In yesterday’s essay, I explained how my growth stock evaluation system works. Companies with world-class earnings growth, superior profit margins and huge revenue growth receive “A” grades. Companies with terrible fundamentals receive “F” grades.
It won’t surprise you to learn that behind the scenes, some stocks at a given grade level will be better or worse than other stocks at the same level. You could think of it like B+ versus B-.
What follows is that, at any given time, inside the top-ranked “A” group is a small, truly elite group of breakout stocks that rank “A+.”
These stocks are the best of the best…the top 1% of stocks with the world’s best earnings growth, expanding profit margins, increasing cash flows and superior returns on equity. These stocks are the Michael Jordans of the stock market … the ones that post mind-blowing numbers.
These truly elite growth stocks often go through short-term phases of extreme share price appreciation.
And we’ve found a way to buy these elite stocks … before they enter these phenomenally profitable runs.
How Geysers Work
Wyoming’s Yellowstone Park is home to hundreds of geysers, the most famous being Old Faithful.
Geysers are hot underground springs with constricted plumbing, which prevents hot water from freely circulating to the surface.
Instead of flowing toward the surface where heat can escape, the constricted water gets incredibly hot … building up enormous pressure. Eventually, the pressure becomes so great that the superheated water can’t be trapped any longer … so an explosion of steam and water results.
I bring up this natural phenomenon because it’s similar to how these elite, breakout stocks behave in the market.
These stocks tend to experience quiet periods (no eruptions, but massive pressure building up) that are followed by eruption periods (large explosions upward).
For example, in November 2017, we identified Ecopetrol SA (NYSE:EC) as one of the top-rated breakout stocks on Earth. It’s an oil company operating in South America. Its fundamental measures (earnings, sales, margins) were off the charts. In 2017, after moving sideways for many months, Ecopetrol’s stock exploded higher, and we made a 90% gain in six months.
To most people, a “geyser” phase like Ecopetrol’s comes out of nowhere … utterly unpredictable.
Fortunately, my team and I are not “most people” … and thanks to our deep computerized market analysis, we can know in advance when these mega moves are likely to happen.
In our offices, we have powerful computers that make your home desktop look like a Stone Age relic. We spend over $100,000 annually on expensive datasets. We spend thousands of man-hours per year researching new strategies and refining existing ones.
We like to think of ourselves as an advanced scientific research facility…only for the stock market.
Up to this point, I’ve described our work in a field you’ve probably heard of as “fundamental” stock analysis … the study of a company’s earnings, sales, profit margins, etc.
You’ve probably also heard of “technical analysis” … the study of market prices and trading volume data. Technical analysis can take many forms, but some of our biggest breakthroughs have come from the study of institutional buying pressure.
Studying institutional buying pressure is a useful tool because it allows you to track the market’s “elephants.”
The real movers of stock prices are institutional investors. These folks manage large pools of money for mutual funds, hedge funds, sovereign wealth funds, pension funds and insurance funds. They are the elephants in the market.
Just one large institutional investor can manage over $10 billion in assets. So even a wealthy individual with $5 million in assets is a mouse compared to an elephant (in this case, the elephant is 2,000 times larger).
No meaningful, sustained move in a stock can happen without the participation of large money managers. They provide the buying fuel that powers every meaningful stock rally.
What logically follows is that being able to track what these elephants are buying and how much they are buying can give someone a huge edge in the market.
Thanks to our advanced computerized analysis of stock data, we’ve acquired this edge.
In tomorrow’s essay, I’ll show how you can put that edge to work in the stock market.
Regards,
Louis Navellier
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Source: Investor Place