How to pick a winning stock

A former broker shares an 11-point checklist.

By Kim Peterson Jul 6, 2011 2:12PM
With about 10,000 stocks to choose from, picking a winner can sometimes feel impossible.

But former stockbroker Kevin Matras says his checklist works. Matras, a contributing editor at Zacks Investment Research, shares his strategy in the following video. Before he buys a stock, he says, he puts it up against this basic set of building blocks. If a stock passes, he says, it has a high probability of success.

By the way, five stocks currently sail through his checklist. I'll go through those stocks after the following video.

Post continues below:
Here are the winning stocks:
And here's the checklist that Matras uses to find good stocks:

1. Check its ranking. Find a rating system you trust. Matras uses the Zacks Rank and looks for stocks with a rank of 1 (strong buy), 2 (buy) or 3 (hold).

2. Find a good industry. Make sure the stock is in a high-performing industry. About half of a stock's price movement can be directly attributed to the group that it's in, Matras said, so you need to focus on the industries that are doing well.

3. Earnings estimate revisions. Pay attention to when -- and by how much -- companies revise their earnings estimates. Look to see what's been happening over the past few quarters, as well as on a one-week, four-week and 12-week basis, Matras says.

4. Positive EPS and sales surprises. Positive surprises beget more positive surprises, Matras says. Look for companies with a high probability of surprising.

5. Positive growth rates. Look for positive growth rates for the current year and the next year. Nothing crazy or extreme, he says. "Since there are so many stocks out there, do I want stocks that are not making money, or do I want stocks that are making money?"

6. Valuations. Matras prefers to value companies using the price-to-sales ratio. He wants to see that ratio less than or equal to 1. He never buys a stock with a ratio of above 4, which signals a higher probability of failure.

7. Return on equity. He wants it to be above the median for the industry. He also wants to see it improving over the five-year average. That shows management is doing a good job.

8. Increasing margins. Those margin improvements go right to the bottom line.

9. Increasing weekly price and volume. A clear pattern of increases here could be a sign of institutional buying, which projects future demand (higher prices).

10. Moving averages. For an indicator of good momentum, Matras wants to see stocks trading above their 50-day and 200-day moving averages. If possible, beating the 10-day and 20-day moving average is a good sign.

11. Chart patterns. He wants a bullish chart pattern on the daily and weekly movement of a stock. A neutral chart pattern is OK, but a bearish chart pattern is a no-go, he says.

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