Richard Love on Superperforming stocks

First consideration in buying a stock is safety. Safety is derived more from the good timing of purchase and less from the financial strength of the company. (All stocks decline in bear markets. When there is no risk appetite, there are no buyers.)

Most stocks are price cyclical. Buying stocks as the market rebounds from bear market lows is the safest time and it offers the best opportunity for large capital gains. (Sellers cover their short positions, large size buyers are stepping in and indexes are rising above their rising 50 dma)

A winning combination in potential Super-performing stock is rapidly rising earnings, a small supply of stock, low P/E, and a product that promises strong future growth. (Investor’s job is to decide 1) when to buy; 2) what to buy) and 3) when to sell; the future best performing stocks have already doubled in value and are close to new 6 months high)

Some of the strongest price moves have been a result of severe imbalance between limited supply and huge demand of investors. Opportunities for a big gains in stock market are most likely to occur in relatively small companies than in companies with many millions of shares outstanding. Look for small company introducing a unique product that is likely to become widely used. This is the combination that has time after time resulted in dynamic growth.

Financial leverage in a stock is often responsible for high volatility in the stock’s price. Companies with high % of debt in their capitalization tend to have very volatile earnings. A relatively modest increase in income in such companies leads to disproportional increase in EPS.  Airlines and retailers are best examples of high leveraged companies. During periods of recession, when profits decline for most businesses, companies that have large amounts of debt sometimes have no profits at all. But as the national economy emerges from recession, corporate sales and profit margins improve. The % increase in profits can usually be larger than for stocks with small leverage. Highly leveraged companies, then, are even more business cycle sensitive and often are buying opportunities when the stock price is depressed.