The Secret to Finding the Best Stocks to Buy in a Volatile Market

Looking to avoid trouble in this unpredictable market? This checklist will lead you to the best stocks to buy.

A lot of you have been writing in lately, asking if I recommend Facebook (NASDAQ:FB) or Google (NASDAQ:GOOGL) … now that they’ve finally come down a bit from their lofty highs.

Not a chance.

And I say this as one of the first to recommend Google in 2005, a few months after the IPO, when it met my earnings-growth criteria.

Don’t get me wrong; I certainly recommend buying on dips. But the stock’s got to pass eight critical tests first. That’s the basis of my Portfolio Grader.

Let me briefly explain those eight criteria now for anyone looking to avoid trouble in this volatile market.

Imagine this system like a door lock. There are eight “key pins” inside, and the right key will push all eight of them upwards … unlocking the door!

But if you insert the wrong key, the eight pins won’t align correctly, and you’ll never get where you want to go.

When a stock DOES meet these eight criteria, it becomes an urgent buy inside my system:

1. Sales Growth: the percent change in a company’s sales this quarter versus the same quarter last year. Companies that show increasing sales at a very high rate are among the best candidates to become big winners over time. If a company can continually increase sales over long periods of time, then it would seem to indicate that they have a product or service that is very much in demand.

I look for companies that show year-over-year sales growth of 20% or more.

2. Operating Margin Growth: the profits left after direct costs such as salary and overhead are subtracted. I then look at whether this percentage margin is contracting or growing year-over-year. A company’s operating margin will increase when its product is in such high demand that the company can continue to raise prices for the product or service without an offsetting increase in costs.

3. Earnings Growth: the percent increase in a company’s earnings per share (EPS) this quarter versus the same quarter last year. EPS is just the company’s earnings divided by the number of shares they have outstanding.

Naturally, companies that are continually growing earnings year-over-year get a higher score than those that aren’t.

4. Earnings Momentum: how rapidly a company’s earnings have been accelerating over the past four quarters.

Companies that are accelerating and growing earnings faster year-over-year are stronger candidates for my Buy List than those where earnings are slowing.

5. Earnings Surprises: a company’s ability to exceed the consensus earnings estimate among Wall Street analysts. Here I am looking for stocks that can exceed what Wall Street believes they can achieve.

Stocks that deliver positive surprises for several successive quarterly earnings periods often go on to become growth stock megastars.

6. Analyst Earnings Revisions: the magnitude in which earnings projections have increased over the past month. When an estimate is raised, it has tremendous positive implications for a company and its stock. If the expectation is up, then the stock should be worth more — and rise in price to reflect that fact.

7. Cash Flow: the money the company has left after paying the cost of doing business and the upkeep and the maintenance needed to stay in business (relative to its total market value). In simple accounting terms, free cash equals operating earnings minus the capital expenditures needed to run the business.

8. Return on Equity: a company’s profitability in terms of profits made from the money shareholders have invested. It is calculated by dividing the earnings per share by the equity (book value) per share. The higher the number, the more profitable a company is and the higher return management is providing to shareholders.

Companies that are dominant in their industry tend to earn very large returns on the equity invested.

But determining whether these criteria are met by any given stock — at any given time — well … that’s a lot of numbers to crunch. So, I run Portfolio Grader on my universe of 5,000 stocks every Saturday (to get a full week’s worth of data).

And I’m getting some surprising results.

Some of the best stocks to buy right now are small-cap stocks. If you want growth — in a market where growth is becoming scarce — then small caps are just the ticket.

My #1 Breakthrough Stock to Buy Now

It’s a tech stock … but NOT Facebook or Google. In fact, you’ve probably never heard of it before. Those have been disappointing investors lately, while this smaller, more specialized company has had a banner year. We’re talking 49% sales growth, 289% earnings growth in the latest quarter. And yes, that’s even better than Wall Street analysts had forecasted!

Go here now for more on my Breakthrough Stocks system and this hot new buy.

When you do, you’ll have a chance at five MORE of my best stocks to buy now. One is in an industry where I said I’d never invest — so I’m keen to explain myself. Check out Breakthrough Stocks now for full details.

Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth InvestorBreakthrough StocksAccelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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