3 Ways to Beat the Market

The headline you just clicked on isn't a lie. In just a few minutes, you're going to have three of my favorite tricks to find market-thumping stocks.

You should know that I'm a growth stock investor, and that's one of the many components that go into the Million Dollar Portfolio newsletter service to find tomorrow's biggest winners. Stick around and you'll hear some of the value-investing voices that also go into the real-money portfolio.

My growth stock strategies won't work all of the time. Nothing does. However, if any of these three tips helps you home in on a winner or sidestep a loser, you'll be better off than the reader who passed on this article because the headline seemed too good to be true.

Let's dive right in with the three traits that I believe separate the market darlings from the laggards.

1. A winner in motion tends to stay in motion
Show me a company that consistently beats the market and I'll show you a company that is likely to do that again.

Investors were shocked when Apple (Nasdaq: AAPL  ) came up short in its latest quarter. The reason that the market was left flabbergasted? You have to go all the way back to 2002 to find the last time that the world's most valuable tech company didn't land ahead of the prognosticators.

How well do you think Apple's stock has performed in that time? Spoiler alert: pretty darn good.

A company that tops bottom-line estimates is likely to repeat. A company that consistently beats Wall Street's targets will also likely beat the market's average return.

Don't cry about Apple's miss. Let me give you three stocks that are working on pretty impressive streaks of their own.

Company

Sector

Beat Streak

priceline.com (Nasdaq: PCLN  )

Online travel

21 quarters

Varian Semiconductor (Nasdaq: VSEA  )

Semi processing

13 quarters

Stanley Black & Decker (NYSE: SWK  )

Tools

13 quarters

Source: Yahoo! Finance.

These companies have little in common. You will find them in any industry, but they all have the traits of winning companies that underpromise and overdeliver.

2. Higher revisions eventually lead to higher share prices
Another popular technique I use to smoke out winners is to see which way analyst estimates are trending.

Let's take Green Mountain Coffee Roasters (Nasdaq: GMCR  ) for a test brew. The company behind the Keurig single-cup brewers and K-Cup refills can be a polarizing stock. Cynics argue that it trades at a lofty multiple and that patent expirations will be a problem next year.

I'm bullish on the fast-growing java junkie; let a quick peek at analyst trends show you why. Three months ago, Wall Street figured that Green Mountain would be earning $2.15 a share next year. Now those same pros see a profit of $2.62 a share.

If you see estimates trending lower over time, run.

3. Fast growers deserve fat multiples
It's hard to drive well if you're glued to the rearview mirror, yet too many investors love to live in the past. They give more importance to trailing earnings than forward forecasts, simply because a company's performance over the four previous quarters is set in stone.

You're a better driver than that.

Today is tomorrow's yesterday, and tomorrow is tomorrow's today.

Let's consider Sirius XM Radio (Nasdaq: SIRI  ) . Value purists cringe at the satellite radio giant. The company nearly filed for bankruptcy two years ago, and it only recently turned profitable. Well, I think any premium service with a growing subscriber base of more than 20 million deserves more respect than that.

Analysts see Sirius XM earning $0.06 a share this year, and $0.08 a share next year. Let's not stop there. Wall Street also sees the popular broadcaster earning $0.12 a share in 2013, and one analyst has gone as far as to forecast net income of $0.16 a share come 2014. In other words, this seemingly overpriced growth stock is trading at a pretty reasonable 11 times 2014's projected profitability.

Headlines don't lie
Now I did promise you three ways to beat the market. I've been a Motley Fool newsletter analyst since 2004, and I know it can be tough to do this analysis alone. Even armed with my three tricks, you may still want a community of like-minded investors and analysts to bounce ideas off and to serve up new stocks for you.

So if the kind of investing I've been writing about appeals to you, I invite you to grab a free report detailing five stocks hand-picked by the Million Dollar Portfolio team. Just click here to access your copy now. We hope you enjoy the free report!

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Green Mountain Coffee Roasters, and priceline.com. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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