How To Find The Best Growth Stocks: What Author Marcel Proust Can Teach About Investing

A friend or family member might ask you: Can you help me learn how to find the best growth stocks? Well, for a one-of-a-kind answer, consider the historic Descanso Gardens, nestled in the Southern California town of La Canada.

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Inside its small yet lively art exhibit space, a wall plaque quotes the French novelist Marcel Proust: “The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.“

These words can apply to the art and science of using charts to find the right time to buy the best growth stocks.

Chart reading, like novel writing, is not easy. It can take months, perhaps years, to attain the visual and analytical skills to discover superior base patterns and the correct buy point. Not every cup with handle has the same quality. So, carefully view a chart a second or even third time. You’ll gain insights that can transform into better stock picks and more investing profits.

First, always check a stock’s IBD ratings (EPS, RS, SMR, Accumulation/Distribution) via Stock Checkup. Read a few articles by IBD writers to gain a superior fundamental understanding of why the company can win big on Wall Street. Winnow your watch list to those with the best growth in earnings per share, highflying sales, thick profit margins, solid return on equity, high industry group strength, and loads of institutional sponsorship.

Savvy Stock Chart Analysis

After you scan the stock’s current chart action, take a second look at the current base. On a weekly chart, go week by week and compare the price-and-volume changes. What are you looking for? Clues that the big investors are buying with abandon, selling in a miserly way, and holding for the long haul.

Do you see multiple patterns emerge? No problem. Can the handle on a long base turn out to be a base of its own? Sure.

Can a stock form what looks like a shallow cup with handle on the daily chart, and a flat base on the weekly chart? Yes. The buy points may differ some. A great breakout will snuff out the difference.

How To Find The Best Growth Stocks: A Retailing Leader Breakout

In October 2002, Dick’s Sporting Goods (DKS) went public at 12 a share as the Nasdaq’s dot-com crash ended. Dick’s ran up quickly, peaked at 23.13, then started etching its first real base in December. In late February 2003, the fast-growing retail chain cleared a 10-week double bottom.

In it, the second low clearly undercut the first low (1), an essential ingredient of all good double bottom patterns. The middle peak was 22.19.

The correct buy point: 22.29, a dime above the high.

Viewpoint No. 1

Dick’s stumbled after breaking out. See the three weeks down and sideways action (2)? You could view that as a handle that formed at the top of the base.

Handles mark a final shakeout of uncommitted shareholders. Their shares get transferred to sturdier hands. The handle showed a downward slant along the lows. Volume dried up. All good.

A new buy point emerged at 23.70, above the original breakout price of 22.19.

Another way to view that “handle”? It was five weeks long, the minimum time needed for a flat base. The structure showed a mild decline of just 13% from high to low. The maximum decline within a strong flat base? No more than 15%.

This flat base served as the top part of a base on base.

A Second Opportunity

Either way you look at it, the big weekly gain of 13% in the third heaviest weekly turnover in the stock’s trading history produced another precious moment to buy (3).

By September 2007, Dick’s rallied more than 550% from the original buy point in the double bottom. The stock plunged 75% from a then all-time high of 35.21 during the Great Recession bear market of 2008-2009. It eventually recouped all of those losses to make new highs.

A version of this column was first published on May 11, 2018, and has been updated. Please follow Chung on Twitter at both @SaitoChung and @IBD_DChung 

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