How Our Most Successful System Finds Market-Crushing Stocks
Some of our longtime readers know that I used to co-write one of our premium newsletters along with my colleague Jimmy Butts. The newsletter was Maximum Profit, and my experience working with that service was one of the most eye-opening experiences of my investing career.
While Jimmy is still at the helm of that service, I’ve since moved on to greener pastures. But I still carry the experiences I learned with me to this very day.
That’s because the Maximum Profit system flies directly in the face of what most of the mainstream financial media tells us “works” in the market. But they couldn’t be more wrong.
So today, I’d like to pull back the curtain a bit and walk you through how the system works. I think every one of our readers would be well-served to adopt at least some of the principles this service uses…
How The Maximum Profit System Finds Market-Crushing Stocks
At its core, the Maximum Profit system is based on two key components: a technical indicator and a fundamental indicator. By combining the two, we get an elite system that has the uncanny ability to find solid companies that deliver big-time returns over a short-term period.
In its most basic form, this is a momentum-based system. That means it looks for stocks that have performed well and should continue performing well.
If that sounds counterintuitive, then you’ve been led astray by the so-called “experts” in the financial media. All too often, they hype stocks that are skyrocketing, but aren’t actually quality companies. Then, the crowd follows along, and a lot of time the whole affair ends in tears. So how do we prevent that?
Well for starters, let’s get one thing clear. Many academic studies do show that stocks that have fared well recently should continue doing well in the short term. In other words, winners keep winning.
The Maximum Profit system scores stocks based on their relative strength. Relative strength tells us how well a stock is doing compared to all other stocks in the market. It’s as simple as that. So if a stock comes in with a score of 90, that means it is outperforming 90% of all other stocks (the rankings range from 1-100). A score of 90, for example, is rare and tells us that the momentum behind the share price is strong.
But remember what I noted about the “hype machine” in the financial media. A lot of times, they just tout what’s going up without any follow-through. So here’s how we make sure we’re investing in quality rather…
The system then combines the relative strength rating to a fundamental indicator we developed, called Cash Flow Relative Strength. And as you may have gathered from its name, we’re looking at a firm’s cash flow… and how well it is growing. As Jimmy says, cash flow is one of the only numbers a company can’t fake. This makes it an extremely reliable indicator of a company’s health.
So we designed a little algorithm that ranks a company’s cash flow growth relative to other companies from 1 to 100, with 100 being the very best.
Average those two numbers together (relative strength rating and cash flow relative strength) and you get the stock’s two-digit Maximum Profit score, or MP score. A score above 70 tells us a stock is firing on all cylinders and has a great chance of short-term gains.
Making Big Gains, Avoiding Huge Losses
To understand just how well this works, take Micron Technology (Nasdaq: MU) for example. This stock came to our attention in October 2013, when the system told us it was time to buy. During that time, shares rose 89% — from $17 a share to $32.
Not bad, right? But buying is only half the battle. As Jimmy consistently points out, the most vital part of successful investing is knowing when to sell.
That’s where the system can really save your bacon. For example, in January 2015, the system alerted us that it was time to sell MU. And as you can see from the chart above, it was a good thing, since the stock leveled off afterwards. But here’s the kicker… if you look at the chart below, you’ll see that MU fell all the way down to $10 by early 2016.
It took two years for MU to recover. Yes, if you look up MU’s chart today, the share price is a lot higher. But you’ll see a lot of wild swings like this. I challenge any “buy and hold” investor to tell me they would have had the stones to ride this stock through this many ups and downs.
Action To Take
Like any system, this only works if you actually follow it. But like the Micron example I showed you above, it’s hard to argue with the results.
The point is, knowing when to take profits or let a stock run can make or break your portfolio. It’s the difference between an average investor and a great investor. That’s because it’s also probably the hardest part of investing. Most investors let small losers turn into big ones or cut their profits short. But having a system like this at your disposal takes the emotion out of the equation.
Right now, our Maximum Profit system is only available to subscribers of Jimmy’s other premium service, Top Stock Advisor.
But the takeaway is this: Don’t be afraid of “momentum” stocks. Just make sure it’s a healthy company that’s actually growing a vital metric like cash flow. And systematizing your process (like using a stop-loss) can go a long way to ensure you get out at the right time.
Editor’s Note: As I mentioned, the Maximum Profit system is only available to Jimmy’s Top Stock Advisor readers right now. But that’s just one more reason why you should check out Jimmy’s latest research, because it’s one of the most interesting things we’ve seen in a while…
Right now, Elon Musk is busy working on a “secret” project with his company, SpaceX. And it could be his most ambitious (and profitable) venture so far…
It’s barely getting any attention in the media right now, but it will be an absolute game-changer — and it’s only a matter of time before the crowd catches on. And Jimmy and his team have discovered a unique “backdoor” way we can gain invest that could lead to massive gains.