Trading Horsepower How to Find Quality Stock Candidates in Seconds

Trading Horsepower How to Find Quality Stock Candidates in Seconds

By Doc Severson
Copyright 2013 by Doc Severson All Rights Reserved

This training program, or parts thereof, may not be reproduced in any form without the prior written permission of Trading Concepts, Inc.

No claim is made by the Trading Concepts, Inc. that the (stock and option) trading strategies shown here will result in profits and will not result in losses. Stock and Option trading may not be suitable for all recipients of this Training Program. All comments, trading strategies, techniques, concepts and methods shown within our Course are not and should not be construed as an offer to buy or sell stocks and/or options they are opinions based on market observation and years of experience. Therefore, the thoughts expressed are not guaranteed to produce profits in any way. All Opinions are subject to change without notice. Each stock and/or option trader/investor is responsible for his/her own actions, if any. Your opt-in to this free information constitutes your agreement to this disclaimer and exempts Trading Concepts, Inc. from any liability or litigation.
Important Notice - Risk Disclaimer: ! Stocks and Options Trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the stock and/or options market. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy or sell stocks and options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in our training program. The past performance of any stock and/or option trading! strategy or methodology is not necessarily indicative of future results.! Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual stock and/or option trading. Also, since the stock and option trades have not actually been executed, the results may have under - or over - compensated for the impact, if any, certain market factors, such as lack of liquidity. Simulated stock and option trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those that may be shown.

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Table of Contents

Introduction to Finding Stock Candidates !..........................................4 How Most of Us Find Stock Candidates Today .............................5 How We Screen for Stock Candidates .....................................12 Summary ........................................................................15

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Introduction to Finding Stock Candidates

Welcome to one of the most discussed, convoluted, tedious topics in the Investing world - how to find the best stocks to trade! Chances are, if you get ten investing professionals in a room, youll get ten different opinions on how to best accomplish this. The truth is that theres no one best way to identify good stock candidates....there are many, many different ways to accomplish this task, all of which are fundamentally sound....so it really comes down to one thing: Can you find a method that resonates with you? The reason that this is important is because YOU are the one thats going to have to do the legwork and come up with the candidates, and those stock candidates are going to have to fit your purpose: Long Term Buy/Hold: You might be a very long-term, fundamental-based buy and hold investor, shaped in the mold of Warren Buffett. To you, buying stocks at a discounted price to their longer-term valuations will be extremely important, as will be receiving a stream of Dividends during the lifetime of this investment. Short Term Swing: This type of investor really doesnt care about longer term valuations or even Dividends; the average hold time might be measured in days or at most weeks. This investor is just looking for a very solid stock that will behave predictably during a pullback, in order to participate in the next short-term move higher. DayTrading: This type of investor really has no use for fundamentals, because they dont have time to make an impact on the price of a security during the time window of a single trading day. Since we talk to a lot of traders, what we found was that majority of todays Retail investors fit into the Short Term Swing category. Their time horizon is a little more compressed, and they need strong performance in the short term so that they can eventually earn the right to get into the former Buy & Hold category once they build up a larger account. To that end, lets see how the the shorter-term swing trader can identify some stock candidates to meet their goals, starting with how most of us identify our stock trading candidates today.

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How Most of Us Find Stock Candidates Today

Im going to do my best here to follow that old piece of advice, If you dont have something nice to say about someone, then dont say it - HOWEVER - its your money, so we have to draw the line somewhere. You see, at the end of the day these folks are mostly concerned with their money, and with all due respect, most of the time its going to be at the expense of yours. Lets see some of the sources that most of us are using today to find our candidates: TV Stock Media I think that its possible to learn a lot from these TV shows, and you can pick up some valid IDEAS, however under no circumstances should you take a highlighted recommendation from a TV show and immediately buy into it. Its not that their advice is bad; in most cases its well-reasoned and presented constructively. The problem is the Herd effect; unseasoned Retail investors come piling into the stock the next morning on this good news after it has already spiked in price during the overnight session...so they buy in at the high water mark, with professionals happily selling them the stock. Stocks often peak out on this good news, and a live TV analyst recommending/featuring a stock is nothing more than a blip when it comes to this effect; it does not compare to a real news event where un-discounted news was not priced in. So if youre going to watch someone like a Jim Cramer, then follow his advice and do your homework. Dont just play along blindly with what he highlights; let his recommendation become a starting point for your own research. And wasnt that something that you were trying to avoid in the first place?

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Other popular shows are in the form of a panel discussion where ideas are flying past you in break-neck speed. Its highly entertaining Stock TV where these highly skilled professionals discuss their take on the market using some very advanced techniques and trading strategies. The feeling that one gets when watching a show like this is urgency; you generally feel like you have to get up off your couch and ACT! Again, we have to go back to understanding what the point of this show is. Its not to make YOU money; its entertainment designed to help sell ad space. The faster-paced that the show is, the more addictive it becomes and it helps prod Retail investors into action. Many of their advertisers during this period are on-line brokers, who love it when Retail investors go wild and trade recklessly. Unfortunately, there are some very bad side-effects from shows like this: I see Retail investors jumping into stocks that they know nothing about, with no research whatsoever. Now were back to gambling with no edge. I also see Retail investors doing complex trades that are mentioned on the show, with no knowledge on how to execute those trades. The professional can manage them in their sleep regardless of what happens, because they have a plan for how to handle price movement up, down, or sideways. The inexperienced Retail investor does not. Its my personal opinion that the more that you watch Stock TV, the more that you become part of the investing Herd that is generally on the wrong side of the Market. The job of these channels is entertainment so that they can sell ad space, nothing more. It takes a great deal of discipline not to be affected by the tone of the mainstream media, which will almost always lead you to having an incorrect bias when it comes to the market. In time, you will find that less TV is actually better for your investing portfolio.

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Professional Mailings Youve seen them; they come in your mailbox by the dozens as soon as you buy something in the investing world, whether its a book, a program, or a financial newspaper. You are now a TARGET customer for the mass-mailing financial world. Here is an example of one of the brochures that came in my mail recently. The way that these things work is that they are sent on the behalf of some stock market expert, who is endorsing some new thing that promises to skyrocket in value over the short run. You have to ask yourself, Why would they send this to me? Out of the goodness of their own heart? And some might see the price tag of $8.95 assigned to this flier and assume that they got away with one. I mean, can you believe your luck? Someone is tipping you off to a future gold mine, and they even forgot to charge you for this pot of gold! Well, hold on to your horses for a minute. Theres a reason why you got this brochure. Theyd like you to buy shares in this company. And oh, by the way, the guru is also selling a newsletter so that you can be on the bleeding edge of this information in the future. Lets read the fine print contained in this flier to see that the Devils in the details. Heres how this works: The shareholders of IPRC got together and scraped up $800,000 and paid it to a marketing company in order to market this company, IPRC. The marketing company turned around and paid this stock guru $20,000 to endorse this flier/advertisement. What they are betting on is that good folks like you and me will receive this flier in the mail, be sold on its authenticity and the wonderful ad copy promising future riches, and buy a few thousand shares of this company.
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Now, lets think about this for a second. IPRC is not listed on the NYSE or NASDAQ, so by default its on the OTCBB exchange. That means that its got pretty puny volume, certainly nowhere near the minimum 1,000,000 average daily volume that we require, which well discuss in a minute. What these guys are betting on is that enough uninformed investors will buy this stock, that it will raise the price. Lets see if this is the case; here is the price chart for IPRC for the past year:

How about that; as soon as the flier went out, the price spiked, and those who had bought in early sold into that spike, leaving outside investors like you and me underwater. A stock going for $.35/share is now trading at $.07/share. Thats a pretty hefty loss if you got in for a few thousand shares. At the peak, it traded about 4.7 million shares a day, compared to an average of about 250,000/day. This is all fully legitimate and every disclaimer in the brochure speaks to the fact that they are not advising that you buy the stock. How would you feel if you had done so? And this is just one of many examples that I get every week sent to me in the mail. Lets just check another couple of random samples from my pile....
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And guys, Im just pulling these out at random. Heres another one that promises huge gains if you just get in on the ground floor:

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And you can see that this one hasnt been around for very long, spiking early at about $.50/share down to the current value of $.006! Yes, that is six-tenths of a cent per share!

I could go on and on with all the examples that Ive saved for this exercise, and I havent found one that actually won yet but Ill keep looking. The point here is to understand the game that is being played behind the scenes, preying on the uninformed investor. Please do not play any of these mail advisories, no matter how reputable the guru is that endorses it. Remember, its your money.

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Pump and Dump Youve all gotten those emails that look like this:

The best is yet to come Rise and Shine, fellow subscribers, Holy! quite the last few days we just encountered. Between Hurricane Sandy, website black outs and naked short sellers, P N_G M still managed a solid 30 percent gain! Trade: Tuesday, Nov 6th OTCBB: Pengram Gold Corp Symbol to buy: P N_G M Market cost: 0.0501 Short Term Target Price: 0.33 We hope this is only the beginning, with another serious press release set to hit sometime in the next few days! I am expecting Pengram Gold Corporation to cut through the .10 marker and scare these shorters away from the market for good!!!

This is known as a Pump & Dump play. These emails come out and they sound perfectly legitimate, however the only purpose for these emails is to attract unseasoned investors to buy these shares and help pump the share price up, at which point the individuals who sent out these emails will then dump the shares, leaving you, the unwary individual investor, holding the bag. What makes these particularly attractive is their cheap per-share price, such at the above example which is currently trading at five cents/share! A trader does some quick math and figures that they can buy a thousand shares for just fifty bucks! A properly executed pump & dump campaign can create a lot of volume in a short period of time, and with the low levels of float on these stocks it can move the price quite a bit in a short period of time. Guess who is selling to those buyers, however? When the volume dries up, the share price plummets. Lets just make it a point to stay away from these Pump & Dump emails and their recommendations.

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How We Screen for Stock Candidates

If youve made it this far into this report, youre probably expecting some kind of sales pitch from us for some magic software that will find fundamentally find the very best stocks to trade; were not going to do that. In fact, all that you need to find great stock candidates is already at your fingertips and can be accessed with some free tools that are available to you today. In the remainder of this report, Ill cover 1) what constitutes a quality stock candidate, and 2) what free tools are out there to find them. Criteria for Stock Candidates First off, I only trade Markets that I understand, and for me, that means trading stocks that are on US exchanges, and more specifically, those stocks that are on the NYSE/Euronext and NASDAQ OMX exchanges. We dont want to play the bucket-shop OTCBB stocks; we want large, high-volume stocks that are attracting institutional attention, ones that the big financial firms are starting to accumulate. The point behind this is that when these large firms decide to invest their funds in a stock, they might be committing to buy millions of shares at a time over a period of several days. Where are they going to invest their funds? In the best candidates, of course! What well notice about these candidates is that when they pull back to a logical support level, there is sometimes massive buying power coming in, IF the stock pulls back that much at all. OK, so big, fundamentally-sound stocks that are traded on the large US exchanges. That leaves us with somewhere around 7,000 stocks to funnel through. Fortunately, using the tools that well discuss in a minute, we can carve out huge chunks of them in what we call Pre-Screening. Our Pre-screening criteria are: Using only US-based exchanges Using only stocks listed on the NYSE Euronext and NASDAQ OMX exchanges Only looking for candidates when the S&P500 is trending higher Only using candidate stocks that belong to up-trending sectors. Only using candidate stocks of $25/share and higher Only using Optionable candidate stocks Only using candidate stocks with average daily volume of 1,000,000 and higher

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Those criteria will typically leave us with a few hundred candidates left, but still a fairly daunting number to comb through. Now well add some Fundamental criteria to our screen: Return on Equity of 20% or better One Year EPS Growth of 25% or better One Year Sales Growth of 25% or better Only a very few stocks will be able to offer growth numbers to meet those standards, so usually we only have a dozen candidates at any given time that meet those standards. We might find that its difficult to measure/screen on these factors, so in that case well look for quarter-over-quarter growth numbers, which is even more restrictive. And when we get this list, well do a little bit of final due-diligence on them to ensure that the following criteria are met: No downside earnings surprises on recent reports Generally positive Analyst ratings No earnings dates in the near future Are these criteria the ONLY criteria that we can apply to stocks? Of course not! We just happen to believe that this set of screening criteria represents a viable, high standard....and should significantly improve the probabilities that when a stock comes down to a support area, that it will attract institutional buying. And stacking the odds in our favor is the best thing that we can do as an individual investor to achieve consistent performance! Now lets talk about the free tools that are available to scrub this list of 7,000 stocks down to a manageable number.... Free Screening Tools Once upon a time, retail investors had to scan the pages of papers like the Wall Street Journal with a magnifying glass, looking for that needle in a haystack. Its no wonder that so few investors managed their own portfolio. Big institutional firms had the cash to spend on big iron mainframes to sort through all of this data and mine their stocks prospects. That changed maybe 30 years ago as some online services came on board and offered some cryptic search capabilities, but they were slow, hard to use, and imagine paying $12.50/hour just for a connection to that host! Those were eventually displaced by free web access to subscription tools that significantly improved the process maybe 10 years ago, but now the disruption of the Web is complete as ALL of these tools are available for free through many different websites out there. Lets talk about a few of them:

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 FINVIZ.com: This website offers a free scanning service and is very powerful; we feature this one in the video. StockRover.com: This is a very powerful, easy-to-use scanning service that has tons of features and is presently free. Im not sure how much longer it will be for free or how much a premium service would cost, but its a terrific tool that we can use for now. ZACKS.com: Another free service that offers some nice upgrades for a nominal cost. Zacks.com is a terrific research site with some really good proprietary information. Your Online Broker: Weve looked at most of the popular online broker tools, and they are as good as the FINVIZ/StockRover offerings in most cases, and you can do everything from one login from your broker. And this list is just scratching the surface as there are hundreds of value-added financial research sites out there, few of which actually require a monthly subscription fee. The same information that the institutions have had for decades is now at your fingertips, and its free!

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Summary
Look, the point that we want to make to you here is that you dont have to SETTLE. You can start TODAY to add more of an edge in your favor by insisting that any stock that you play has to meet your minimum criteria. Treat your portfolio in the same manner as the Special Forces units around the world; if they make no apology for only accepting the best of the best, then why are we all accepting lower-quality candidates into our portfolio? And the best news of all is that this power comes to the consumer WITHOUT COST and its easy enough that ANYONE can do it! If you have fifteen seconds to spare, you can start to screen your stocks today!

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