I introduced the subject of Net Profit Margin, NPM, two weeks ago because first quarter earnings reports were quite good, but that wasn't good enough for many analysts...they were looking for signs of better sales growth. Everyone knows that sales growth is vital to a company's long-term viability. Increased sales normally lead to rising earnings which, in turn, drive a company's stock price higher and higher. So the best situation is one in which a company has a positive NPM and rising sales and earnings.

So I created a search in which NPM was > 0.00 and EPS and SPS were both higher than they were 39 weeks ago. My first test found 1,115 such stocks, as of yesterday's close. They showed an average Price increase of 8.34% since 12/31/09 with 788 winners, 320 losers and seven unchanged. I then ran a test in which NPM was negative and EPS and SPS were falling. I was certain these stocks would have been destroyed. But they were not. I found 754 stocks which showed an average Price increase of 13.63%, with 460 winners, 275 losers and 19 with no change. I was surprised at these results, to say the least. So what's going on?

I didn't know, but I did see that the average Price of the stocks in my first test was $29.57 per share and that of the second test was only $5.40. This could be the difference maker since we have seen, time-and-time again, that low-priced stocks pop the most in a rally. When I adjusted the search to disallow stocks less than $1.00, I found 557 stocks with an average Price of $7.03 per share. They gained only 12%, but this was still better than I had expected.

Undaunted, I still believed that stocks with positive profit margins should outperform those with negative margins. So I decided to change the searches I used above so that I could study the effects of NPM Deltas. Without going through all the gory details, I was truly shocked by what I found. This search found 236 stocks as of yesterday's close that have gained an average of 20.90% since 12/31/09, with 163 winners and 73 losers. Yes, the average Price was relatively low at $6.24 per share, but these results tell me a story.

The world loves a fighter who comes off the mat and wins the match. Think about Ford Motor Company. You could have taken it for dead 15 months ago, but they turned things around. Their NPM may have been negative but it was on the way to recovery. Ford's making money right now and its stock is doing just fine. A lot of the stocks found by this search never will make money, but those that do, will soar. I added the search to the Net Profit Margin Group in the UniSearch tool. I call it "The Comeback Kids."

P.S. I still prefer to own stocks of companies with positive NPM and rising EPS and SPS, but if you like to bet on underdogs, this search is for you.

CHEERING FOR THE COMEBACK KIDS.
Many of these stocks may be down, but they're not out as you will be able to see from the great results that are possible with "The Comeback Kids." Mr. Steve Chappell, Director of Educational Services, will be tonight's promoter, trainer and referee in managing these lightweights. So join Steve at the VectorVest University to see this week's exciting "Strategy of the Week" presentation: "Cheering for the Comeback Kids."

About 30 years ago, I was in charge of a billion dollar business that was largely involved with a commodity, plastic. We were the world's leading producer of this plastic, making over two billion pounds a year. In order to cut costs, the business was integrated back to its basic raw materials that came right out of the ground. In fact, the plastic was called Geon, which was derived from the word Geo, of the earth.

In running this business, the name of the game was to produce a quality product at the lowest possible cost. Just do the math. One cent taken two billion times is $20,000,000. Our goal was to continue to be the world's low-cost producer and we worked very hard at it. But cost reduction alone wasn't enough to make a good profit. You also needed pricing power, which was impossible to get during a recession like we had in the early 80's.

Yes, I remember the early eighties very well...they were so reminiscent of what we have today. Cost cutting is king and pricing power is nowhere in sight. Last quarter's profits are deemed to be good, but investor's want to see sales growth because you can't cut costs forever. But, hey, all businesses aren't commodity businesses. There are companies out there that make specialty products, have pricing power and good profit margins. Who are they and how do you find them?

You use VectorVest, of course. All you have to do is create the following parameter: 100*(EPS/SPS), by using the Custom Field Builder. The 100 converts the ratio EPS/SPS from a fraction to a percentage. Since EPS is the forecasted Earnings Per Share and SPS is Sales Per Share, the new parameter gives you the Net Profit Margin, NPM, in percent. Let's see how well it works. (Dan Misch will show you how to create this parameter as an addendum to tonight's "Strategy of the Week" presentation).

You may recall from my November 10, 2006 essay, "How I Use Stock Viewer," that I like to use Stock Viewer to explore the extremes of all the various indicators and parameters in our database, so I put our new parameter into Stock Viewer and sorted by 100*(EPS/SPS) Desc. A stock called Targa Resources, NGLS, popped to the top of the list as of March 4, 2010. I took a look at its graph and it's beautiful. Wow, it has an NPM of 2,400%. Are you kidding me? VectorVest showed an EPS of $1.20 per share and SPS of $0.05 per share. So the math is OK. What about the data?

I clicked on News at the top of the Stock Viewer screen and a page from Yahoo!Finance popped up. I immediately saw that NGLS was a Limited Partnership, LP, so I was prepared to see some bizarre stuff...but nothing like I actually saw. I clicked on Key Statistics; then scrolled down to Income Statement. It showed that NGLS had Revenue of minus $1.52 billion and EPS of $0.66 per share over the last 12 months. VectorVest shows Sales of $3,180,000 and forecasted earnings of $1.20 per share. So who's right? I think VectorVest is, but if Yahoo!Finance is right, they ought to send whoever is running Targa to Congress.

Next I set the date in Stock Viewer to March 10, 2009, i.e., the day we saw the market explode from the Bear market bottom. I sorted by 100*(EPS/SPS) Desc., and ran a Quick Test from 03/10/09 to yesterday's close. It was up 118.42% with eight winners and two losers. Not bad, but the big winner was a $0.30 stock, which I didn't like. So I created a Derby Ready Strategy that I called NPM Analyzer and I put it into a new Group called Net Profit Margin. I ran the search as of 03/10/09; then ran a Quick Test through yesterday's close. It was up 65.07% with 100% winners. The big winner was Baidu.com, up 214.41%. Hmm, maybe, I have something here. I set the search date to 03/17/09, the first day we got a Green light after the March bottom and ran the test. Uh-oh. It was up only 29.93%. So I tried it on 03/26/09, when we got a C/Up signal. The result was better, up only 38.16%, but still somewhat disappointing.

I figured I had to adjust the search to return better stocks. So I set VST > 1.25 as one of the criteria and tried that. This search returned a better quality of stocks, but its overall performance was substantially worse than before. Out of curiosity, I decided to sort by 100*(EPS/SPS) Asc., instead of Desc. Remarkably, I got much better results with gains of 57.38%, 123.36% and 107.18%. Unbelievable! I then began to pick dates at random. In every test I ran, the Asc., sort beat the Desc., sort. What was going on?

I thought of Mr. Carlton Lutts, former editor of The Cabot Market Letter. He loved to pick stocks that were unknown, not yet making any money but were expected to. Many of his picks would sky rocket; then crash. When that happened he would say the love affair was over. He said that stocks were romanced before they started making money; then the accountants took over when they finally started to make money and they plunged. In honor of good, old Carlton, I called the revised Strategy, Romancing the NPM.

WINNING BIG, THE EASY WAY: FOLLOW UP.
We got so many questions regarding last week's "Strategy of the Week" that we decided to clarify exactly how those phenomenal results were obtained. We want you to know exactly how to use the 5-Day Derby Winners because it could be very big if it fulfills its promise. So join Mr. Dan Misch at the VectorVest University to see this week's very important "Strategy of the Week" presentation: "Winning Big, The Easy Way: Follow Up."

Five weeks ago, when we got a Confirmed Up signal, I wrote an essay called, "Time to Transition." It was meant to show how stocks with weak fundamentals fly upward in Price when the market rallies from a bottom, but stocks with good fundamentals do not perform as well. The Price performance of the weak stocks, however, tends to peter-out in a relatively short time while the Price performance of the strong stocks tends to get better as time goes by. Therefore, I was suggesting that it was time to transition from picking weak, beaten down stocks with "S" ratings to solid stocks with "B" ratings.

To my amazement, our Bottom-Fishing strategies continued to work well and even outperform high VST stocks, so I have stayed with Bottom-Fishing strategies to the current time. Furthermore, I was quite impressed by last week's "Strategy of the Week" presentation, "Digging for Gold Using Stock Viewer," given by Glenn Tompkins. You may recall that the best result he showed was obtained by sorting by RV, Relative Value, Desc. It was up 87% from 03/10 to 04/23. This result is logical since RV goes up when a stock's Price goes down and the stocks Glenn found certainly had gone down as shown by their low RT, Relative Timing, values.

Hmm, I wondered, what would I find if I looked at the stocks with the lowest RT's? So I sorted Stock Viewer by RT Asc. I really expected to get a lot of crazy, low-priced stocks from this sort, and I did get some. But the percent gain was 230%. Wow! The percent gain from 03/10 to yesterday's close was 274%. Wow! Wow!

OK, the results are astonishing, but how can I get a selection of stocks with better fundamentals? Sort by VST/RT, of course! So I clicked on the Edit button, selected VST/RT from the list of Custom Sorts and clicked on the radio button to the left of Desc. This sorted Stock Viewer by VST/RT Desc. Uh Oh. I got a gain of only 167%. Somehow, I had to start with a list of better stocks. This meant that I had to use UniSearch, which I didn't want to do because the beauty of Glenn's presentation was its simplicity, or I had to use WatchLists.

The first WatchList I tried was Blue Chip Bargains. Sorting by RT ascending worked like a dream. Would it work with the S&P 500? You betcha! Does it work with the Russell 2000? Oh my goodness! The results were incredible. Well, doing this was simple enough. I just open the WatchList of my choice, set the date and sort by RT ascending. Fantastic. So I did this over and over again, testing different combinations of low points to high points as identified on the Market Timing Graph, going all the way back to 1997. The results were fantastic just about every time.

Now I want to use this bottom-fishing technique in managing portfolios. The easiest way is to create Strategies in the UniSearch Tool. These Strategies are named as follows: Blue Chip Bargains/RT, S&P 500/RT, Russell 2000/RT and they're all located in UniSearch in the Strategies - Bottom-Fishing Group. To make things really convenient, we took our other favorite bottom-fishing strategies, such as Jail Break - No Contra ETFs, Blyar's Bottom Feeders/BMB and so on and also put them in The New Strategies - Bottom-Fishing Group.

The goal of every brokerage firm is to have thousands, if not millions, of its customers send them a check every month. So how do they try to make this happen?

They tell investors things that aren't true. They say things that have been carefully crafted to sound factual, logical and reasonable but are not. These things have been repeated so long and so often that they have become the conventional wisdom of Wall Street. They are presented as though they were meant to help you make money in stocks, but they actually were tailored to get your money and keep it. So what are these lies and how can you avoid their pitfalls?

Come hear my presentation on Saturday night, January 3, 2009, at our All-New, Two-Day Investment Seminar in Tampa, FL, and I'll tell you all about Wall Street's Five Biggest Lies.

JAIL BREAK.
What do Bottoms Up, Jubilee, Odd Fellows Long and Pirates Long have in common? Why have these strategies produced explosive profits time after time when the market soars from a bottom?

They all find stocks that have very low RT levels at market bottoms, whether you find these stocks by sorting by VST/RT, RV/RT or GRT/RT Desc. These strategies also find stocks with high RV levels. So the moral of this story is that reasonably good stocks which have been the most beaten down in price fly higher and faster than those that have held up the best. With this in mind, I wanted to create the mother of all explosive strategies. So I came up with a new strategy called "Jail Break."