2 Powerful Indicators Signal This Top-Ranked Stock Will Deliver Big Profits

Jim Woods's picture

Monday, November 10, 2014 - 7:30am

by Jim Woods

After a big sell-off in early October, stocks are back with a vengeance. The uncertainty about the Fed and the end of quantitative easing is off the table, as is the uncertainty over the midterm elections. 

Not surprisingly, traders now are turning to more substantive, company-specific metrics to identify winning stocks.

One trader friend of mine told me yesterday that he can now "get back to doing what I do best." And by that he meant finding high-quality momentum stocks "that are just killing it" and riding their coattails to big gains.

Sounds good, but in the vast universe of tradable equities, how do you consistently identify the winners?

The key indicator I use is relative strength (RS). 

I suspect you are aware of the concept of relative strength, as it's by no means a new tool in traders' kits. In fact, relative strength is something I first used back in the mid-1990s to identify those stocks most likely to move higher.

In case you aren't familiar with the indicator, relative strength compares a stock's performance against the performance of every other stock in the market. It assigns a numerical score from 0 to 100, which provides traders with a way to quantify a stock's strength. 

This is important because a stock's past performance relative to the rest of the market has been proven to indicate how it is likely to perform going forward.

RS can be found for any time frame, but I prefer to use a six-month window. This is the perfect time frame to both smooth out any outlier action in the markets and to catch a rising star while momentum remains firmly in place. 

With an RS rank of 94, meaning it has outperformed 94% of all stocks in the market over the past six months, Electronic Arts (NASDAQ: EA) looks like a solid buy.

If you are a gamer, or if you have kids who are, you likely know that EA is one of the premier companies in the gaming entertainment space. It is perhaps best known for its sports video games, including one of the most successful video game series of all time, "Madden NFL." In recent years, the company also scored big with its "FIFA World Cup" series.

On Oct. 28 after the close, EA showed Wall Street just how much people loved its games, reporting fiscal Q2 results that trounced analysts' expectations. Earnings per share (EPS) came in at $0.73, well above the consensus estimate of $0.53. That translated into 121% year-over-year EPS growth. 

Electronic Arts also thoroughly impressed on the revenue front, growing its top line 17% to $1.22 billion versus estimates for $1.16 billion.

Not surprisingly, EA soared on the news, up nearly 4% the next day. 

That one-day move is part of a bigger bullish trend in the stock, with shares up 21% over the past six months, earning it that aforementioned RS rank of 94. 

EA Stock Chart

EA now trades at levels not seen since the summer of 2008, before the Great Recession decimated stocks. 

I suspect that this latest spike to multiyear highs will be a catalyst for continued strength in the stock, but there's one more reason I'm bullish on EA.

The stock scored a 184 out of a possible 200 on a little-known indicator called the Alpha Score, which has predicted some of 2014's biggest winners.

This puts EA in the top sixth percentile of all stocks in the market over the past six months. 

So far in 2014, the Alpha Score identified the 7th, 9th, 11th and 16th best-performing stocks -- and generated an average gain of 109% on those positions. It also pegged 29 stocks right before they made double-digit percentage jumps within a month. 

So you can understand why I'm extremely bullish on EA. I think shares could revisit their mid-2008 highs around $50 in the next six months, a 20% gain from current levels.

And if you want to learn more about the Alpha Score, I invite you to read our new report. In it, you'll get the name of a stock it's predicting to be a top performer in the next 12 months. Click here to get the free report.

This article originally appeared on ProfitableTrading.com: 2 Powerful Indicators Signal This Top-Ranked Stock Will Deliver Big Profits​

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.