Stock-Picking, Week 1: How to Pick Momentum Stocks

Keeping an eye on what the big funds are starting to buy can net you big returns.
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Editor's note: The Stock-Picking Training Program is a series of six weekly assignments. Each assignment is based on one of Jim Cramer's lessons in his book, Jim Cramer's Mad Money: Watch TV, Get Rich. To learn how to get a copy of the book for free, click here.

Any successful trader will tell you that it often pays to buy high and sell higher. When a

stock generates

momentum because it's being bought by large

institutions, unless you completely disagree with the pick, you too can benefit from tagging along on this type of trade.

When

Google

or

Apple

first started to rise a couple of years ago, the naysayers were quick and wrong to step in and say the rally was over the first time these stocks doubled. Rather, it was only then when the big-time

money managers and momentum-driven

hedge funds began to take notice.

Here is your first stock-picking assignment:

Pick Five Momentum Stocks

Step 1

. Check out the top

"Pro Portfolios" on Stockpickr

.

Step 2

. Take note of the top five or 10 holdings in each pro portfolio, especially

new

positions or names where

recent

purchases have been made.

Step 3

. Compare this list of holdings to the 52-week highs list, which can be found on most financial portals. You can also review

Stockpickr's "52 Week Highs Portfolio."

Step 4

. Pick your top five stocks. See if you can pick stocks that are up at least 100% over the past year, but not up three or four times.

Note: Of the five names you select, do some

fundamental work on them -- make sure the

balance sheets look clean and that the companies are not operating in a declining business cycle.

Also, you should not forget to maintain

diversification across

sectors, and possibly

market capitalization and geography.

Step 5

. Create a portfolio on

Stockpickr

to track your top five stock names. Name your portfolio "Momentum:

Your Stockpickr Username"

(To create a portfolio on Stockpickr, you'll need to first login. If you're currently not a Stockpickr member, you can register at

www.stockpickr.com/register

.)

Step 6

. Search Stockpickr for other portfolios that include the word "momentum," review the holdings and post comments (see "Add Your Comments" in the right-hand column of each portfolio screen).

Again, the focus of this assignment is to pick stocks that are top holdings in multiple professional portfolios that are consistently on the new 52-week high list.

Editor's note: To learn more about the lesson that this assignment is based on, check out "Follow the Street's Lead."

Next: Stock-Picking, Week 2: How to Pick Contrarian Stocks