An examination of 222 firms whose stocks at least doubled in price during one year of the 1970–83 period reveals several distinct features shared by the majority of companies. For example, investment advisers on average more than doubled their claims in these winners while stock prices were advancing. Also, the firms’ pretax profit margins rose by about 2 per cent during the period of rapid price appreciation, while their growth rates based on five years of quarterly earnings data advanced from an average of 23 per cent to 38.2 per cent. Indeed, changes in earnings growth rates and profit margins probably fueled the price advances.

Of perhaps greater interest are the shared features that revealed themselves prior to the rapid price appreciation. The winners, for example, generally sold at a price less than their book value prior to their substantial price advances. Their quarterly earnings accelerated in the quarters preceding the price rise, and their relative-strength ranks, while already high, increased further.

Nine characteristics common to the 222 stock market winners were used to form the basis of a trading strategy that was applied to 2,057 NYSE and AMEX firms over the 1970–83 period. The trading strategy significantly outperformed the S&P 500 index. After one year, the average holding-period return of the selected firms equaled 30.6 per cent, versus 6.9 per cent for the S&P 500. By the end of two years, the sample firms’ average holding-period return was 65.4 per cent, versus 14.7 per cent for the index. These return differentials amount to excess returns for the trading strategy of 23.7 and 50.7 per cent after one and two years, respectively. These results cannot be explained by the firms’ historical betas or stock market capitalizations.