In racing, the horse that breaks first from the gate and takes the lead and tries to keep it all the way to the finish line is called a "front runner."
Going "wire-to-wire" is a wonderful sight, especially if you have a ticket on the nag. The same principle can be applied to the stock market - even more so.
When a stock in a particular industry group breaks out of a basing pattern and is the first issue to do so with the rest following later, the stock is called a "leader." Often times, that stock is the one you want to buy because it will provide the best return.
The catch is, though, that the "leader" will move out so quickly that the average investor will be afraid to buy it because it has risen so much.
Instead, he probably will opt for a "laggard" in the group thinking it will catch up. But, in the stock market the "front runner" usually wins the race. The reason is that the leader has certain fundamental characteristics that appeal to institutions, it's their buying that drove the stock up first and most likely will keep it going.
An example in 1995 was the action in the savings & Loan group. In early April, the S&Ls started to move higher - and interestingly before a drop in interest rates took place several weeks later.
One of the first S&L stocks to burst out of the gate was Golden West Financial Corp. (GDW), which emerged from a two-month base at 39 on expanding volume on April 5. In just a nine days, the stock sprinted to 44.
Several other S&L stocks moved out around that time too such as Great Western Financial Corp. (GWF) and H.F. Ahmanson & Co. (AHM) to confirm the group's strength.
Later in May, Standard Federal Bank of Troy, Mich. (SFB), broke out of its consolidation pattern on rising volume but that late move tagged the stock as a laggard in the group.
What should an investor have done?
They should have been alert and watching the breakouts occurring in the Savings and loan group, noticed Golden West was the first one of the gate, and jumped on board. One way to have spotted that would have been to follow Ticker Tape Digest's Daily report of breakouts.
For the average investor, the natural mistake is to think: Well, I missed Golden West. It's too high in price now. I'll buy Standard Federal. It'll catch up."
The fact is Golden West had a high probability of outperforming Standard Federal, especially if the S&L group stays in an up trend for a substantial time. So, a smart investor would do well to be in Golden Western, the leader; not Standard Federal, the laggard.
Why was Golden West the leader?
Like most S&Ls, Golden West and Standard Federal both were expected to show a small decline in profits for the year. However, in 1996, Golden West's net income was projected to climb 30%, while Standard Federal's was to be up only 8%.
Also, F.H. Ahmanson's net income was projected to be up 40% in 1996 and Great Western Financial's 38%. So, those two S&L stocks could have been considered to be hot on the heels of Golden West as far as being the best performer in the S&L group.
An important principle to remember is that the "leading stock" in an industry group is not the biggest company in that group. When investing in stocks, the "leader" is the one whose stock price moves up first and the fastest.
For investors, a good way to be alert to the initial move by a leader in a newly emerging industry group, is too follow Ticker Tape Digest's list of stocks breaking out in TTD Report, or TTD's Web page Market Report.
When going through the price action, if you see the stock has big volume and no other stocks in the group have moved yet. Try to check out that stock to see if it might be a potential group leader making its initial move.
If it is, you may have a hot one on your hands.
Be aggressive and don't wait for the rest of the stocks to move. Buy it! If the other stocks move too. Then that is a great confirmation your buying was correct. However, many times other stocks in the group will move the same day.
Also, be aware of changing fundamental news that might trigger an industry stock move. In that case, go after the stock with the strongest move in price and volume. Most likely it'll have good fundamentals too.
To be successful in the market one has to be well informed, know what to do, and act decisively. Buying a leading stock at the time of its initial move can improve your return immensely.