How to Pick Winning Retail Stocks, Pt. 1

Filters are available several places on the Web, including Reuters, MarketWatch and Yahoo! Finance. These are all solid filters and will give you the tools you need to get started. One of my favorite filters is at MSN Money. It's easy to use, powerful, and free. You can use prepackaged filters as well as your own, a huge positive in my book.

First, I want to weed out the smaller players and focus on stronger companies. I use my filter to discard any stocks with a capitalization of $10 million or less and a stock price of $10 or less.

The next most important factor to me is liquidity. I run the filter to select only those shares that are trading at least 500,000 shares a day on average daily volume over the past month. I'm left with stocks that are sufficiently liquid to give me decent spreads when it comes to buy and, ultimately, sell.

At this point, I usually have a list of a dozen or some companies. I feed them into my charting program and take a gander at the technical performance for each stock. I'm looking for well-formed uptrends on a weekly and, less importantly, daily basis -- that is, good long-term technical strength. I make a note of them and cross the others off my list.

You don't need a fancy charting program to get the job done. Most financial Web sites, including RealMoney and Yahoo! Finance, will work just fine.

Then I return to my filter, feed in my revised list of stocks and focus on valuation. I look at the P/E ratios of my stocks and how they compare to the industry average and the S&P 500. Those stocks that boast P/E averages way above -- leniently defined as more than double -- industry averages get cut here. For example, if the industry P/E is 20, I discard a stock trading at a P/E ratio of 40 or more. Industry P/Es are available from lots of sources, including Yahoo! Finance and Reuters, both for free.

My list of retail stock candidates is now down to a handful. It's time to put my filter away and begin to drill deep into each individual company. I'll focus on the company's position in the marketplace, its retail platform, brand quality, management and significant catalysts for future growth. I'll also take a deeper look at each company's detailed fundamentals , including recent financial performance, long-term growth rates and margin performance.

Editor's note: Click here for part 2 of this column.

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