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Aggressive Stock-Picking, Week 6: How to Blast Off With Rocket Stocks

Learn how to find the next stocks to take flight.

Editor's note: The Aggressive Stock-Picking Training Program is a series of six weekly assignments. To start with Week 1, click here. Each assignment is based on one of James Altucher's strategies in his book, Trade Like a Hedge Fund. To get a copy of the book, click here.

The sixth and final aggressive stock-picking assignment, we will go inside Stockpickr's

James Altucher's head to understand how he makes his selections. However, there's no one surefire method. Altucher uses a combination of the techniques that have been covered in this program, and then he integrates his many years of Wall Street and

money management experience.

The past five assignments, covered several different ways to spot stocks ready to take off, including

52-week lows,

52-week highs,

unusual volume and special situations such as

insider buys or

short squeezes.

The ultimate goal is to find those stocks poised to increase in price in the shortest period of time. Altucher calls these "rocket stocks." Each week, he

writes about and

creates a portfolio of his top rocket stocks. He also writes a

midweek update, if some rocket stocks need to be sold quickly.

Cepheid

(CPHD)

, a stock Altucher highlighted as a

rocket stock for the week of September 4, is a great example of gathering more than one piece of sometimes contradictory data to identify a rocket stock. Cepheid is a clinical diagnostics company with

a large, 19% short position, trading near its 52-week high -- two great reasons to call it a rocket stock. Even though Cepheid is

hardly an

analyst favorite -- most recently,

UBS downgraded Cepheid -- Altucher still stuck to his rocket stock position.

His persistence paid off. In his

September 5 midweek update, Altucher recommended selling Cepheid because it rocketed up 7% since his initial recommendation. Jim Cramer, incidentally, also likes Cepheid, calling it "the next

Dendreon

(DNDN)

."

Amazon.com

(AMZN) - Get Report

made Altucher's list because of both

technical and

fundamental reasons. Technically, Amazon.com is highly

shorted and is owned heavily by Renaissance Technology, a major

hedge fund. On the fundamental side, Amazon.com beat earnings by 20% the past two quarters. There's a lot of rocket fuel in Amazon.com's tank. Indeed. Amazon is still rocketing up, a great example of a stock hitting its

52-week high and then just going higher.

Altucher also looks for "snapbacks" (stocks that recently hit

52-week lows or have otherwise fallen out of favor but are poised to reverse course) and "breakouts" (stocks that have been flat for a long time but are ready to rocket up). Where does he search for snapbacks and breakouts? He often checks these two Stockpickr portfolios:

  • Today's Hot List: This daily list is a must-view at midday of each trading day to see what stocks are making the biggest moves and why. Recent hot list stocks have included clothing retailer Pacific Sunwear (PSUN) , optical network manufacturer Sycamore (SCMR) and cigarette manufacturer Altria Group (MO) - Get Report.
  • Biggest Percentage Losers: This is a list of stocks that lost big the previous trading day. A few of these can snap back quickly.

Sometimes you pay the price for aggression. Altucher is always looking for some sort of catalyst, a driver to propel the stock up. Timeframe is important. It could be as short as a few hours. For example, in his

rocket stocks for the week of August 29, he recommended buying

Apple

TST Recommends

(AAPL) - Get Report

on Sept. 5 at the market open, based on the expectation of their announcement of a new generation iPod, and then sell in the afternoon, after the announcement, a classic case of "sell on the news." While this flies in the face of doing a disciplined

analysis, it frequently works out. Even a 1% gain in this situation is a great result.

Unfortunately, this particular trade didn't work out because, instead of announcing a new product, Apple announced a $200 price cut for the iPhone, causing its stock to fall because of the Street's concern for eroding

margins. Steve Jobs ended up with egg on his face and

terrible PR with his offer of a $100 rebate to early iPhone buyers because the money had to be spent on Apple products. This just shows the necessity of doing your own homework and understanding the

risk involved.

This last assignment ties all the previous ones together. It's time for you to pick the next rocket stocks.

Step 1

. On

Stockpickr, create a portfolio called "Rocket Stocks:

Your Stockpickr Username." (To create a portfolio on Stockpickr, you'll need to first log in. If you're currently not a Stockpickr member, you can register at

www.stockpickr.com/register.) Turn the "Porfolio Tracking" feature on, so you can monitor stock prices over time.

Step 2

. Pick four stocks from Altucher's latest rocket stocks portfolio on Stockpickr. Read the "Reason for picking" box for each stock in the portfolio and read his related article, where he elaborates on the reasoning for some of his picks.

Step 3

. Read the latest news about each company, by searching for articles and videos on

TheStreet.com

(via the "Search Articles" or "Get a Quote" boxes) and other financial sources. Look for reasons

why

these are rocket stocks.

Step 4

. Check the

fundamentals (including the

balance sheet) on all four stocks and make sure each company is operating in a healthy business cycle. As you do this fundamental homework, write your observations in the "Reason for picking" box for each stock.

Step 5

. Cross-reference your picks with the Stockpickr portfolios used in previous assignments:

  • 52-Week Lows
  • 52-Week Highs
  • Stocks Rising on Unusual Volume
  • Insiders and Buybacks
  • Activist Situations
  • Weekly Short Squeeze Candidates

From these updated lists of stocks, find potential rocket stocks that Altcuher may have missed. Identify four additional stocks that

you

think are ready for "blast off."

Step 6

. Do the same research on these new stocks as for the initial four stocks you picked. For each stock, remember to note the reasoning for your decision and the

closing price in the "Reason for picking" area.

Step 7

. Follow these eight stocks during the next three days. Note intraday trading patterns, including

trading volume and price movement.

When, if ever, should you actually buy the stocks in your Stockpickr Rocket Stock portfolio?

Test your strategy on paper first. If you do decide to buy, note the day and the price when you make your move. Did any of the stocks shoot up like a rocket? Did they retreat later, or did they keep rising?

Homework Hints

Search Stockpickr for other portfolios that include the term "rocket stocks." The phrase has become a signature Stockpickr term, so you'll find all sorts of portfolios. How do your rocket stock picks stack up against the Stockpickr community's picks?

Stockpickr is a wholly owned subsidiary of TheStreet.com.