Secrets to Spotting the Next Hot Stock
WHY YOU SHOULD CARE
Because nobody wants to one day liken their stock portfolio to a pancake.
By Gary M. Stern
When Paul Natali started investing eight years ago, the online customer service manager says he did it “out of curiosity” while “looking to make a few extra bucks.” But he has also been methodical in his approach. Before plunging in, the now 28-year-old from Chatsworth, California, read a book by a stock-trading specialist, studied charts of what moves stocks and gathered intel on knowing when to buy and sell.
And he didn’t stop there. Now he also taps Yahoo! Finance and plugs in “hot stocks” on Google to determine what’s trending. Sound like more work than it’s worth? So far this year, Natali says, his portfolio of about 500 individual shares is up 14 percent, while last year it grew 20 percent, both ahead of the pace of the Standard & Poor’s 500 index, which has grown less than 5 percent this year and was up about 11 percent in 2014. “You have to stay alert for the next big stock,” he adds.
Betting in the stock market and finding the next Netflix or Amazon isn’t for the squeamish. After all, investors have been known to lose their entire savings, not unlike some gamblers in Vegas. But keeping money in a savings account isn’t making anyone rich these days, either. And while there’s nothing wrong with buying safe stocks like Coca-Cola and GE, over the past couple of years, they’ve been almost as flat as an ironing board.
Do your own research, and invest in something you believe in.
Atanas Stoyanov, software-company owner turned stocks investor
If identifying highfliers like Priceline and Electronic Arts (which rose 105 percent last year) is the goal, then what are the criteria for nabbing the next great stock? Experts will tell you that the givens haven’t changed: extra cash, a little chutzpah and some market savvy. But each year, it’s taking even more elbow grease, entailing a combination of research, listening to what people are talking about, watching what they’re buying and sensing the next great trend. And timing. That helps, too, of course.
For Tampa, Florida-based Atanas Stoyanov, a strategy slowly developed after he sold a software company in 2007 and then had to deal with thyroid cancer. Unable to work, he opted to buy and sell stocks from home in 2008. Since then, he has read Peter Lynch’s Beating the Street and Jim Collins’ Good to Great and studied Warren Buffett’s investment strategy to establish a framework for buying stocks. From Buffett, Stoyanov learned to view each stock as an independent business and dissect its cash flow.
And he hasn’t done too badly. After seeing the 2008 economic recession as a buying opportunity, Stoyanov thought Apple was the stock to buy, and he kept acquiring its shares as the stock value plunged. “They had cash reserves that covered their market cap,” says Stoyanov, who claims he sold the shares at $605 in 2012, netting $1 million in gains.
Dig deeper, though, and Stoyanov shares that his strategy is also based on company fundamentals and analyst ratings. Translation: He identifies industries primed to grow — like biotech and 3-D printing — and looks for industry leaders. For example, he acquired shares of 3D Systems, a pioneering 3-D printing firm, which spiked in value. “I look for technologies that are emerging and a management that knows how to grow the company,” he explains. His best piece of advice? “Do your own research, and invest in something you believe in.”
Indeed, someone who loves sports could follow that industry’s movers and shakers. Take Under Armour, the sportswear company, which launched at around $6 a share in late 2005 and now sells for nearly $80. Tech geeks, on the other hand, might focus on breakthrough products such as the collision-warning systems made by Israel-based Mobileye.
But watch out for basing decisions solely on emotions. “That can kill you,” warns Mary Ellen McGonagle, a former Goldman Sachs fixed-income trader and the founder of MEM Investment Research. When it comes to picking growth stocks, she notes, look for companies that are “generating strong and sustainable sales and earnings and offering a high-demand product.”
Of course, the hardest part might just be pulling the trigger on a trade, due to either nerves or — worse — a lack of cash. Natali, for one, carefully sets aside a percentage of what he earns to invest in the market, knowing that he’s not risking his rent money or food budget. Yet he sometimes misses (major) gets. One time he targeted Shake Shack, known for its gourmet burgers, and considered buying it at its initial public offering price of $21 when it debuted earlier this year. He targeted it as the next Chipotle, the rapidly expanding burrito and taco house. But he didn’t have the extra money to invest and so sat on the sidelines while Shake Shack skyrocketed to $65 a share. Now that’s tough to swallow.
Knowing he has a limited amount of capital to invest, Natali now uses a couple of helpers to assist him. Through the site Motif Investing and the stock-trading app Robinhood, he has bought a small percentage of 10 stocks, including 2 percent of one share of Google (which was recently selling for more than $535) as well as 1 percent of Alibaba (which topped $85). He keeps adding money to boost his ownership stake and now owns 20 percent of one share of Google, for example. And maybe one day soon, he’ll own the full share of his Next Big Stock.
- Gary M. Stern, OZY Author Contact Gary M. Stern