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Finding Hot Stocks in a Hot Market 

As you’ve probably noticed, the market has been strong lately. How long that lasts is anybody’s guess. Nevertheless, why not hop on some hot stocks and enjoy the ride. Just be prepared to get out quickly when the market turns.

Here’s a stock screen, intended to pinpoint hot stocks suitable for short-term plays. A momentum strategy, the screen mainly looks for stocks with strong price charts that are “in favor” with market players.

If you’re not familiar with the term, stock screens are programs offered by financial websites that allow you to list stocks meeting your specific requirements. I’ll demonstrate the process using FINVIZ.com’s free and user friendly screener. Get there by selecting Screener from the FINVIZ.com homepage (finviz.com). FINVIZ calls its selection parameters “filters.” To start, click “All” on the Filters bar to see the entire list of available filters. Then, use each filter’s dropdown menu to pick a value. Here’s how to set up my “hot stock” screen.   

USA Only
Because, currently, at least, the U.S. economy is the strongest in the world, I required USA-based stocks (Use the “Country” filter and specify USA).

Small – But Not Too Small
For momentum strategies, you usually get the best results by sticking with smaller stocks that are not yet on most investors’ radar screens. Market capitalization, which is how much you’d have to shell out to buy all of the outstanding shares, is the standard way to measure company size. Typically, firms with market-caps below $2 billion are considered small-caps, which is what we want. However, if you go too small, risk goes through the roof. To keep the risk down, I set my lower limit at $300 million. Thus, using the Market-Cap filter, I specified “Small: $300 million to $2 billion.

Actively Traded
Trading volume is the average number of shares that change hands daily. Most stocks trade at least 100,000 shares daily. Since hot stocks should have high trading volumes, I required a minimum 200,000 shares per day average volume.

Cheap Stocks – Not!
Stocks trading at very low prices, say below $5, are out of favor with most market players, and obviously not hot stocks. Thus, I specified “Over $5” for price.

Make The Trend Your Friend
Many investors believe that stocks move mostly in trends. For instance, a stock that has consistently moved up is in an “uptrend,” and is likely to continue its winning ways. Same thing in reverse for downtrending stocks. Hot stocks, by definition, must be in strong uptrends.

You can determine a stock’s trend by comparing its share price to its moving average (average closing prices over a specified time). Stocks trading above their moving averages are in uptrends and those below are trending down. The amount the share price is above or below the moving average gauges the trend strength.

I used the 50-day (medium-term) and 200-day (long-term) moving averages, and required passing stocks to be 10% above both (filters labeled” Simple Moving Averages”).

In Favor 
Hot stocks must be “in-favor” with most market players. We can identify in-favor stocks by checking two indicators, “analyst recommendations” and “institutional ownership.”

Analyst Recommendations
Stock analysts publish buy/hold/sell recommendations on the stocks that they cover. FINVIZ tabulates their ratings into these categories: strong buy, buy, hold, sell, and strong sell. I specified stocks “buy or better” for Analyst Recommendations.

Institutional Ownership  
Mutual funds, pension plans, and other big players have more access to market moving information than we do. If they don’t hold significant positions in a stock, you shouldn’t either. Institutional ownership, which measures the percentage of a firm’s shares held by those big players, typically ranges from 40% to 95% for in-favor stocks. I required “Over 40%” for Institutional Ownership.

Profitability Counts
Whether you’re looking for hot stocks, reliable growers, or beaten-down value plays, you’ll always do best by sticking with profitable firms. “Return on assets,” a profitability measure, compares net income to total assets. Any positive value says a firm is profitable. However, for profitability, higher is always better. I specified a minimum 10% return on assets, which signals a highly profitable firm.

Hot Stock Candidates
My screen turned up five stocks, all in different industries.

 • Akorn (AKRX): produces generic eye-care products. Recently agreed to acquire a make of cold and cough remedies.

 • Dean Foods (DF): produces milk, ice cream, other dairy products, as well a juices, teas, and bottled water.

 • Federal Signal (FSS): produces security systems for cities, other government agencies, and for industrial customers.

 • Methode Electronics (MEI): makes switches and other electro-mechanical devices used in automobiles and kitchen appliances.

 • TASER International (TASR): makes electrical weapons used mostly by law enforcement agencies.  

These small-cap plays are not long-term holds. You must watch them constantly. Sell on any bad news, analyst downgrades, or when their 50-day moving averages fall below their 200-day MAs.

9/22/13

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