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Friday, 10 August 2007

Look For Leaders In Top Industry Groups

Some investors love hunting for bargains. They go after the stocks that have fallen 50% in a month. Or they'll pick up the stock that's been treading water while its industry rivals have been soaring.

But that means they'll rarely end up with the leading stocks in a top-tier industry group.

Whether a stock crashes due to an earnings miss or bad news in the company's industry, it has an uphill battle ahead.

Don't you want the stock that goes from 30 to 300? First it has to go to 31, then 32, then 33 ... trading at 15 doesn't do you any good.

So how can you search for the best stocks in leading industry groups?

IBD's Industry Groups shows you which sectors lead the market. The New Price Highs list is sorted by sectors with the most stocks hitting new highs, a sign of strength.

For instance, in Wednesday's IBD, 30 Medical stocks hit new highs, followed by 11 Business Services and eight Retail stocks.

But you can't buy just any Medical stock. Since Medical includes everything from drug firms to hospitals to device makers, the sector is broken down into 14 groups.

Check IBD's Industry Group Rankings to find out how each group has been performing. For the best odds of finding leaders, focus on the top 40 groups.

To find out which stocks lead in their groups, you first want to have a list of possible buy candidates. Go to investors.com's IBD Stock Checkup, type in a ticker symbol, and you'll get the top five stocks in that company's group.

The screen shot above shows the Stock Checkup results for a leader in the No. 1 group, Chemicals-Fertilizers. The group has held the top spot for the past few months.

Fertilizer maker Potash Corp. of Saskatchewan (NYSE:POT - News) has been a regular in each week's IBD 100. If you type in the ticker symbol, POT, you see that it gets an Overall Rating of 99 (A+). That helps it earn the top spot in its 13-member group.

Just below the rankings, you'll find the top five companies trading above $10 in the group. Potash leads, followed by Sociedad Quimica y Minera (NYSE:SQM - News) and Mosaic (NYSE:MOS - News).

Even if the stock you're looking up is the leader, you still need to do further research. Make sure it meets all your buy criteria.

A leading stock's action can often tell you how other group members may be performing. IBD studies show that about half of a stock's move stems from group strength.

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