usually goes down."

Just by applying the laws of supply and demand you can see why new highs are important.

When stocks advance, they're demonstrating growing demand as investors raise their

expectations about the company. On the other hand, stocks making new lows are usually

afflicted by just the opposite: sagging expectations. Yes, there's plenty of stocks in the

bargain basement, but they're there because the merchandise, so to speak, isn't hot.

Some stocks may have very strong fundamentals or great stories, yet they don't go up

because there's little investor interest. So while you wait for a stock to be discovered -- if it

ever does -- other stocks are moving into the spotlight.

Stocks reaching new highs tell you professional investors are moving in and pushing prices

higher.



Often, The Best Is Yet To Come

Would you shy away from stocks that more than doubled in the past year or less? Consider

taking a look at what happened with the greatest stocks of every bull market. They looked

overpriced or had already moved or looked risky to buy just before its biggest move up.

In a good market, opportunities such as these, which start with new price highs, will surface

every two or three weeks. In fact, if you ignore this simple rule, you would miss out on just

about every major winning stock.

However, there can be such a thing as an "overextended" stock: one that truly has gone uptoo much, too fast and is likely headed down. As a rule, don't buy any stock that has risen

more than 5% past its buy point. In a nutshell, the buy point is the price after a stock clears

the highest point in its basing formation. Basing formations are periods of price consolidation

when a stock moves more or less sideways for a number of weeks after earlier advances.

The buy point and basing formations are explained in lesson on charts.

Overhead Obstacles

One reason new highs represent better opportunities is because of something market pros

call overhead supply. Suppose a stock that once traded at Rs.50 falls to Rs25. If it starts

making its way back up, investors who bought near Rs.50 start hoping the stock gets back to

the old high so they can sell and break even. This presents selling pressure near the Rs.50

mark. But once it clears that Rs.50 hurdle, the stock is no longer burdened by disappointed

investors looking to wipe out their losses

Avoid Cheap Stocks

Perhaps you're one of those investors who think they'll hit the jackpot buying a low-priced

stock that goes on to make huge gains. Some investors equate cheap stocks with better

value or low risk. If a stock costs cheaply priced, then you can't lose a whole lot, right?

Wrong. The truth is that trying to consistently make money with cheap stocks is difficult, at

best. Stocks are cheap for a reason. Think of a stock's price as a measure of its quality and,

consequently, its potential. Stocks selling cheap have a much smaller chance of making



major advances, because they're usually companies lacking good performance records.

Also, professional investors shun low-priced stocks because they tend to be lightly traded,

making it harder to move in and out of such stocks.

So, you can see what research bears out: it's best to look for new highs in quality stocks. It's

especially good when the stock is coming out of a base. But don't wait too long: As soon as

you spot a buy point -- and if all other factors are in place, such as good earnings growth --

it's time to have confidence and conviction and make your move. Otherwise, you may miss

your opportunity.

Avoiding Pitfalls

Like you've seen in earlier chapters, you don't want to buy a stock on any single factor.

Where a stock is in relation to its 52-week high and low price is just one part of your stock-

selection checklist. Other important ingredients are the Earnings Per Share (EPS) Rating,

the Relative Price Strength (RS) Rating, the Industry Group Relative Strength (Group RS),

and so on. These concepts are explained in the lessons on earnings, leaders and industry

groups.

Also, be careful with stocks that make new highs on less and less trading volume. This could

be a sign of a stock topping (reaching its peak), especially in cases when a stock has gone

up at least 50% in a few weeks after an extended advance. When a stock goes up on low

volume, it's a gain produced by relatively small purchases. It's much safer to go with a stock

that makes a new price high on higher volume, which indicates broader support for the stock.


Quality stocks making new price highs just as they emerge from sound bases onhigher volume are often likely to continue climbing, while stocks making new lows

are probably headed even lower. Therefore, focus on the new price highs list for thebest potential opportunities. The great paradox of the stock market is that what seems too high and risky to most

investors is likely to continue rising. And what seems low and cheap usually goesdown.

You can think of a stock's price as a measure of its quality and, consequently, itspotential. Typically, stocks higher in price reflect higher quality



New Products

New Products Or Management

Management Makes Success Happen




Explosive stock growth doesn't happen in a vacuum. Usually, new products, new

services or new management propels stocks to astounding heights. That's why it's

important to keep up with developments that could launch the next great stock.

The Best Stocks Reflect Success Stories

Stocks don't double, triple or move even higher in a vacuum. There's usually a new

story behind a stock's major price advance. Where would Microsoft be today without

its Windows operating system? If you look through the list of greatest stocks in U.S.,

there are plenty of breakthrough products that fueled stock advances:

Syntex rocketed 450% in six months during 1963, when it began selling the first oralcontraceptive pill.

McDonald's surged 1,100% from 1967 to 1971 as its low-cost, fast-food franchisingbusiness model swept the nation.

From 1978 to 1980, Wang Labs' shares grew 1,350% with the development of word-

processing office equipment.International Game Technology surged 1,600% in 1991-1993 thanks to thedevelopment of game technology based on microprocessors.

Accustaff rose 1,486% from January 1995 to May 1996 as outsourcing grabbed holdof Corporate America, sending this temporary-staffing firm to big profits.

America Online surged 593% from September 1994 to June 1996 as the companyrose to become the leading Internet service provider to a nation eager to log on tothe Web.

Qualcomm rose 376% from February 1999 to December 1999 on the risingpopularity of the company's Code Division Multiple Access technology for wirelesstelephones.



You've probably heard about super-executives who rescue companies from the brink

of bankruptcy or take them to astonishing heights. Visionaries such as these can be

responsible for a powerful stock move. Apple Computer was faltering in 1997, when

co-founder Steve Jobs returned to lead the company back into profitability. Under his

leadership, Apple shares more than quadrupled over the next couple of years.

What makes management outstanding? There's more to successful management

than inventing the next personal computer or coming up with the next big trend in

fast food. Executives must also be adept at guiding companies through difficult times,

adjusting to changing market conditions, taking advantage of new opportunities.

Good managers are visionaries, able to redefine business models. Often, other

companies emulate their successful strategies. These leaders demonstrate the

ability to deliver on promises, meet growth projections and deadlines, building a

reputation for credibility and integrity. Communication skills in today's corporate

world are vital if managers are to reach workers at each layer of their organizations.


A stock that makes big gains often result from new products or services. But be waryof unproven products, especially if the company management doesn't have a solidtrack record.

Superior management is essential to a company's success. That's why sometimes achange at the top pushes a stock's price higher

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Trading Philosophy

We never advise to buy or sell stocks on tips or rumors, no exceptions. We identify an uptrend or downtrend by using a complex proprietary method. Only buy when the market is in an uptrend. 3 out of every 4 stocks follow the market

either up or down. Buy leading stocks in the leading industry groups. Half of any stock’s move, either up

or down is due to the strength or weakness of its industry group and its overall sector. Buy stocks with the best EPS growth in the past 3 years giving added weight-age to

the most recent quarter results.



Identify chart patterns: cup with a handle, flat base. Buy leading stocks at proper buy points in a market rally. Buy stocks as they break out into new highs on high volumes, at least 50% higher

than the 50 day average volume. Sell stocks as they break down into new lows on high volumes, at least 50% higher

than the 50 day average volume. Stocks tend to make their biggest gains within the first 8 years after an IPO. In US about 80% of leading stocks went public within the past 8 years. Cut losses at 8%, no exceptions. Remember it takes 100% gain to recover a 50% loss. The 8% rule only applies to your entry price. Cutting your losses is like paying insurance premium. In a bear market, average decline of a leading stock is 72%. Only 1 out of 8 will come back to lead the next bull market. Look for price and volume actions. Don’t let emotions take over; we believe that’s one of the biggest dangers in

investing. Never average down, instead averaging up is a better strategy. Use 50 & 200 day moving averages as vital points. Buy & hold investing can be very dangerous. Look for distribution days (high volume down days) on major indices of the country

and also other emerging countries like Hong Kong, Brazil, Korea, Taiwan, mostimportantly USA.

4-5 distribution days in the past 4 weeks, indicates that market is in down trend andits time to be in cash.

On an average bull markets last for 3 to 4 years and bear markets for 6 months to 18months although longer bull & bear markets have been witnessed in the past.

Growing institutional holding is a positive sign for a stock whereas declininginstitutional ownership is negative.

History definitely repeats itself in the stock market. Don’t back your judgment until the action of the market itself confirms your opinion.

―Markets are never wrong – opinions often are.‖

Rules For Stock Market Success

If all our rules are carefully followed (not just the ones you like), yourinvestment results should materially improve:

Rule 1. Consider buying stocks with each of the last three years' earnings up 25%+, returnon equity of 17%+ and recent earnings and sales accelerating.

Rule 2. Recent quarterly earnings and sales should be up 25% or more.



Rule 3. Never buy or sell stocks on Tips or Rumours, no exception.

Rule 4. Cut every loss when it’s 8% below your cost. Make no exceptions so you can alwaysavoid huge, damaging losses. Never average down in price. In a bear market,average decline of a leading stock is 72%.

Rule 5. Follow selling rules on when to sell and take profit on the way up.

Rule 6. Buy when market indexes are in an uptrend. Three out of every four stocks follow themarket, either up or down. Reduce investments and raise cash when general marketindexes show five or more days of volume distribution.

Rule 7. Buy leading stocks in the leading industry groups. 50% of any stocks move either up

or down is because of the strength or weakness of its Industry Group & its overallsector.

Rule 8. Pick companies with management ownership of stock.

Rule 9.

Buy stocks breaking out in heavy volume from chart patterns like cup with a handle,flat base, double bottom, etc.

Rule 10. Select stocks with increasing institutional sponsorship in recent quarters.

Rule 11.

Current quarterly after-tax profit margins should be improving, near their peak andamong the best in the stock's industry.

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