Source : https://indianinvestingconclave.com/alpha_series

In investing, investors look for a set of conditions/patterns and when they find appropriate conditions/patterns, they place a bet i.e. buy/sell a stock

Patterns are trying to answer the questions such as:

- How does the market work?

- What factors will trigger price moves for a certain stock?

The markets are probabilistic and so patterns do not lead to certainties but are probabilities

Below are a few patterns to spot winning stocks:

- Identify the growth sectors within the current business cycle

- The sector will have tailwinds and will be the talk of the cycle

- Generally identified by higher sales growth, profit growth, margin expansion, higher PE than market PE, earnings visibility for the next 2-3 years

- The tailwinds do not last forever so know when to exit by and always remember this is a 2-3 year cycle so bet accordingly

- PEAD – Post Earnings Announcement Drift

- Stocks seeing movement due to earnings announcement

- Announcement tend to be surprising and have accelerating growth and the trade is not crowded

- Typically works well in small and mid-cap stocks

- Debt Reduction

- Any company that has meaningfully reduced its debt will therefore reduce its interest expense leading to higher profits and higher EPS

- Debt reduction also makes the business less risky which along with a rising EPS also gets a PE expansion

- Typically happens over quarters as companies use cash flow to reduce debt significantly

- 52 week all-time highs

- This is an explorative pattern i.e. having seen the effect of multiple stocks in a sector hitting 52 week highs you need to search for the cause

- Spin-Offs

- Lead to opportunities for retail investors

- Institutions typically do not want to keep the spun-off entity because it may be too small, might not fit their investment theme, etc.

- Institutions not wanting the entity leads to forced selling and if the company performs well leads to multi baggers

- Investing in the parent company can also be an option as the demerged entity might be dragging the parent company

- IPOs

- Do not buy on Day 1 but when bought after price has settled and combined with PEAD

- Beware of IPOs during a bull market

- Low capacity utilization/General Pessimism

- Found in industries which are out of favor due to generally been through an upcycle and now there is massive capacity but low demand

- When the demand cycle changes there will be operating leverage and earnings will explode

- Very difficult though because you need industry knowledge and scuttlebutt to understand changes in demand cycle

- Massive rewards with low risk if you get it right and early

- 52 week lows with Insider Buying

- When you see a promoter/insiders buying at 52 week lows for meaningfully large stake you should be interested

- Quality Businesses

- Sector leading compounding machines that have endured multiple cycles and have proven management track record

- Accumulate them during a market correction not company specific correction, and then plan to hold on forever

- Change in Management

- A change to well-known and proven manager/management can trigger a large rally in the stock sometimes even before the new management starts delivering results

- Small Caps

- Small cap moves are accentuated on both extremes i.e. during bull markets they are over/extremely over valued and during bear markets they are under/extreme under valued

- Generally a vehicle of choice during market corrections

- RoCE Expansion

- Happens due to either change in management, demand rebound/expansion, margin expansion

- Understand the drivers of RoCE expansion

- Companies expanding RoCE also get expansion in PE

These are some of the patterns helpful in identifying stocks for further analysis although an investor has to identify patterns that suits his/her style :)