SEPA - Specify Entry Point Analysis
The Origin of a Superior Strategy
In 1983, while visiting a local library, Mark Minervini read Richard Love's book Superperformance Stocks. While a good portion of the work was written on how the political cycle relates to the stock market, Minervini was intrigued by Chapter 7, which focused on the commonalities of big stock price performers. Love's studies from 1962 to 1976 focused on the common characteristics of stocks that went up a minimum of 300% within a two-year period without as much as a 25% correction; he called them Superperformance Stocks.
Although Love's approach caught Minervini's attention, it wasn't until 1988 that the formulation of his own strategy took flight. He read an interesting article in the March/April 1988 issue of Financial Analyst Journal titled "The Anatomy of a Stock Market Winner." The article discussed the findings from a study of superior securities—stocks that went up a minimum of 100% in a calendar year. The author, Mark R. Reinganum, had explored 222 stock market winners from 1970 to 1983 to determine what contributed to their superior performance.
Interestingly, the Reinganum study corroborated Love's findings. Furthermore, the purpose of both studies was almost identical: focusing on the characteristics of stocks that had made the biggest gains to identify the cause of stellar performance. The concept made intuitive sense to Minervini: study the best to find the best. This set Minervini on a course to learn what makes a stock move up dramatically in price to join the elite circle of Superperformers, and it ultimately became his life's work. And so, Mark Minervini turned on his computers and the rest is history.
Specific Entry Point Analysis® -SEPA®
Specific Entry Point Analysis® -SEPA® is a highly disciplined stock trading strategy developed by Mark Minervini. The methodology's foundation is built upon historical precedent analysis of past stock market "Superperformers."
The SEPA® strategy focuses on identifying, company-by-company, the precursors of inefficient pricing in order to distinguish appropriate low risk/high reward entry points. Utilizing SEPA®, stocks displaying the potential for significant price appreciation are identified and pinpointed. This proven technology consistently highlights many of the best investment ideas and stock market leaders before they're widely recognized by Wall Street.
• To demonstrate the effectiveness of his SEPA® methodology, in 1997, trading against hundreds of stock, options and futures traders, Mark Minervini traded a stock only account to win the U.S. Investing Championship with a 155% annual return.
• Using the SEPA® trading strategy, in a five-and-a-half-year period Minervini generated a 220 percent average annual return (36,000% compounded total return) with only one losing quarter. To put that in perspective, a $100,000 account would explode to over $30 million with those returns.
The Earnings Maturation Cycle
A company that delivers strong earnings prompts upward revisions of analysts' estimates and brokerage upgrades. More upbeat analysis can lead to more buying. As the stock's price rises fueled by the prospects of improving fundamentals, additional quantitative models kick in and price momentum players start to buy the stock on the basis of a strong price trend.
At some point, the growth becomes obvious and essentially everybody knows about it. The stock is officially termed a growth stock. The smart money that got in early is getting out with a hefty profit, and naive investors step in to buy what they've been reading about in the financial pages or hearing about on TV. Then the momentum stalls. What follows is the loss of EPS momentum, an eventual negative earnings surprise, and downward revisions, all of which puts considerable pressure on the stock price. This earnings maturation cycle happens time and time again, market cycle after market cycle.
The key is to understand where you are in the cycle and take advantage of its effect. The SEPA® strategy focusses on stocks in Stage 2 of the earnings maturation cycle. The result is a much higher likelihood of owning the next Superperformer than investing in any of the other stages of the cycle.
The SEPA® Ranking Process is Focused on Finding Stocks that have Potential for the Following:
1. Earnings and sales surprises and positive estimate revisions
2. Institutional volume support (significant buying demand)
3. Rapid price appreciation due to a supply/demand imbalance (lack of selling versus buying)
Leadership Profile®
The Leadership Profile® is a success blueprint derived from historical models of excellence in the stock market. Based on accumulation of data from as far back as the late 1800s, Minervini and his team constructed a Leadership Profile® of the common characteristics shared by Superperformance Stocks. Current stock candidates are compared to how well they conform to the optimal profile and they are ranked accordingly.
The MPA database is continually updated to account for market dynamics and new available information. On-going efforts are focused on identifying in detail the characteristics of the most successful performers of the past to determine what makes a stock likely to outperform its peers in the future. Leadership profiling results is a dramatic increase in the probability of finding the next Superperformer.
Key Identifiable Characteristics Present Prior to Foster Wheeler Advancing 180% in 9 Months
Five Essential Building Blocks of SEPA®
Using a process of profiling, stocks are compared and ranked according to how well they fit the optimal success blueprint--a Leadership Profile®. The basic characteristics are broken down into five major categories, which make up the key foundational building blocks of the SEPA® methodology:
1. Trend: Virtually every superperformance phase in big, winning stocks occurred while the stock price was in a definite price uptrend. In almost every case, the trend was identifiable early in the superperformance advance. Our Trend Template ensures a stock candidate is in a proper uptrend.
2. Fundamentals: Most superperformance phases are driven by an improvement in earnings, revenue and margins. This typically materializes before the start of the superperformance phase. In most cases, earnings and sales are on the table and measurable early on. During a stock's superperformance phase, a material improvement almost always occurs in the fundamental picture with regard to sales, margins and, ultimately, earnings.
3. Catalyst: Every stock that makes a huge gain has some catalyst behind it. The catalyst may not always be apparent upon a casual glance, but a little detective work into the company's story could tip you off to a stock with superperformance potential. A new hot-selling product that accounts for a meaningful portion of a company's sales may provide the spark to ignite a superperformance phase in a stock's price. Approval by the Food and Drug Administration (FDA), a newly awarded contract, or even a new CEO can bring life to a previously dormant stock. Each situation may be somewhat different, whether the stock is a classic growth company, a turnaround situation, a cyclical stock or a biotech trading on the promise of a new drug. Whatever the reason, behind all superperformance is always a catalyst driving institutional interest.
4. Entry Points: Most superperformance stocks give you at least one opportunity, and sometimes multiple opportunities, to catch a meteoric rise at a low-risk entry point. Timing the entry point is critical. Time your entry incorrectly and you will be stopped out unnecessarily, or lose big if the stock turns around on you, and you fail to sell. Time the entry correctly, and you could be at a profit right away and on your way to a big gain.
5. Exit Points: Not all stocks that display superperformance characteristics will result in gains. Many will not work out, even if you place your buys at the correct point. This is why you must establish stop-loss points to force you out of losing positions to protect your account. Conversely, at some point your stock must be sold to realize a profit. The end of what once was a superperformance phase needs to be identified in order to keep what you've made.
Recent SEPA® Entry Points Recommended to Our MPA Members
Linkedin (LNKD)
In January 2013, sporting exceptionally strong quarterly earnings and sales, LNKD emerged from a primary base. The stock price advanced more than 50% in less than two months.
Pharmacyclics (PCYC)
We originally recommended PCYC in January 2010 before it advanced 20-fold. The stock then set-up another low risk entry point in February 2013 before rallying 32% in 15 trading days.
Pacira Pharmaceuticals (PCRX)
Compelled by a strong fundamental story and stellar technical action, we recommended PCRX on February 1, 2013. After a brief pullback the stock price rallied 50% in only 20 trading days.
Caesars Entertainment (CZR)
After New Jersey Governor Chris Christie signed a law formally legalizing online gambling in his state, we recommended shares of CZR as a major beneficiary of online poker. The stock price advanced more than 40% in 10 trading days.
Lululemon Athletica (LULU)
We purchased LULU at two low risk entry points in November 2010, and also in March 2011. From our initial purchase, LULU advanced more than 160% in eight months.
The SEPA® Screening Process
1. Stocks are screened through a series of "filters" based on fundamental and technical data. Most stocks in the market are eliminated from this first layer of screening leaving roughly one-thousand initial contenders.
2. The remaining stocks are scrutinized and ranked for similarity to a proprietary Leadership Profile® in-line with specific criteria exhibited by historic models. This second stage of qualifiers removes most of the remaining companies, leaving a narrowed list of investment ideas for further review and evaluation.
3. The final stage is a comprehensive manual review. The narrowed list of candidates are examined individually and scored according to a "relative prioritizing" ranking process which considers the following factors:
- Reported earnings and sales
- Earnings surprise history
- EPS and sales acceleration
- Company issued guidance
- Earnings estimate revisions
- Profit margins (historic & projected)
- Industry and market position
- Potential "catalysts"
- RS compared to other stocks in sector
- Stock price action and trading volume