Finding winning stocks poised in pre-sprint mode is not a push-button business. Savvy investors don't rely on any one indicator or tool to say "Buy this, now.
Trust, as Mr. Reagan said, but verify.
Even a top-grade stock must meet all the requirements of a sound investment method before you deploy hard-earned cash. It has to make sense according to what you know about industry leadership, chart analysis and the state of the market.
So a broad-based measure, such as IBD's Composite Rating, provides a solid starting point. But keep in mind, it is a starting point only.
Introduced on Jan. 31, 2001, Composite Ratings have been flagging top stocks for more than a decade. They are an immense time saver. But don't assume every stock bearing a high Composite rank is ready for purchase.
Composite Ratings digest a bundle of IBD SmartSelect Ratings, including EPS Ratings, RS Ratings, SMR Ratings and Accumulation-Distribution grades into a single, 99 (best) to 1 (worst) scale.
The rating also crunches data for how far a stock is off its 52-week high. The closer to the high, all else being equal, the higher the grade. This factor gets added weight in the stock's rating.
You can find the ratings scattered throughout IBD, starting with the Research Tables and the Stock Spotlight. At Investors.com, you can start with the Stock Checkup, which lists the top five Composite Rating stocks in any stock's industry group.
Investors trying to determine whether high Composite Rating stocks are leaders should always start with two basic technical metrics: stock price and average daily trading volume.
In the biomedical drugmakers industry group, for example, Alexion Pharmaceuticals (ALXN - News) and SciClone Pharmaceuticals (SCLN - News) both hold the best-possible Composite Rating of 99. Which is the better-quality stock
Both have strong fundamentals and interesting chart patterns. Both also trade at healthy average daily volumes, above 400,000 shares a day. But Alexion trades above 90. SciClone has yet to hit 7 a share — below IBD's 10 minimum for leading stocks.
Anika Therapeutics (ANIK - News) and Vertex Pharmaceuticals (VRTX - News) both have a 98 Composite. Again, the rating has guided us to stocks with compelling fundamentals. Pricewise, both are also loosely in target range, although Vertex, near 57, looks stronger than Anika, which is below 15.
The kicker here is average daily trading volume. Anika trades a scant 168,000 shares a day. Vertex sees more than 4 million shares change hands in each trading session. This is a sign of large institutions at work, which is a vital element to great runs by the true market leaders.
