3 Steps to Stock Picking Success & 2 Little Stocks on the Move

3 Steps to Stock Picking Success & 2 Little Stocks on the Move

Following Dave Goodboys last educational article, I am going to share some of the things I have learned about stock investing. It goes without saying (but, I am going to say it anyway ) that choosing the right stocks to buy is the stock investors most difficult task. Locating winning companies before the crowd finds them is a key component in successful investing. Although one can jump on an up-trend or buy beaten-down gems, getting into a stock before the hype often yields the greatest returns. How are these pre-hype stocks located? I have devised a simple three-step plan to locating these companies before the crowd.

Step 1: Finding the right company

Always be observant of new trends, new products and new ideas in the marketplace. Constantly read cutting edge magazines, Web sites and various chat rooms that discuss the next big thing. (However, be aware that the motives of chatters are not always pure.they can pump a stock as good as any slimy stock promoter ) Remember superstar stocks like Google (Nasdaq: GOOG) and Amazon (Nasdaq: AMZN) all started out small. Peter Lynch, one of the most famous market researchers and fund managers of the 20th century, started the mantra to invest in what you know. Go to the mall, look at what you like, and see what is selling. Chances are, if you like something, others will also.

Make a list of these companies that appeal to you, this will be your starting research group. This step is something you should be doing all the time; its not a weekly or daily ritual. It needs be imbedded in your mind to be constantly thinking about what may be the next big thingsooner or later you just may hit it.

Step 2: Check the fundamentals of the companies you like

In the niche that I invest in (small cap stocks under $5) websites like Yahoo Finance and AOL Finance provide in-depth research on most public companies financials and fundamental picture. If it is a OTCBB or OTC Pink, you can also use pinksheets.com to get info,

However, all is not lost if the fundamentals are unclear or questionable at first.

The fundamentals may look a little shaky but the idea, product or companies service seems strong. In this case, pull up the companys Web site, what do you think? Take a look at the bios of the management team. Do these people look like they have the experience to run the company? Call the company, ask for investor relations and request a packet of information about the firmhow were you treated on the phone? All of these factors play a part in rudimentary fundamental research.

Step 3: Look at the technical picture

I love charts! Maybe it is because I am so visual. Stockcharts.com and profitspi.com have some great charts that allow you to slice and dice the info anyway you want. There are literally hundreds of indicators and overlays that you can follow. Play/practice with them and find the three or four that are the most meaningful. My charts always include Volume, MACD and Stochastics. I will also use Williams %R, On Balance Volume, RSI and confirmation of what I am seeing in my top three indicators. I usually only use the 50 and 200-day MA as overlays. I will occassionally lay in the Bollinger Bands as further research.

And, you will probably set your chart in a totally different way. That is o.k.

The primary factors to keep in mind are volume and trend. Take a look at the stocks volume, is it sufficient? How does the volume compare to other companies in the same space? What about the price? Is it trending up or down, does it have erratic or smooth moves?

These three steps will allow you to find stocks ready to make a move before the crowd.

Using what I had written above..here are 2 little stocks on the move

Lucas Energy (AMEX: LEI) This oil and gas company just exploded higher by more than 70%. The firm just completed a new horizontal well that will increase production and dramatically lift the bottom line.

Edgewater Technology (Nasdaq: EDGW) A merger and acquisition consulting firm just posted stellar results with revenues up more than 100% and a huge increase in profits. The stock is up more than 25% on the news. Provided the current climate of increased merger activity; this company should continue to profit.