99% of the ‘Biggest Winning Stocks’ Share This Criteria, Says Investing Legend Mark Minervini

Investment icon Mark Minervini, a two-time U.S. Investing Champion, recently offered insights into identifying the next generation of tech leaders, particularly in light of the so-called “Magnificent Seven” stocks. In an interview with MarketWatch, he discussed the unusual performance of these leading tech stocks, cautioning investors about the potential risks associated with their prolonged dominance in the market.

The Rise and Risks of the ‘Magnificent Seven’

Minervini noted that the extended success of the “Magnificent Seven,” which includes giants such as Apple, Amazon, Microsoft, and Google, is historically atypical. While investors may believe these tech stocks are immune to underperformance, he argued that market dynamics can shift swiftly.

To illustrate, Minervini referred to the “Nifty Fifty,” a cohort of large-cap stocks that ruled the market during the 1960s and 1970s. Despite their earlier success, only a select few—like American Express Co. (AXP) and Coca-Cola Co. (KO)—managed to sustain their momentum. Many others, such as Avon and Polaroid, faltered drastically.

Insights from a Veteran Investor

With nearly four decades of trading experience, Minervini has a proven track record. He clinched first place in the U.S. Investing Championship with a staggering 334.8% annual return in 2021 and previously achieved a 155% return in 1997. His wealth of knowledge is reflected in his published books and courses aimed at educating aspiring investors on sound stock selection methodologies.

One of his guiding principles emphasizes that core fundamentals can significantly influence technical stock movements. However, the reality is that investors may not always detect these fundamentals early enough, noting the importance of technical indicators. The common adage that “stocks are a discounting mechanism” captures this idea well: by the time significant news or earnings reports are made public, the effects are already reflected in stock prices.

Evaluating Big Tech’s Future Performance

Regarding the future of the Magnificent Seven, Minervini expressed skepticism about their ability to continue outpacing the market. He posits that much of the good news has already been accounted for in their valuations. Although these companies have recently experienced minor pullbacks, most, except for Tesla Inc. (TSLA), maintain market capitalizations over $1 trillion. Consequently, Minervini suggests that these tech outings are likely to align more closely with market performance rather than exceed it.

For investors seeking superior returns, he recommends being highly selective in identifying emerging tech leaders. He drew parallels to formerly obscure companies like Amazon Inc. (AMZN) and Microsoft Corp. (MSFT), which once flew under the radar but later revolutionized the industry.

Finding the Next Amazon: Criteria for Success

When searching for new potential leaders, Minervini emphasizes a couple of key criteria to pinpoint winning stocks:

1. Trading Above the 200-Day Moving Average

Minervini describes stocks trading above their 200-day moving average as essential for success. He claims that 99% of the highest-performing stocks from the last century made their significant moves while maintaining this uptrend.

2. 200-Day Moving Average in Uptrend

In combination with the first criterion, having the 200-day moving average itself trending upward signals a robust bullish phase.

3. Near 52-Week Highs

In the context of stocks emerging from a bear market, Minervini suggests focusing on those that performed the best during downturns and are rebounding quickly.

These criteria may diverge from traditional fundamental value investing approaches, which typically favor stocks trading near their 52-week lows, often suffering from negative news. However, Minervini asserts that while both strategies can yield profits, leaders reside closer to their highs than their lows. “Leadership is never at the 52-week-low list,” he contends.

Conclusion

As the market evolves, Minervini’s advice serves as a guide for investors seeking to navigate the complex landscape of stock trading effectively. By focusing on key technical indicators and remaining vigilant, investors may position themselves to discover the next wave of successful stocks amidst the market’s relentless ebb and flow.