A lot of investors and traders searching for complex algorithms and techniques as well as advanced strategies to maximize their profit in the stock market. They go through a lot of websites and tutorials to find that piece of the puzzle to help them start making more profit in the stock market. They came to cross a lot of strategies that one of which depend only on the fundamental analysis of company financial reports that released quarterly, while the second of which depends only on technical analysis and studying the history of stock’s price to predict its future movement. Finally, the third of which tries to mix between fundamental analysis and technical analysis in order to end up with better investment or trading strategy that will maximize their profit and help them to pick the winning stock from 5000 or more.
In their journey in searching for this strategy which might help them in making a good decision in picking the winning stocks, they forgot to ask them-self the most crucial question which is why companies exist?. The importance of answering this question is the main criterion that helps people to pick the winning stocks.
Companies around the world exist for one simple reason and that is making a profit. If the company did not make a profit or keep losing money it will be obvious that this company will go out of business very soon. So those investors and traders should look for companies that make a profit and eliminate those which did not from their screening process. But there is another question to ask here which is what if the screening process end up with many companies that made a profit, How can the wining stock rightfully selected among those stocks?.
The answer to this is simple, the wining stock is the one that belongs to the company that made more profit than the rest and that profit reflected in its stock. What I mean by that is to choose the stock that its EPS ( earning per share) has been doubled since the last earning report or tripled or maybe hit new records.
In order to do this properly, investors, as well as traders, should go to the previous earning report for company under investigation, and find how much was (EPS) in last quarter, and check the current (EPS) by the time it’s released immediately, and once
current (EPS) >= 2 * previous (EPS)
then they can select these stocks and invest in it, or trade it for the coming quarter until releasing next (EPS). Once the new (EPS) is released and it is equal or greater than the (EPS) that help them choose the stock in first place, they can keep this position in this stock, but if the released (EPS) is less than the (EPS) that helped them investing in first place then they should exit this position and look for new stock to invest or trade.
To test this strategy I invite you to go through S&P 500 index and investigate the leading companies in that index such as Apple, Microsoft, Google and Amazon, and others, to see how much did these stocks move from low prices to reach all times highs and that only happened when (EPS) of these companies have been doubled or tripled.
Stocks market is a complicated environment, and it’s controlled by supply and demand as well as greed and fear. Investors and traders don’t need to add more complex variables to this environment to choose the winning stocks. Instead, they should simplify the complexity of this market and stick to basics that will help them to choose the best stock that will maximize their profit.