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L = Leader or Laggard
Our studies show that, on average, 37% of a stock's move is directly tied to the performance of the industry the stock is in, and another 12% is due to strength in its overall sector. That's why it's so important to track the performance of both industry and sector groups. Leadership also refers to an individual stock's performance in the market. Once you've identified the most powerful industry groups, the next step is to identify the strongest stocks in those industries.
Winning Characteristics
Look closely at the top 20% of industry groups (Investor's Business Daily tracks 197). Our study of the greatest stock market winners show the best stocks generally come from the top 22% of industry groups. Also, you want to avoid the bottom 20% of groups. Historical analysis also shows stocks within the top half of all industry groups greatly outperform those in the bottom.
The best-performing stocks are generally No. 1 in their industry based on key fundamentals, including return on equity, annual earnings growth, pretax and after-tax profit margins and its relative price strength.
Look for confirmation of strength from at least one other company in the same industry group.
Look for leading stocks: Our study of the greatest stock market winners found that all-star stocks had, on average, outperformed 87% of the market before they began their most dramatic price advances. In a manner of speaking, if you want to find next year's winning stocks, look at the better-performing stocks today.
Once a general-market decline is definitely over, the first stocks to bounce back to new price highs are almost always your authentic leaders.
Investing Tip: Stay away from "sympathy plays," meaning a stock in the same industry group as a leading company bought in hopes that the leader's luster will rub off on to it. The performance of such sympathy plays usually pale in comparison to the true leaders. Eventually they will try to move up "in sympathy" but they rarely, if ever, do as well.
How to Find the Leaders
IBD's "Your Weekly Review,"
1. Each day, Investor's Business Daily's Industry Rankings table, found on the Industry Groups page, ranks 197 different industry groups by the price performance of all stocks in that group over the latest six months.
2. An Industry Group Relative Strength Rating is provided for all stocks. The proprietary rating describes how well the industry to which the stock belongs is performing. Industry groups are rated on a scale of A+ to E, with A+ being best. B-rated stocks may also have potential. It's also significant when the industry group has been moving up in ranking in the industry rankings table.
The Industry Group Relative Strength (RS) Rating is a gauge of industry strength and can be found in IBD's main stock tables and IBD Stock Checkup® on investors.com.
1. The table of 52-Week Highs, which IBD sorts by sector, can also provide good insights to which industries are drawing interest among professional investors.
2. Look for stocks with a Relative Price Strength (RS) Rating of 80 or higher. This rating is on a scale of 1 to 99, with 99 being highest. An 80 rating indicates the stock is outperforming at least 80% of all other companies based on its price performance over the last 12 months.
The Relative Price Strength Rating, indicating the price strength of a stock relative to all other stocks, can be found in IBD's main stock tables and IBD Stock Checkup® on investors.com.
The Relative Strength line, included in IBD Charts on investors.com, helps confirm a stock's upward price movement. You also want to see the RS line moving in a strong up-trend. IBD Stock Checkup® on investors.com provides a list of the top five stocks in each industry, based on the most relevant fundamental and technical factors.