This year’s Total Wealth Symposium is in Las Vegas. It starts September 20. That’s the day I’ll provide a “quick start” session on options trading.
That session alone could be worth the time it takes to get to Las Vegas. Options are confusing. They are also rewarding. We want to teach you everything you need to decide if they’re right for you.
Later in the symposium, I’ll share my latest research with attendees. I’m working on something that could be even bigger than the strategy I shared last year.
That’s exciting because last year’s research showed attendees how to find stocks that delivered large gains, including one that gained 700%.
Before going any further, let me share the exact screening criteria with you.
Why Earnings Don’t Matter
This screen identifies value stocks that are moving up. It finds companies with increasing sales and cash flow. It completely ignores earnings per share.
That surprised attendees last year. But my research says earnings aren’t important. And there’s a good reason for that.
This screen looks for stocks that can gain more than 100% in the next year. Earnings don’t make stocks like this move.
Earnings for small companies can be accounting fictions. Some accountants might answer the question “What’s 2 plus 2?” with: “Whatever the boss says.”
Big firms won’t hire these accountants. But small firms might. So we need to ignore accounting hijinks in small stocks.
Instead of earnings, we need to focus on the rules I showed you above.
Why Those Rules Matter
Big winners are almost always small companies. That’s because it’s easier for a company with $1 million in sales to double in a year than it is for a company with $100 billion in sales.
Market cap measures how big the company is. The first rule eliminates large companies.
The second rule says to buy stocks that are going up. That means other investors are also buying the stock. And other investors buying is what makes stocks go up. It’s really that simple when you think about it.
You don’t need to be the first one into a company to make money. Microsoft wasn’t the first company to develop an operating system, a word processor or spreadsheet. Really, Microsoft isn’t the first to do anything.
But the company makes money by following after others who recognized the opportunity. Stock market investors should do the same thing. Move into stocks after other investors show they like the company.
After finding small-cap stocks that are moving up, screen for fundamentals. But ignore earnings. Big winners don’t need earnings. They need sales and cash flow.
Sales demonstrate value of the product or service. If a company doesn’t have sales, it’s unlikely to survive in the long run.
That’s not always true for biotech companies researching new drugs, or some other tech companies. But, in general, it’s better to wait for sales before making an investment.
Cash flow from operations shows the company can generate profits someday. Cash flow allows for investments in the business.
Without cash flow, companies borrow money or sell more stock. Those actions reduce shareholder value. That’s why increases in cash flow are important. It keeps a company from diluting shareholder value.
Finally, look at a valuation metric. But not one everyone else is looking at. Look at the enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio.
EV includes the value of a company’s stock and debt. EBITDA reduces the impact of accounting charges on the company’s valuation. By looking for a low EV/EBITDA ratio, we are looking for real value instead of accepting at face value what accountants tell us.
That’s it. This screen combines value, growth and momentum. It’s proven to find big winners.
Five stocks passed this screen last September. Total Wealth Symposium attendees had a chance to buy those stocks. Each gained at least 24%. The average gain was 224%.
And, this year, I’m sharing research that could top those gains.
Michael Carr, CMT
Editor, Peak Velocity Trader