Watching The Leaders Can Be Profitable

Christina Wise

Sticking with the leader in an industry group can pay off -- when looking for buy opportunities or tops.

Think of the leading stock as sort of a canary. It's usually the first to take off in flight and -- according to the old coal mine saying -- the first to signal there may be trouble ahead.

The leading stock is usually the strongest company in its industry in terms of both fundamentals -- things like earnings and sales growth -- and price performance.

Perhaps it has a unique product that sets the pace for its industry.

For instance, when personal computers began to become wildly popular in the 1980s and 1990s, you could have invested in virtually any PC-related stocks and had a pretty good chance of making money.

But if you'd chosen industry leader Dell (NasdaqGS:DELL - News) as your key investment at that time, you would have made even more money.

The same thing occurred during the tech frenzy of the 1990s with Microsoft (NasdaqGS:MSFT - News) and its competitors in the software industry.

Similarly, Wal-Mart's (NYSE:WMT - News) unique supply chain set it apart from the also-rans in the retail industry when it rose to prominence in the late 1990s.

But when an industry's leader breaks down, flashing clear sell signals on its chart, it probably means the rest of the group is also headed down.

Watching the leading stock in the group can also help you spot when that group has reached its peak and is heading for a fall.

For instance, early last summer Google (NasdaqGS:GOOG - News) was arguably the leader in the Internet-Content industry group. It broke out of a base in late May at a 492.60 buy point, then went on to gain 13%.

But on July 20, it suffered a nasty high-volume fall (point 1), an unquestionable sell signal as shares plummeted. The stock went on to form a new base, though it was smart to sell at least some shares when Google tumbled.

The break also signaled that Internet stocks were ready to take a break. During the following weeks others in the group, such as Sina (NasdaqGS:SINA - News) and Shanda Interactive Entertainment (NasdaqGS:SNDA - News), which had previously scored some solid gains, also began to come off their highs.

A good way to quickly size up how a stock compares with its industry peers is to check out its Composite Rating, which appears in the price tables and quotes at investors.com. The rating combines the five IBD ratings into one. Also helpful is the IBD Stock Checkup at investors.com. Its ratings compare a stock to its industry in key metrics.

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