Investor's Corner
Friday, October 5, 2001
Superior Stocks Show High Relative Strength
By Christina Wise
Investor's Business Daily
Everybody loves a winner. And when it comes to stocks, a real winner beats most of the others on the market ball field - in good times and bad.
Rather than betting that a beaten-down stock will claw its way back, you’re much better off sticking with one that has already proved itself. That’s because stocks that outpace their peers during tough times tend to keep doing so when the market turns north. After breaking out, they keep hitting new highs.
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Eighth in a series
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Perhaps the quickest way to gauge a stock’s price performance is to check out its Relative Price Strength Rating. It’s listed daily in the stock tables for the three major exchanges.
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Image: Nifty Numbers
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This can be a particularly valuable tool when trolling for investment candidates as the market kicks back into gear.
The Relative Price Strength Rating goes from 1 to 99, with 99 being the best. It measures how a stock’s price performance over the past 12 months compares to all other stocks. In general, stick to those with RS ratings of around 80 or higher. This means they have outperformed at least 80% of the entire market.
Let’s look at a dozen of the biggest winners of 2000 during the week of their breakouts. Their RS ratings ranged from a low of 67 to a high of 96. Medical services provider Impath (IMPH) boasted an 87 RS Rating at its April 2000 breakout and went on to nearly quadruple in price. Shaw Group (SGR), which makes piping for the power industry, carried a 75 RS Rating when it cleared an eight-week base in March of last year. It went on to gain 352%.
This time around the 18-month bear market has left a number of stocks damaged. The Relative Price Strength Rating can help you find stocks that have held their own through the vicious downturn.
Of course, relative strength shouldn’t be your only criterion for buying stocks. You should also demand the stock have a high Earnings Per Share Rating and good marks for SMR, Industry Group RS and Accumulation/Distribution.
Let’s consider the 3,537 stocks in IBD’s database priced 10 or higher. Of these, only 507 carry EPS and RS ratings above 80. The top 12, sorted by RS and then EPS, are shown in the chart on this page.
But remember, lists such as this should serve as only a starting point when looking for investment candidates. Check to see if each one is in a leading industry group and is forming a good base.
Another way to tell at a glance how a stock rates against the rest of the market in terms of price performance is via its Relative Strength line.
The line shows you graphically how a stock’s price performance compares to that of the S&P 500. If the line is in an uptrend, the stock is outperforming the large-cap benchmark. If it’s heading downward, you’re better off avoiding the stock.
Relative Strength lines appear in a number of charts in the paper, including those in the Stocks In The News pages. The stock charts on IBD’s Web site, investors.com, also include Relative Strength lines. |
