How to Make Big Stock Returns Without Taking Big Risks

Yesterday, we covered the importance of owning stocks with world-class fundamentals… things like earnings growth and profit margins. We also talked a bit about how my proprietary system works, which tells us how “in demand” a stock is on Wall Street.

Market analysts like to say that a stock in great demand among money managers is “under accumulation.”

Think of it like this: Our proprietary system can “x-ray” the market and see stocks that are under heavy buying pressure, or accumulation… just like the unseen pressure building in an underground hot spring.

For example, in early 2017, a semiconductor equipment company called Nova Measuring Instruments (NVMI) began registering extraordinary fundamental qualities like major earnings growth, expanding profit margins, and strong returns on equity. It also began registering very strong institutional buying pressure.

We recommended the stock just before it entered its breakout phase that produced a 96% return in less than six months.

NVMI Chart

Or, take China Distance Education (DL), for example. It’s a China-based provider of online education focusing on helping people obtain and maintain job skills, licenses, and certifications. They specialize in everything from accounting and law to healthcare and construction.

In August 2013, it began sporting incredible fundamental ratings along with strong institutional buying pressure ratings. We recommended the stock just before that buying pressure ran it up 105% in about four months.

DL Chart

By this point, you might be wondering exactly how we spot stocks under heavy accumulation by big money managers.

Our analytical model is actually pretty simple. Let me give you a breakdown of exactly how it works. Let’s start with a key financial concept: alpha.

Alpha measures the performance of an investment against a market benchmark like the S&P 500. The investment’s return relative to the benchmark’s return is the investment’s “alpha.”

Alpha is quoted as a number. For example, if the S&P 500 rises 10% in a given year and a stock rises 12% during that same time, the stock has an alpha of 2. If the S&P rises 20% and the stock rises 25%, the stock has an alpha of 5.

Our proprietary system scans the market for stocks with alpha. We find stocks that tend to rise more than the market. But we don’t stop there. To base my recommendations only on alpha is far too risky, and I see no need to take on that extra risk.

You see, many stocks that exhibit alpha (or “beat the market”) are more volatile than the broad market. You’ve probably been told that in order to make market-beating gains, you have to take bigger risks and accept more volatility. But that’s just not true.

Our research has shown that some extraordinary stocks beat the broad market while at the same time are LESS volatile than the broad market. These extraordinary stocks are things of beauty because they offer bigger returns, but with less volatility.

We rank stocks according to a combination of alpha and volatility. Those stocks that are going up the most with the least volatility are ranked the highest. Obviously, only the stocks that are enjoying very strong institutional buying pressure can manage to both beat the market AND be less volatile than the overall market. Only constantly flowing rivers of capital can allow stocks to behave this way.

When an elite stock with incredible fundamentals and strong buying pressure reports earnings, it tends to create a “geyser” event… where the stock makes a large price advance in a short amount of time. An earnings report often acts as the “catalyst” that draws in more buyers and sets off big price runs.

Our buying pressure analysis led us to recommend shares of Chinese online car shopping firm Bitauto to our readers in June 2013. The stock soared 209% in about eight months.

BITA Chart

Our buying pressure analysis led us to recommend online retailer Vipshop to our subscribers in April 2013. The stock soared a whopping 487% in just under a year.

VIPS Chart

Our buying pressure analysis led us to recommend automaker Ferrari to our readers in early 2017. The stock soared 100% in just under a year.

RACE Chart

Considering that the broad market’s long-term (inflation-adjusted) return is around 7% per year, you can see how powerful these hyper-growth stocks are.

If you make 7% per year, it will take you about 10 years to double your money. A high-quality growth stock in “geyser” phase can double your money in six months. These stocks put you in wealth creation’s express lane.

And I can’t emphasize it enough: Earnings drive stock prices. The reason these stocks can deliver such large returns in short time frames is because they have such strongest earnings growth. I call these stocks the “crème de la crème.”

Over the past 15 years, these “best of the best” stocks have performed phenomenally well compared to the broad market.

Stocks that meet our stringent fundamental and technical requirements gained, on average, 0.33% per week over the past 15 years. The broad market (as measured by the S&P 500) gained, on average, 0.18% per week over the same time. That’s a giant outperformance of 83.3%.

Outperforming the broad market by an average of 83.3% per week produces market-crushing returns over time.

The chart below shows what this outperformance looks like. It shows the growth of our “best of the best” strategy versus the growth of the S&P 500 from late 2003 to today (both sets of returns are compounded weekly).

The S&P 500 started at 100 and climbed to 312.

Our “best of the best” strategy started at 100 and climbed to 1,775 …more than FIVE times better.

Our Performance vs. Market Averages - Chart

To be clear, everyone’s experience will be different. My point is that stocks in the top 1% of fundamental ratings tend to rise much faster than the broad market. And I’m saying that if you’re looking for an edge in the market, you’ll find it by owning stocks in the market’s top 1%.

Consistently putting this edge to work over time can allow you to pile up huge capital gains.

Over years of studying the world’s top growth stocks, my team and I kept seeing “geyser” phases — compressed periods of hyper share price appreciation — over and over and over. The returns were so extraordinary that we had to start sharing our work with readers.

This “accidental discovery” can make people hundreds of thousands of dollars in extra stock market profits.

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