How to Find Industry Leading Stocks
- Rohit Musale, CFA
- 6 days ago
- 2 min read
I only put my money in stocks that are leaders in their own respective industry groups.
Or at least 8 out of every 10 stocks I buy are industry leaders.
I relax this criteria only when the market condition status on MarketSmith platform says "Confirmed Uptrend".
For all other market conditions namely,
- Uptrend Under Pressure
- Rally Attempt
I prefer to go with industry leaders.
How do I determine which stock is an industry leader ?
I use a very simplified method.
I just look at the top 5 stocks in an industry group as per their market cap.
Is this a correct definition of an industry leader ?
Absolutely not.
Is this a convenient definition of an industry leader ?
Absolutely yes.
What exactly is an industry leader ?
The answer is given in William O Neil's book, How to Make Money in Stocks
A stock is a true market leader in its own industry group if it is showing highest strength in the following 5 parameters:
1. EPS Growth
2. Sales Growth
3. ROE
4. Margin Improvement
5. Relative Strength Rating
The problem with this definition is:
To find out an industry leader, I will need a table with 5 columns for each of the parameters mentioned above for a particular industry group listed with its stocks.
That table is not available in the MarketSmith platform.
If I try to do it manually via the TradingView App, its a tedious process.
Its possible to do but not easy to nail it down.
Another problem,
even if I have this table, the interpretation of the data is going to be highly subjective.
What if a stock shows strength in 3 or 4 out of the above 5 parameters ?
How do I treat that stock ?
Do I consider that stock an industry leader ?
What if there is no stock that is the best in all 5 parameters ?
There are too many ifs and buts here.
Hence, I go with a simple process.
My brain cannot process too much data.
I love to keep things simple.
What is the problem with my approach ?
Big problem.
Some industry groups are huge in terms of market cap.
The top 5 stocks in the group are like elephants.
And
Elephants do not run.
This is where subjectivity enters the equation.
Because, now I am entering the realm of "Relatively High Risk Situation".
I have to weigh the risk of getting on board a stock that could be in the top 10 or top 15 in that industry group but not in top 5.
This is where the Orange Trading System comes in handy.
It gives me a perspective on a stock.
If a stock is not in top 5 but is showing strength in other areas of the orange trading system (example: the fundamentals and the technicals), I might get in the stock but with,
- Small Position Size
- Tight Stop Loss
- Or Both
That's not violating the rules.
That's called sound risk management.
Regards,
Rohit Musale, CFA
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