The Three Ms of Investing
05/21/2004 12:00 am EST
The Coolcat Explosive Small Cap Growth Stock Report was ranked #1 by the Hulbert Financial Digest for 1999-2003, with a gain of 529%–a 44.5% annualized return. Says Kevin Kennedy , "Our goal is to focus on the three Ms–market timing, momentum, and money management.
"Regarding timing, we try to be aggressive in a strong market and defensive in a weak market. Three of four stocks will go up in a rising market and go down in falling market, It doesn’t pay to fight with Mr. Market. A sign of a rising market is if the averages trade above their 50-day moving average. We also look for the 50-day moving average to be above the 200-day moving average for key indexes like the NASDAQ and the Wilshire Micro Cap. In terms of individual stocks, we look for situations that are marked by an uptrend, where a series of higher highs and higher lows are seen. We also look for higher volume on up days and lower volume on down days. We'd emphasize that investors should be aggressive buyers during strong market conditions and move to the sidelines or be short the market when the market is weak.
"In terms of momentum stocks, we focus on strong performing stocks that have the characteristics of past major market winners. We look for a low float, where there is the potential for big demand and small supply. We look for a low price. It’s easier for a stock to go from two to 20 than it is to go from 20 to 200. We also look for high relative strength. Huge winners start as big winners. We also look for new highs, which suggest that there are no disappointed buyers holding the stock. We look for strong industry groups, particularly in growth-related areas like technology and healthcare. We also look for breakouts from bases on big volume, and pullbacks on lighter volume. We also look for a low price-to-sales ratio, which often attracts bargain hunters. Finally, we look for an early stage turnaround, which can often be seen in stocks with high p/e ratios or no trailing 12-month p/e.
"Regarding money management, we focus on buying stocks that are acting strong, but are not too extended from a consolidation base of at least four weeks. The ideal buying situation is on a pullback of 15% to 30% off the high on light volume, after a strong surge upward on big volume. We also recommend that investors diversify into a basket of at least 20 to 25 stocks to increase the chances of finding a big winner. Finally, in addition to buying during pullbacks in price, we follow strict selling rules that let our profits run while keeping our losses small in order to protect ourselves from a stock that turns into a mistake. We also love to sell on the way up at pre-determined percentage gain figures and into high volume price spikes. We would suggest selling half of a position on a double. We would also sell a parabolic stock that doubles in less than two weeks after it has already made a big move. We also suggest selling a stock which rises more than 75% above its 50-day moving average. And if a stock’s 50-day moving average falls below its 200-day moving average, it’s time to move on.
"Given this background, what are the characteristics of the very best performing stocks? The first criteria I look for is based on the top performers of the past three years at the time they make my stock screens: the factors I look for are:
- An average three-day volume of less than 150,000 shares a day
- A relative strength rank of at least 96 (99 is even better).
- Group strength of A
- A price below 12 (Below five is even better).
- A 52-week low of 1.25 or less.
- A price-to sales ratio of 5-to-1 or less.
- No trailing 12-month earnings and no p/e ratio or a p/e above 30.
- A market cap of $150 million or less.
"Based on these factors, here are some of the stocks recently added to our Coolcat Report's model portfolio:
"SPACEHAB (SPAB NASDAQ) is a provider of commercial and government
space services with three primary business units. The Flight Services business
unit develops, owns, and operates habitat and laboratory modules and cargo
carriers aboard NASA's Space Shuttles for Space Station resupply and research
purposes. SPACEHAB's Astrotech subsidiary provides payload processing support
services for both commercial and government customers at company-owned
facilities in Florida and California. The company's Government Services business
unit supports NASA's Johnson Space Center providing configuration management,
product engineering, and support services for both the Space Station and Space
"Hauppauge Digital (HAUP NASDAQ) is a developer of analog and digital TV receiver products for the personal computer market. Through its subsidiaries, the company designs and develops analog and digital TV receivers that allow PC users to watch television on their PC screen in a resizable window and enable the recording of TV shows to a hard disk, digital video editing, video conferencing, receiving of digital TV transmissions, and the display of digital media stored on a computer to a TV set via a home network.
"IntraBiotics Pharmaceuticals (IBPI NASDAQ) is focused on the development of novel antimicrobial drugs designed to overcome many of the shortcomings of currently prescribed anti-infectives, including the growing problem of multi-drug resistance. IntraBiotics' product candidate, Iseganan, is in clinical development for two indications. The Food and Drug Administration (FDA) has granted fast track designation for the development of Iseganan for the prevention of ventilator-associated pneumonia, the most common infection occurring in hospital intensive care units. The company is also developing Iseganan as a potential treatment of lung infections associated with cystic fibrosis."