Tutorial – High growth stocks (December 08, 2017)
CBOE VEEV CGNX CBOE CGNX OLLI VEEV OLLI CBOE OLLI VEEV CBOE
I want to look at growth stocks. Here’s the deal: I am putting this video together because we have a feature at Stock Market Mentor that effectively finds a list of stocks that have specific characteristics. The intent of this list is to give our members stocks to be hanging onto for a while. In other words, not the swing trading stocks that, “Oh, it is rebounding off support and so buy it now. Our price target is $3.00 higher than it was yesterday or something.” Which by the way, is a great way to trade, we do a lot of that stuff too. A lot of members need to have longer holding periods. You are not going to trade your whole portfolio on a four-day swing trade or a day trade or something.
One of the biggest questions that I get is, can you give me a list of stocks? Give me one stock other than like, Facebook ( NASDAQ: FB ) which is obvious or whatever, that I can just buy and hang onto for a while. I don’t want to have to mess with it every single day. I don’t want to be always nervous about where my account is on any given day. I will go ahead and set my stops but I just need some reliable stocks. So from those questions I put together what I call our Growth Stock list. So I want to go through our criteria here; that is pretty easy.
By the way, the difficult part of all of this, of trading in general, is to avoid the, “Oh, this time is different,” reaction. We all have that. You should have a criteria for when you are going to buy or when you are going to sell a stock. But the problem is our emotions start to get the best of us because we see the price is moving and the charts and the flashing lights and all that. And we get excited and we kind of lose our mind; pretty soon we have no discipline at all and the stock is ruling you, the stock is trading you rather than you trading the stock. So your challenge is not going to be finding the right stocks. Your biggest challenge is going to know, to know what to do with those stock and only doing what you are supposed to do.
Let’s look at this; I really need to see three things:
• I need to see reliable and accelerating growth in both earnings per share and in revenues or sales
We want to see a company that is not just growing. A lot of companies do that but is want to see the growth actually accelerating. It is like a car going from zero to 120; if it is clipping along at 10 mph every 4 or 5 seconds that is not very fast. On the other hand, if it really starts motoring and just gets going faster and faster, and faster, that is the kind of growth that we want to see. And you will be able to find that if you are just looking at earnings and revenue growth over, say, the last four quarters.
• Then I also want to see a good return on equity.
In other words, what is the company actually doing with the money? What are the profit margins? Are you making a lot of money with the money that you are spending or are you not? We want to see this reliable 15 percent but frankly, I like 20 percent or better. For the most part the bigger the better, at some point, if it gets to be too high, you have to say, “Well, wait a minute, something is going on here. Maybe this is just a one quarter or a couple quarters where something unusual is going on that gives us a big return on equity.” But we want to just see 20, 30, 40 percent totally works.
And then the last thing is:
• We need to see the technical picture, the chart. It needs to look good. We need to see an uptrending stock.
Here is why: Large funds and institutions move stocks. What we want to do is be on the front wave of a stock that institutions are buying. The earlier that we can get on the bandwagon the better. We wouldn’t have to do any of this work if institutions and funds, if they would reach out to us, maybe send out a tweet, maybe a text message, log on to Stock Market Mentor, let us know, “Hey, we are buying such and such a stock. We are going to buy such and such a stock, we have got 5 million shares or 50 million shares to buy. Just thought we would let you know, this is what we are doing.” If we got that kind of information we wouldn’t care about doing any of this stuff, just buy from the list and it is all good. Unfortunately, I don’t know about you but I don’t know anybody who is going to do that for me; so we have got to do it for ourselves. It is a little bit of kind of a sleuth work; we have got to do a little detective work.
What we are looking for are stocks that large funds and institutions are going to buy. Because the thing is, when they buy a stock, you could say, “Oh, well the stock moves higher.” Well, duh, that is like saying, “Well, how come stocks go higher?” Because there are more buyers than sellers; there aren’t. They are all the same. For every stock that is sold somebody bought it. What we are talking about is the relative aggressiveness. We want to see buyers actually reaching up for the stock; taking stocks at the offer rather than waiting for stocks to be sold at the bid.
One thing that a lot of folks don’t talk about is that as institutions buy they remove stocks from the float. They are no longer freely trading stocks. If Vanguard is taking a big position in a company, and say maybe it doesn’t have a real large float, well as they buy those shares, you know, they are not trading around them every day, they are sitting in their account doing nothing. And so subsequent buyers have a more difficult time buying the stock at a reasonable price because the float is lower. Those are the stocks that we want to buy; we want to be in those stocks. You kind of look for low-float opportunities, we want to see all of these things.
Again, it is the criteria that I mentioned a minute ago. All of these things we want to see and this is why: Because we look at these large funds an institutions and sure they look at the company. A lot of these guys I think that is where they start. You know, they are looking at the financials. But then ultimately they are going to look at the chart. They are going to buy these stocks with these earnings, revenues and return on equity growth that we are talking about. So we want to be there and so we want to look at the same criteria that they are doing.
Also, they don’t buy they accumulate. They don’t sell, they distribute. What I mean is, they don’t just hit the button and do everything in one day. An institution, if it is starting a position, if it is buying a stock, they are not going to change their mind in a day. So because of that these stocks can actually kind of be more reliable for you in your portfolio. We want these stocks that are reliable, I will show you a few of them in a minute. These institutions are position holders, they will buy Facebook ( NASDAQ: FB ) before it started trading or during that time after the company came public and then the stock kind of wallowed for quite a while.
These big guys are buying the stock. They didn’t sell it the next year or the year after that. Some of these guys have been holding the stock all this time. They just hang on to the stock. By the way, this is why sometimes companies will split their stocks, because they want a greater number of shares in the float.These institutions are holding too many shares. And so if we can keep it in our mind that these stocks that we are owning are stocks that institutions are buying, this will enable us to not be shaken out all the time by every pullback in a stock. Because we don’t look at it and say, “Oh, something is wrong. Something is wrong with it.” No, institutions are buying and selling. But when a stock gets too high institutions kind of stop buying. Then when it pulls back they do start buying. So we will see these opportunities in pullbacks. When pullbacks occur we will be able to buy these stocks because we know this is what institutions are doing.
And then also, and this is the big point for most of our members, we want longer holding periods. You want to be in these stocks that you buy it at $50.00 and maybe you are adding a little more here and there. And then low and behold a month or two down the road you look at it and it is at $60.00 or it is at $62.00. Okay, you didn’t get rich but you made 20 percent; maybe 25 percent in a couple months. Why did you do that? Literally, because you did nothing. Because you held the stock and then you let other traders push that stock higher. You let those other institutions absorb those shares and push your stock higher.
So let’s look at some charts, we will just look at a few charts of some real high growth companies. We will look at:
• CBOE ( NASDAQ: CBOE )
• VEEV ( NYSE: VEEV )
• CGNX( NASDAQ: CGNX )
• OLLI ( NASDAQ: OLLI )
These all have strong fundamentals. They all have strong fundamentals but it is the chart, that final analysis that tells us whether we want to be in a stock and what institutions are doing. So let’s look at these.
Cboe ( NASDAQ: CBOE ). Look at the relative strength line. When it is moving higher this means it is stronger relative to the S&P 500 ( INDEXCBOE: .INX ). We see that Cboe ( NASDAQ: CBOE ) is a stock that we have wanted to own for quite a while. Again, strong fundamentals. It is just the type of stock that an institution would be interested in buying. And so you say, “Okay, is the institution buying it? Massive institutions that control stocks, are they actually accumulating this stock? The answer would be, yes. So this is a stock that you can comfortably hold, right?
Now, compare that to Veeva ( NYSE: VEEV ). Strong fundamentals here; the company has great fundamentals; really good growth in earnings and revenues. Great return on equity. Which stock would you rather be in, Cboe ( NASDAQ: CBOE ) or Veeva ( NYSE: VEEV )? I am not talking about trading right now. I am saying, what are institutions doing here? I look at this and I don’t see institutional accumulation, I see a bunch of selling going on here. Now, we don’t know whether this is ultimately going to fall out of this support line here. But I sure wouldn’t want to own this stock. And I think that institutions don’t want to own this stock either. If you look at where this thing has come from, back in February of last year it was down at $20.00. This ran up at one point, up 220 percent. So this has had a big move. Institutions were in this stock here. It is my feeling that now they are getting out; they are getting out of this stock.
Now, Cognex ( NASDAQ: CGNX ). Great chart, looks just like Cboe ( NASDAQ: CBOE ) until recently. This gives us an idea that while back here the stock was moving up because institutions are sponsoring the stock, they are owning the stock. This doesn’t make this kind of move on such huge volume when institutions are not active, and they are actively selling. So while this stock is still really technically in an uptrend, this looks to me like a pretty significant blow-off top.
So would I sell this stock just because of this big sell-off? You know what? Frankly, probably yes, I would. But it would only be because I would have been in it down here at lower levels just like institutions. If I was late on this, if I didn’t get in until 71.00, 72.00, I would not still be holding the stock at 64.00 because I didn’t have any profits to protect. If you are buying it at what turns out to be the top, don’t sit there and cross your fingers and hope that the stock is going to go on this parabolic move and save you. It is probably not going to do that.
What you want to be doing is, you want to be getting into these stocks early and then holding them as long as institutions are buying. And by the way, let’s just face it, we don’t really know what early is until the stock continues to trade for quite a while. In other words, when you are buying a stock you are buying a stock. You are speculating, you think you know what is going to happen because of the work you have done. But if the stock tanks next week you weren’t early, you were late. On the other hand, if you are buying and then the stock just continues to move higher, and higher, and higher, then you were early. So we are speculating here.
But when we see a stock that looked really, really good back here do this, this now is a stock to be really taking off of that growth stock list. You don’t want to be messing around with a stock like this unless you have a longer time horizon. You like the way this company works. You believe in this stock and you have decided you are going to hang on to it even if it continues to fall and maybe you will sell it when it hits $100.00 or something. It wouldn’t be my preferred way, only because this stock is showing clear signs of breaking down.
And then finally we will look at Olli ( NASDAQ: OLLI ). By the way, I picked these because these four stocks are all on our growth list. You can see how the chart gives you an entirely different way to approach your stock. Like Olli ( NASDAQ: OLLI ), I have been on this stock for quite a while. It has been forming, frankly, a really sloppy pattern here, resistance there but then the stock has just really gotten sloppy and then it rallies up here and then you could see what happened.
This, frankly, was looking kind of toppy to me but the stock never broke down. It never gave us a Veeva ( NYSE: VEEV ) like this; the stock is still holding strong. But are you more confident holding a stock like Olli ( NASDAQ: OLLI ) or a stock like Cboe ( NASDAQ: CBOE ), the first one we looked at? This is easier to hold, a much easier stock to hold. But Olli ( NASDAQ: OLLI ) has all of those characteristics of this growth stock as far as growth in revenue and earnings and also a great return on equity. So it really does take the chart to give you that confirmation that a stock that looks good, the fundamentals look good; you think it is the type of thing that institutions are going to buy. You finally look at the chart and then you will know whether institutions actually are buying. Here, it is kind of a muddled picture here but the stock is still one that you want to hold.
Veeva ( NYSE: VEEV ), I don’t think this is muddled, I don’t see a lot of institutional buying here. I see a lot of confusion and probably what looks like a double top. Ultimately, Cboe ( NASDAQ: CBOE ), for the time being, ultimately this is going to change, but for the time being, we are still seeing buying here so this is the kind of stock that you want to continue to own.
That is just kind of the long and short of my Growth Stock profiles. They are designed to be the types of stocks that you can buy and just hold for a while.
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