I wanted to share a post today on how I develop my watchlist using specific stock characteristics. Everyone has their own technique for developing a list of trade candidates. Some use screens that they've developed while others will pull from multiple sources. The key commonality is that the stocks chosen for their watchlist usually have very similar characteristics regardless as to where or what source was used to harvest the idea. I personally use a set of screens developed on stock characteristics that I've found to be helpful based on my personality and trading objectives.
In my screens, I'm looking for strong relative strength stocks with specific technical patterns accompanied by a handful of fundamental criteria. It's similar to CANSLIM, but their is no emphasis placed on the EPS ranking needing to be above 80. I screen for stocks within 15% of a 52 week high and then scrub earnings and sales, as well as, shares outstanding. I like to break my screens up into varying market caps because I know that the majority of my best trades will happen with small to medium sized companies. By having a separate screen for large cap stocks, I'm able to more efficiently find the types of stocks I prefer. I've included several charts below, but will only breakdown one of them to explain the technical and fundamental data.
RTEC is a stock on the watchlist which is currently trading around 13. The first and most important part for me is the weekly price pattern, without a constructive chart, the fundamentals don't matter. Notice how the price high's since 2008 have been very similar (11, 8, 10, 12, 13, 14, 12). RTEC has had relatively no price appreciation for 7 years now. During the first of 2015, you can see the price jump to the 12 dollar range, and then work back for about 10 weeks-making a higher low. It then tried to move out again but was pulled back into the pattern to the 10-11 dollar range. Last week, RTEC had another strong move towards the top end of it's range. The most recent price action is what sets the stage to look a little deeper into the fundamentals. You'll notice that RTEC has strong growth in both EPS and Sales. Fund ownership is reasonable but not excessive and 2016 earnings are near .90 cents per share. As a quick test, I like to take forward earnings x 20 for a rough valuation. When you do this for RTEC, you get a valuation near 18 while the stock trades near 13. If the majority of the criteria are passed, the stock is then added to the watchlist.
Click the chart to enlarge it.
The charts above show how similar each stock is with relation to the characteristics that I'm looking to find. There's no grand secret with my screen, but there is consistency in the setups that make my watchlist. With consistency, probabilities for success can improve exponentially. Once you find successful trade setups, the next step is to position size and manage risk based on your trade objectives.