Investors are always looking for the next best thing. Where is the next Amazon (NASDAQ:AMZN) or Google (NASDAQ:GOOGL) or Tesla?
Seeing these stocks with multiple thousand dollar price tags per share has a way of making day dreamers dream that much bigger. If there is anything to be learned from the dramatic runs in those big dollar stocks, it is one simple concept.
All of those stocks were "cheap" at one point. Cheap can mean different things to different people, but a lot of investors think of cheap in terms of share price. That isn't the best way to judge the valuation of a stock, but it's just a fact that many people focus more on share price than anything else.
I want to share my formula for finding exactly what those investors are looking for.
Run With The Herd
The recent phenomenon of the Robinhood trader has really taken hold of the market. The lack of a commission cost drove a lot of money from savings accounts into the stock market. The pandemic also played a role in that it gave many people the chance to watch the market all day and learn from it.
Before long there was a massive herd of investors that were blindly fumbling over themselves rushing to buy shares of stocks that have dipped...even though they had declared bankruptcy. The lesson here is that not all dips are buyable.
Another lesson is that running with the herd works very well if you are in the lead. If you are the last in line, there is a good chance the herd is already headed in another direction before you even get to a full stride.
Likewise in the investing world, it can be good to be in the herd but you have to trust the leader will give you good signals. You have to trust that the leader of the pack will find the next green pasture before it gets over run. You have to agree with the ideas presented...at least most of the time.
More . . .
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Cheap Buys and Good Buys
So how do I marry the ideas of buying the next hot idea with getting it at a good price and trusting the herd will follow? It's a delicate dance, but we do it all the time.
1) We look for stocks that have low price points. That helps attract the herd.
2) We focus on good growth stories, something that has legs. Value investors are in the mix too, but more often than not a stock needs growth to move from single digits to double digits.
3) Finally, we don't just select the hot names of the day, we build a portfolio of stocks that offer diversification if one sector gets slammed.
Defense And Offense
As much as we are always on the hunt for the next best thing, we also have to play some defense. Not all the stocks out there will be winners and the key is to let go of the ones that are showing early signs of being losers.
Cutting losers early and letting winners run is a cornerstone idea for success. When you are down 10% in a stock you will see that it can quickly become a loss of 20% or 30%. Those negative returns will do great damage to the overall performance. Keeping losses manageable is a key to overall positive portfolio returns.
One of the ways to identify a stock that could be a loser is to closely follow the trends in earnings estimates. This will give you a heads up as to where industry experts believe the stock is heading. More often than not, a stock will move up when estimates move higher. The best way to track that trend is the Zacks Rank.
Leverage The Rank
Earnings are a primary driver of stock prices. Good earnings reports can send stocks straight up, while bad "prints," as they are called, can send stocks much lower. The key is to pay attention over time where the industry experts believe the earnings are heading.
The Zacks Rank is a tool that does just that for you. It helps separate the wheat from the chaff and indicates which stocks have the best earnings estimates revisions. Keeping one eye firmly on the Zacks Rank can give you the heads up you need to get out of a stock that is seeing negative revisions. On the other side of the coin, look for a solid Zacks Rank for future potential investments.
The path to profits is littered with potholes, but there is also a solid roadmap to help you get you where you want to be. Low-priced stocks often hold great potential but it is important to stay vigilant on the earnings prospects. Getting out of a bad play that you like can be hard to do, but trusting the Zacks Rank is an essential key to profits.
Position Yourself for Profits Now
Do you want to avoid costly mistakes and position yourself for substantial profits with single-digit stocks? Then I suggest you see the recommendations we're holding in our Zacks Stocks Under $10 portfolio.
We select a diverse group of companies on the verge of big upward moves. Then, we get in when the Zacks Rank and other proven indicators point to success ahead. For example, we've recently closed out positions with gains of +109.4%, +117.8%, +142.9% and even +475.8%¹.
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Best
Brian
Brian Bolan is our aggressive growth expert and the editor of Zacks Stocks Under $10 portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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