Want to find stock market leaders like Microsoft stock? You have to start by knowing what is a leading stock in the first place.
Basically put, a leading stock is one that outperforms the stock market and most if not the rest of its industry. IBD Stock Checkup identifies these leaders using IBD's database. Typically, leaders are found in the top five or six IBD sectors and in the top 40 of 197 industry groups.
The IBD Composite Rating is another handy tool because it weighs multiple fundamentals and price-volume factors.
Also important is the EPS Rating, which takes into account earnings growth and stability of those profits over the past three years, with the two most recent quarters weighed more heavily. That prioritizes strong current earnings growth.
The Relative Strength Rating identifies the best price performance over a 12-month period, giving higher weight to the three most recent months.
Leading stocks have Composite Ratings of 90 or higher. They also tend to have EPS and RS Ratings of at least 80.
RS Line Shows Stock Market Outperformance
Also check the relative strength line. It measures a stock's price performance vs. the S&P 500. If the stock is outperforming the broader market, then the RS line angles upward. If a stock is performing worse than the broad market, then the line will point lower.
In leading stocks, the RS line should hit a new high on a breakout from a base, shortly thereafter or even before the breakout.
A leading stock also has good chart action. Look for high-rated stocks forming sound price bases. These patterns act as pauses during longer-term advances where the stock can launch another leg higher.
IBD Live: A New Tool For Daily Stock Market Analysis
Microsoft Stock: A Stock Market Leader
On June 21, 2021, Microsoft broke out of a cup base (1). Volume swelled the week of the breakout (2). The RS line was not at new highs but nearing the highest level of the 21-week basing period (3).
Microsoft's fundamentals exhibited leadership traits, with accelerating quarterly earnings growth, from 7% to 32% to 34% to 39% over the previous four quarters. Sales growth accelerated from 12% to 17% to 19%. At the breakout, the Composite Rating was 97, the EPS Rating was 96. The RS Rating lagged (55) due to a long consolidation.
At Microsoft stock's 2021 peak price of 349.67, shares had rallied nearly 33% from the cup entry.
Other ways to find leaders include the IBD 50, IBD Sector Leaders, Big Cap 20 and the MarketSmith 250 index.
Be sure to follow Scott Lehtonen on X, formerly known as Twitter, at @IBD_SLehtonen for more on growth stocks and the Dow Jones Industrial Average.
