Several years ago (back when the Fool was only on AOL), I wrote a column called "Relatively Speaking." The idea was to dig through Investor's Business Daily and discuss stocks with the highest relative strength (RS) ratings.
For those of you unfamiliar with RS, it's simply a numeric measurement of how well a stock is performing relative to all other stocks out there. The idea here is that investors should want to buy stocks that are performing better than all others. That makes sense, right? The trick is figuring out not only which stocks are currently performing the best, but also those that are moving up in the pack.
Every day, IBD ranks thousands of stocks from 1 to 99 in relative strength. By poring over the newspaper, you can identify those stocks with the highest RS rankings. (By the way, if you aren't subscribed to IBD, you really should check it out and use the tools inside the newspaper. It's less of a newspaper than it is just an enormously useful database of stock rankings.) Using IBD, you can find all stocks with high RS ratings.
High octane
There is a school of investing thought, specifically the momentum school, that believes that a stock in motion will stay in motion until some other force acts against it. Stated another way, those stocks with high RS values will continue to perform well and maintain their high RS rankings, until something gets in their way.
Those who follow this school of thought tend to buy high RS stocks. The somewhat circular madness is that by buying these stocks, investors often ensure that the RS ratings stay high, further fueling the situation. It's never entirely clear if the companies achieving high RS status are there because the underlying business is performing exceptionally well and the stock is following or if the somewhat self-fulfilling prophecy of momentum madness is at work.
As I mentioned above, these stocks tend to rise until something acts against them. Usually, it's bad news like disappointing earnings or some other malady. I titled this column "High-Octane Investing" because as fast as some of these stocks rise, once they hit a wall, the carnage is massive. High risk, high reward -- I love it! (FYI, another Fool who loves to use relative strength in his stock picking is Motley Fool co-founder David Gardner. He's used RS rankings from IBD for years, with great success. His stocks are up 65% in The Motley Fool Stock Advisor since inception. )
Rising stars?
I've used IBD rankings for years as a tool to help me screen for stocks to add to my portfolio. Obviously, I've always been fascinated by relative strength and often looked to the high RS stocks for ideas. What I've always wanted to be able to do, however, was identify those stocks whose relative strength was improving rapidly, but not quite on the top-tier lists.
Recently, with the help of a software program I use, I have been able to simulate the IBD RS ranking and sort stocks based on how swiftly they are moving up in the RS ranks. To restrict the list a little bit, I chose stocks that are trading over $10, as well as stocks whose revenue growth these past four quarters ranks in the top quartile of all companies. With this list of about 1,000 stocks, I then sorted based on the companies whose RS ranking has moved the most in the past month.
You might expect that companies such as Netflix
What about those jet-fueled stocks that are running out of gas? At the bottom of our list is a company called ChipmosTechnologiesBermuda
Keep your eyes closely on the relative strength of the highfliers in your portfolio and don't be the last one shuffling the deck chairs.
Bits & bytes
A few weeks ago, we talked about Ben Graham's equation for valuing stocks. I received several hundred emails from the column, many from money managers who all had a slightly different take on how to use the equation, with some even questioning its validity. With so much hubbub about Mr. Graham's equation, I am going to seek out higher counsel.
There are two folks uniquely able to help us better understand the work of Ben Graham, and I intend to do my best to contact them and learn. The first is Christopher Browne, managing director of Tweedy, Browne Company and an old-school money manager who worked with Graham for many years.
The second is none other than Warren Buffett himself, a disciple of Graham and also a good friend of Mr. Browne. I hope that I can contact these gentlemen, ask for their insights, and report back to you.
David Forrest owns none of the companies mentioned above, as his profile can attest. The Motley Fool is investors writing for investors.
