Five Essential Building Blocks of SEPA®
Using a process of profiling, stocks are compared and ranked according to how well they fit the optimal success blueprint--a Leadership Profile®. The basic characteristics are broken down into five major categories, which make up the key foundational building blocks of the SEPA® methodology:
1. Trend: Virtually every superperformance phase in big, winning stocks occurred while the stock price was in a definite price uptrend. In almost every case, the trend was identifiable early in the superperformance advance. Our Trend Template ensures a stock candidate is in a proper uptrend.
2. Fundamentals: Most superperformance phases are driven by an improvement in earnings, revenue and margins. This typically materializes before the start of the superperformance phase. In most cases, earnings and sales are on the table and measurable early on. During a stock's superperformance phase, a material improvement almost always occurs in the fundamental picture with regard to sales, margins and, ultimately, earnings.
3. Catalyst: Every stock that makes a huge gain has some catalyst behind it. The catalyst may not always be apparent upon a casual glance, but a little detective work into the company's story could tip you off to a stock with superperformance potential. A new hot-selling product that accounts for a meaningful portion of a company's sales may provide the spark to ignite a superperformance phase in a stock's price. Approval by the Food and Drug Administration (FDA), a newly awarded contract, or even a new CEO can bring life to a previously dormant stock. Each situation may be somewhat different, whether the stock is a classic growth company, a turnaround situation, a cyclical stock or a biotech trading on the promise of a new drug. Whatever the reason, behind all superperformance is always a catalyst driving institutional interest.
4. Entry Points: Most superperformance stocks give you at least one opportunity, and sometimes multiple opportunities, to catch a meteoric rise at a low-risk entry point. Timing the entry point is critical. Time your entry incorrectly and you will be stopped out unnecessarily, or lose big if the stock turns around on you, and you fail to sell. Time the entry correctly, and you could be at a profit right away and on your way to a big gain.
5. Exit Points: Not all stocks that display superperformance characteristics will result in gains. Many will not work out, even if you place your buys at the correct point. This is why you must establish stop-loss points to force you out of losing positions to protect your account. Conversely, at some point your stock must be sold to realize a profit. The end of what once was a superperformance phase needs to be identified in order to keep what you've made.
Recent SEPA® Entry Points Recommended to Our MPA Members
In January 2013, sporting exceptionally strong quarterly earnings and sales, LNKD emerged from a primary base. The stock price advanced more than 50% in less than two months.
We originally recommended PCYC in January 2010 before it advanced 20-fold. The stock then set-up another low risk entry point in February 2013 before rallying 32% in 15 trading days.
Pacira Pharmaceuticals (PCRX)
Compelled by a strong fundamental story and stellar technical action, we recommended PCRX on February 1, 2013. After a brief pullback the stock price rallied 50% in only 20 trading days.
Caesars Entertainment (CZR)
After New Jersey Governor Chris Christie signed a law formally legalizing online gambling in his state, we recommended shares of CZR as a major beneficiary of online poker. The stock price advanced more than 40% in 10 trading days.
Lululemon Athletica (LULU)
We purchased LULU at two low risk entry points in November 2010, and also in March 2011. From our initial purchase, LULU advanced more than 160% in eight months.
Summary of the SEPA® Process
Historical Precedent Analysis
- Study of the best performing stocks over each market cycle
- Characteristics defined and archived in our database
- Blueprint is constructed based on attributes of winners
- Data is compared to all stocks
- Leadership Profile® takes into account all available data
- Profile is continually updated to reflect new information
- Computers screen 8,000+ stocks daily
- Narrows down the top 1%
- Companies displaying specific characteristics are identified
Ranking and Selection
- Candidates are monitored for specific criteria convergence
- Catalyst such as earnings surprise, company issued guidance
- Entry point defined based on risk/reward