Virgins are stock which never had a significant rally in their life time. When such stocks start rallying, they tend to have a smooth and enduring rallies. Such neglected stocks offer a extremely profitable strategy for long term investors. The signals on such stocks are rare but extremely profitable with high success rate in term of number of successful trades.
In order to understand this concept, you must understand how the IPO market works. IPOs are clustered. Companies IPO when it is convenient and easy to raise money. When market or sector is hot many IPO's are pushed through. As has been demonstrated by hundreds of studies investing in IPO's is a losing strategy unless you get allotted pre IPO.Studies have shown that IPO's give you below normal returns for 36 months.Majority of IPO's within few days or weeks or months of their IPO start their long journey in to markets dustbin. Some of them get delisted, rest just hang around for years going nowhere and then something happens.
Such neglected stocks can suddenly come in to favor for variety of reason and start rallying. The reason might be sales or earnings acceleration or new product introduction or some news. Now in such stocks sellers are all washed out so when they start rallying , there are only happy buyers.
So the edge in such stock is structural. They are neglected and when discovered as market participants as well as funds scramble to get on board, they have multi week or months rallies.
So if you want to benefit from this you need to track such stocks and then decide a criteria for entry. If you want to profit from such neglect you may want to set up a system for tracking such stocks. Setting up such system in most conventional trading software is difficult. I first set it up in Access and Excel and subsequently migrated to different data management software.
Determine the highest close for a stock in its first few months of trading. The stock should not have rallied more than 50% from its first trading day. Essentially this is your universe of stocks which never rallied more than 50% from IPO. Now you can determine your exact number of months for this. In my trading I take first six months of trading and but the way my dataset is built it gives me stocks which has never rallied from first day to up to the stock which never rallied more than 50%. These are series of different databases. The Pure Virgins are one which have never rallied even a cent above their first trading day post IPO.
Very few stocks meet the pure virgin criteria. Around 300 as of last month. By expanding the criteria to six month and 50% rally maximum in first six month you get around 600 stocks.
In pattern term , this is what you are looking for.
Now on this universe of virgins I use a entry criteria to generate daily list.
The entry criteria on such stock is basically a combination of few criteria. I look for at least 30% growth from 260 days low plus a high volume price breakout of 4% plus and a liquidity criteria. At best you will get 2-3 companies matching the criteria in a day.
Usually many of these companies had IPOed pre maturely and once they start having steady growth and earnings, the market rewards them. Number of companies in the oil and energy sector had great moves in last couple of years. Many of such companies had IPOed in the earlier oil boom.
Virgins to All Time High: Now once these stocks breakout, they will start rallying towards their destination of all time high. In many cases they will never achieve their all time high.
Many times stocks IPO at astronomical IPO price due to the existing market mood and irrational expectations of market participants. In the meanwhile they might have gone up 60 or 100 times from their low price. Take IDP for example, the stock has tripled in last one year. Its highest post IPO price is around 500, so if you wait for it to make all time high, you will have to wait a long long time.
I keep the stock in the list till they achieve all time high.
Finding unconventional patterns or anomalies is the way to find enduring edge. Obvious patterns like technical analyst find are vanilla commodity when thousands follow them. You must find structural edges. If you find such structural edges entries exits are very small part of the equation. You can find such anomalies if you change your existing paradigm. Which always is most difficult thing.
So if you want a very profitable strategy go look for Virgins....