It’s important to take a close and critical look at stocks expected to rise. There could be hidden dangers, but also hidden opportunities

Little-noticed stocks sometimes rise for months before the reason for their strength becomes apparent. In a lifetime of investing, you’ll occasionally choose these kinds of stocks.

Some of these stocks expected to rise may do just that and lead to gains, but they can also be overhyped and go the other way.

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What to look for in stocks expected to rise—and keep rising

To put it simply: the best stocks expected to rise have a clear business plan that seems to be working. Most of these stocks have an established business and a history of sales gains, plus some earnings or cash flow, if not dividends.

When we’re looking for the best investments to recommend in our newsletters and investment services that reflect the Successful Investor philosophy, we start by putting all the important information we know about a company into perspective.

But things are never quite so simple. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put borrowed funds to immediately profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.

In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.

The Successful Investor approach is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook.

Don’t make the mistake of prematurely selling stocks…right before their next rise

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks—and ones expected to rise—way too early.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

One of the hardest things about investing is that it’s easy to form a strong idea of what the market will do next, and then find the market does something totally different from what you expected. That’s why you want to confine your buying mostly, if not entirely, to high-quality stocks that line up with our Successful Investor philosophy. They tend to hold on to their value over long periods.

Bonus: Some of the most volatile investments you’ll find are in speculative stocks expected to rise

Some aggressive investors like to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for one or more of any number of reasons. To borrow from the opening lines of Tolstoy’s Anna Karenina, successful stocks tend to have a lot in common, whereas unsuccessful stocks tend to suffer from their own unique sets of risks and faults.

Sometimes stocks with intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.

What strategies do you use to help you find rising stocks that lead to portfolio gains?

Have you invested in stocks that were expected to rise, but collapsed instead? What do you think went wrong?