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Friday, June 27, 2014 - 09:30
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Friday, June 27, 2014 - 09:30

Use This Winning Strategy Before You Chase A Stock

Friday, June 27, 2014 - 9:30am

If you're like most investors, then you probably repeatedly made the same mistake as you learned the rules of the game.

You likely spotted a great bargain stock, bought shares and waited for something to happen. Shares likely stayed stuck at bargain levels, testing your patience. And you finally gave up waiting and sold shares, only to discover a year or two later that the stock did eventually rebound in a big way.

What's the lesson learned from that experience? That you should simply wait an indefinite period and stick around long enough for the eventual rebound? No. Such a strategy will lead you to tie up all of your investor dollars in a bunch of dud stocks, leaving you with no funds to pursue new ideas.

The better strategy: Create watch lists and track these stocks. Checking in on them frequently (I prefer daily) allows you to finally hop on board when these stocks start to become timely.

Let me cite a few examples. Shares of Maxwell Technologies (Nasdaq: MXWL), a maker of ultra-capacitors, slumped sharply in the spring of 2012 as the company noted a slowdown in sales and a set of potentially fraudulent actions by some key sales members. These kinds of things can take quite a while to fix. For the next 18 months, shares hovered in the $5 to $9 range, well below the low $20s price seen just a few years earlier.

When I discussed Maxwell back in December shares had yet to show signs of life, which meant that it was a good stock to put on your watch list. That gave you the time to do homework, and wait for better trading action. Indeed, shares rose 15% on Feb. 28, to just above $10, meaning the doldrums had ended. That turned out to be a great time to pounce, as shares are now above $15 and likely headed well higher from here in my view.

Other Breakout Candidates
One of the ways to spot such breakout moves is to track the 100-day moving average (MA). Natural gas storage equipment firm Chart Industries (Nasdaq: GTLS) is one such example. When I profiled this company a month ago on our sister site ProfitableTrading.com, shares had been on a steady downward trend, remaining below the 100-day MA. Yet in recent days, shares have started to breakout, piercing that moving average. Still, shares remain far below the 52-week high and appear to have considerable upside. Clearly, other investors are starting to take note as well.

Another timely break-out stock: Derma Sciences (Nasdaq: DSCI), which is developing a promising new treatment for skin wounds. My profile of this company back in March was ill-timed, as the rout in biotech stocks pushed the group lower. But over the past month, this stock is showing signs of a breakout as management has been delivering a set of well-attended meetings with hedge funds. After forming a base in the $9 area, shares are back above $11, though still below the 52-week high of $15 and my $17 target price.

Right now, I'm watching Titan International (NYSE: TWI), which has been trading lower on expectations of soft demand for its mega-tires for the quarters ahead. Titan traded down from the mid-$20s in the first half of 2013 to the upper teens in early 2014 and has recently slipped below $16. This is a company that will show robust earnings growth when demand for mega-tires starts to strengthen. Before that happens, far-sighted investors will start to push up shares. Then again, shares may be dead money for at least a few more quarters, which is why I'm watching and waiting. And when shares move back up to the $17 or $18 as other investors start to buy, I'll know it's time to buy.

Another great sign for breakout stocks: when they move up on trading days when most stocks finish lower. Bucking the broader market is a sign of firming demand for shares, and often sets the stage for much more upside when the market resumes its upward path.

Risks to Consider: Breakout stocks often need to catch their breath as swing traders lock in profits. You shouldn't be deterred by such pullbacks and instead need to ride them out.

Action to Take --> If you don't yet maintain watch lists of potential stocks to buy, this is a good time to start. The key to successful investing is to track as many stocks as your schedule permits. Once you are keeping an eye on them, and have witnessed their trading patterns for an extended period of time, you'll know when it's time to pluck them from your watch list and place them in your portfolio.

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David Sterman 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.

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