Deen Capital Management, Inc.     Our Goal: Outperform the S&P in both up markets and down.
Our Goal: Outperform the S&P 500 in both up markets and down.
Our Result: +60.9% for the 60 months ending January 16, 2020 (vs +80.8% for the S&P)
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Profile of an Ideal Buy

Stocks which meet most or all of these criteria often provide a 10% or better gain in less than three months:

  • True surprise.  The ideal buy candidate is a stock which is suddenly more attractive to investors in the wake of a major news item. In our lexicon, a news item, in order to qualify as a "true surprise", must...

  • ... suddenly and unexpectedly brighten the company's growth outlook. It could be, for example, a positive earnings surprise, a new product announcement, or the announcement of a major new customer or contract.

  • ...not be preceded by a short-term runup in the stock price, which would suggest that the news may have been preceded by rumor, and may be already factored into the stock price. We prefer to see the stock trading flat to down in the days and weeks leading up to the news.
  • ...receive a strong market reaction. We look for a one-day spike in both price and volume in response to the news.

This news item, this "true surprise", may provide the catalyst needed to spark a multi-week or multi-month rally in the stock. That initial market reaction, that "spike" day, may be the first day of this rally. We often buy on that initial spike day.

  • Stock under-valued.  We seek growth at a reasonable price. We generally favor stocks whose forward P/E is no more than 1.7 times the company's long-term projected earnings growth rate.
  • An up or sideways market.  During down markets, we prefer cash. See Risk Management.
  • Long-term strength, short-term weakness.  The stock price should be in a long-term uptrend -- we like to see a rising 200-day moving average. We also, as stated above, like to see short-term weakness leading up to a "true surprise". The ideal buy, then, is a stock which may just now be resuming a long-term uptrend.
  • Accelerating sales and earnings growth.  The ideal stock has a high and accelerating rate of sales and earnings growth in recent quarters.
  • Expanding margins.  The best stocks often are expanding their profit margins.  This can translate into strong earnings growth going forward.
  • Rising estimates.  Rising Wall Street earnings projections suggest that the company's growth outlook was already improving, even before the "true surprise".
  • Recent history of earnings surprises.  This suggests that the company's growth is not fully understood or appreciated by Wall Street analysts.
  • Industry group gaining favor.  Industry groups (software, pharmaceuticals, etc.) can have their own private bull and bear markets. The ideal buy would be in an industry group which is gaining favor relative to its peers.