Profitable investing always comes down to what are the top stocks to buy and why. Is intrinsic stock value the best indicator? Should you be studying up on technical analysis in order to stay out step ahead of evolving market sentiment? Here is what The Street says about five stocks that are poised to deliver big gains and then our thoughts on the subject.
These stocks have both short-term gain catalysts and longer-term growth potential.
We’re still experiencing a tale of two markets as we round the corner for the final week of August – while the S&P is up a bit over 5% year-to-date, nearly half of the stocks in the big index are actually up 10% or more since the calendar flipped to January. Simply owning more of the stocks that are working in this environment and fewer of the ones that aren’t could hold the keys to substantial outperformance this year.
These folks pick their so-called rocket stocks based on consensus upgrades by analysts and surprises in earnings. Their rationale is that when a stock is liked by analysts and shows a surprise uptick in earnings institutional investors tend to pour money into them driving up their stock prices.
Their 5 rocket stocks for the week are Facebook (FB), Illinois Tool Works (ITW), Haliburton (HAL), Constellation Brands (STZ) and Best Buy (BBY).
But, is this the best way to pick top stocks?
Top Stocks for the Short and Medium Term
The approach used by The Street is useful for picking top stocks in the short term. Here is an example of why this works.
Years ago an investor friend of mine used a simple strategy to pick short to medium term winners, so-called top stocks. In the days before Barrons was posted online he would purchase a copy each Saturday morning. He would look to see if there any articles by stock analysts and if they made a decent argument for why to purchase a stock or two. Then he would call his stock broker (pre internet days) and buy one, two or three stocks from the article. His cut off for profits was 30% and his cutoff for losses was 10%. Almost invariably these stocks that were talked up in Barrons went on a multi-week run as long term investors decided these were good investments based on the article and based on the fact that the stocks almost immediately started to rise. Over the longer term the stocks that were hyped in Barrons did not always do well. Taking a 30% profit on almost all of the stocks and absorbing a 10% loss on a few was a good strategy and profited my friend for years.
For the longer term picking top stocks and why you choose them has more to do with strong fundamentals and picking such stocks when the market corrects and takes all good stocks with it. We wrote a year ago about how to identify first signs of a market correction. When the market is overvalued by historic standards, like today, the first step is probably to pick stocks based on strong fundamentals and tag them for purchase when their price falls and their intrinsic value rises.