How I Select a Stock Winner

Rick_PendergraftOver the last 200 days, the airline sector has been one of the hottest sectors. The stocks in the group have experienced huge gains with Delta (NYSE: DAL), Spirit Airlines (Nasdaq: SAVE) and Southwest Airlines (NYSE: LUV) being among the best performers.

With this column being called “On the Rebound,” you might be asking why I am writing about the airline sector. If you will allow me some latitude here, I wanted to show how I differentiate between three very similar stocks within the same industry. So let’s say that the sector goes through a pullback in the next few months and I think the selloff is overdone and I am looking for a rebound. Now I want some exposure to the sector. How do I decide between the three high-flying stocks?

The chart below shows the technical performance of these three stocks over the last 200 trading days. What we see is that DAL has gained 86%, LUV has gained 78% and Spirit has gained 61%. All three have had impressive runs.

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The charts all look similar, so it isn’t likely to be the deciding factor in choosing between DAL, LUV and SAVE. This is where the other two analysis styles come in— fundamental and sentiment analysis. I would start with the fundamentals and I would put together a table like the one below. This allows me to compare the performance of the three companies side-by-side. I highlight the positive things in green and the things that concern me in red.

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In this case, there is a lot more green than red and that is a good thing since we are looking to buy one of these stocks. DAL has three green highlighted areas and one red, LUV has four green highlighted areas and SAVE has three. Does this mean I automatically go with LUV? Not yet, we still have to look at the sentiment indicators.

I do the same thing with the sentiment indicators that I did with the fundamental indicators. I create a table with the various indicators and my own personal weighting system that generates the sentiment composite. You see the red cells with DAL and SAVE. The composite for DAL is among the lowest I have ever seen. The analyst ratings for both DAL and SAVE are concerning as all but one analyst has the stocks rated as a buy.

chart2Given the way the airline sector has performed, from both a fundamental and technical perspective, I am not surprised to see such optimism. Sometimes the sentiment is warranted. But when I am looking to buy a stock, I am looking for a stock that still has some doubters because the doubters are on the sidelines. When these doubters see an opportunity, they become buyers. Additional buyers are needed for a stock to continue to climb or for a stock to rebound.

As an individual investor you might not have the time to go through this same process, but I encourage you to go through something similar. This is the process I go through with each recommendation I make in the Value Hunter service and I think it serves subscribers well. The process can find stocks that are ready to outperform the market and hopefully with less risk.

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