Understanding Market Trends: How to Identify Winning Stocks

The main aim of stock market investing is to maximise profits. With the right combination of strategy, foresight, and a pinch of luck, stock market investments can give you healthy returns on your investments. Not all fingers are equal. Similarly, not all stocks are equal in terms of stock market performance. There are winners as well as laggards. Then, there are stocks in between. Identification of the winning stocks holds the key. In this article, we will explore how to identify the winning stocks.

Ways to Identify Winning Stocks

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1. Technical Analysis

Technical analysis assumes that the price of a particular stock reflects its underlying realities. You could use technical analysis to make sense of all three price movement directions: upward trend, downward trend, and sideways consolidation.

Technical analysis can be carried out using multiple tools, such as volume analysis, moving averages, support and resistance levels, and chart patterns. Its primary underlying assumption is the repetitive nature of human behaviour and emotions.

2. William O’Neil’s CANSLIM Investment Technique

William O’Neil proposed a process for identifying quality stocks that have the potential to be multi-baggers in the future. Let’s examine the criteria he proposed.

C – Current Quarterly Profits

Look for a company whose Earnings per Share (EPS) have grown by more than 25 % year over year (YoY).

A – Annual Rise in Earnings

Look for the share of a company whose earnings per Share (EPS) has experienced a CAGR of 25% over the last three years.

N – New Product

I prefer a company that has introduced a new product and is going through a hiring trend.

S – Supply and Demand of Share

Look out for the companies experiencing an increment in the volume of share trades.

L – Leader or Laggard

It is advisable to look for securities that outperform the market trend.

I – Institutional Sponsorship

Take note of the stocks that institutional investors have been preferring.

M – Market Direction

Keep track of the general trend of the market. Investing in equities when the markets are experiencing an upward trend is advisable.

3. Analysis of Operating Leverage

Consider operating leverage an important checkpoint while finalising stocks. Analysis of operating leverage can give you clarity on a particular company’s existing focus area. For example, high operating leverage is an indicator of high investments in fixed costs.

It could be risky to invest in such companies. Once a company is through the stage of investing in fixed assets, even small sales increments can translate into huge profits. It is prudent to pace your investments accordingly. In case you want to learn more about the exciting world of finance, you could use authentic finance blogs.

Conclusion

Not everystock listed on the stock market exchanges is equal. While some are performers, some are laggards in nature. Determining winning stocks is the most crucial part of stock market investing. In this article, we’ve identified how you can identify winning stocks to maximise your stock market returns.