Mark Minervini Strategy | Think and Trade Like a Champion Part 1 | Technical and Fundamental Filters

Who is Mark Minervini?

Mark Minervini is a professional trader who left school at the age of 15 to focus fully on his passion. The financial markets and more specifically trading stocks. He was heavily influenced by other successful traders such as Jesse Livermore, Richard Love and Stan Weinstein, to name just a few.

Mark is one of the few traders who has managed to bring together both technical and fundamental analysis into one comprehensive strategy where both concepts reinforce each other. However, the key to consistent long-term success lies in how risk is handled.

He is living proof that with passion and perseverance great things are possible.

Two Times US Investing Champion

In 1997 he won the U.S. Investing Championship for the first time. Using $250,000 of his own hard-earned money, he achieved a remarkable 155% return.

In 2021, he dragged in the title again. This time with a starting amount of $1000,000. And if you thought 155% was already a strong result... His return in 2021 was a whopping 334%.

But what stands out most here is how these results were achieved...

When I see these kinds of returns, I immediately worry about one thing: the risk it took to achieve such extraordinary returns.

My reluctance and suspicion when seeing triple-digit returns have mainly to do with the equally "brilliant results" of quite a few self-proclaimed stock market gurus.

The vast majority of their extremely high returns are completely worthless once you take a closer look at their risk management. They take enormous risks with the logical consequence that the probability of a phenomenal return also increases. However, this has nothing to do with investing or trading; it is pure gambling.

None of that, however, with Mark Minervini’s approach. He is extremely risk-averse and takes great care to ensure that loss positions (which are part of any strategy) have minimal impact on his trading account. This is the only way to remain consistently successful over the long term.

With his long successful track record, he counters the Efficient Market Theory. A theory in financial science that states that in the price of securities such as stocks, all public information and future expectations are incorporated and it is therefore impossible to structurally achieve better than average investment results in the long run, except by luck.

In this article (Part 1), we are going to explain what the technical and fundamental conditions are before a stock can be selected as a genuine Minervini setup. Then we are going to translate these rules into screening filters to arrive at a true Minervini screen.

In Part 2, we will go deeper into the actual execution of the strategy.

• Where and when to open a position?
• How many shares can and should you buy, taking into account the amount of capital at your disposal and your maximum risk percentage?
• Where do you set the initial stop? When to raise your stop-loss?
• When to take profits?

SEPA Ranking System Explained

SEPA stands for 'Specific Entry Point Analysis' and it represents the life's work of Mark Minervini. All the knowledge he gathered to become the trader he still is today is contained in his SEPA concept that he has developed and fine-tuned over the years. The SEPA analysis is based on three assumptions:

1. Timing matters: There are good and bad periods to buy stocks.

2. There is some degree of predictability: Stocks that have the potential to become big winners can be discovered before they rise excessively.

3. Exponential growth: By trading these stocks correctly, it is possible to turn a relatively small amount of money into a fortune in a relatively short period.

SEPA Key Elements

The above statements are finally translated and divided into five SEPA characteristics.

1. Trend: Almost every stock that experiences a huge price explosion does so from a pre-existing rising price trend. Therefore, correctly identifying the direction in which the stock is trending is very important.

2. Fundamentals: Moreover, almost all of these stocks are characterized by significant improvements in sales, earnings and margins. The best news is that this sudden improvement is already clearly manifested in the very beginning of the stock price appreciation.

3. Catalyst: Every superperformer owes its success to some kind of trigger. An event that had such an impact that the stock was suddenly discovered and wanted by a lot of market participants. Several things can be at the root of this. A new product that sells tremendously well, management sending out a positive earnings alert, quarterly results that are much better than what the market expected,...etc.

4. Entry Points: Another feature is that for each of these stocks, at least one but usually several specific price points can be identified at which you were able to buy the stock. These price points are characterized by a very good risk/reward ratio. It is essential to recognize and exploit them to take maximum advantage of the subsequent price rise. If you fail to do this, you are more likely to be stopped out each time.

5. Exit Points: Exit points are important in two ways. First, as a safeguard against loss positions that are an inherent part of any strategy. The stop loss ensures that losses remain small and do not turn into large losses that are detrimental to the available trading capital. But clear rules are also needed to secure profits in time. Every price surge eventually comes to an end and it is important to adequately protect accumulated profits and cash out in time.

Stage Analysis

The Stage Analysis concept is not new and assumes that each stock is in one of four stages, including:

Stage 1 - Consolidation

Stage 2 - Accumulation (uptrend)

Stage 3 - Distribution

Stage 4 - Capitulation (downtrend)

The book discusses the 4 stages in further detail. However, it would lead us too far to go into them in depth in this article. An extensive analysis and application can be found in Stan Weinstein's excellent book "Secrets for Profiting in Bull and Bear Markets".

Mark Minervini concentrates his SEPA analysis exclusively on the stage when stocks are rising (Stage 2). Indeed, his strategy assumes that any stock that rises extremely does so from an existing uptrend.

Trend Template Rules

The technical conditions are the blueprint of its strategy. A stock that does not meet all the conditions listed below irrevocably falls off the list of possible candidates. Even stocks with excellent fundamentals must meet these before they can be considered for trading.

Moving Averages

• The current stock price is above the 50-day (10-week), 150-day (30-week) and 200-day (40-week) Simple Moving Average price line.

• The 200-day moving average line is trending up for at least 1 month (preferably 4-5 months minimum in most cases).

• The 50-day (10-week) moving average is above both the 150-day and 200-day moving averages.

• The 150-day moving average is above the 200-day moving average.

52-week High and 52-week Low rules

• The current stock price is at least 30 percent above its 52-week low (many of the best selections will be 100, 200, 300 or even greater above their 52-week low before they emerge from a solid consolidation period and mount a large-scale advance).

• The current stock price is within at least 25 percent of its 52-week high (the closer to a new high the better).

Relative Strength

• The relative strength ranking is no less than 70, and preferable in the 80s or 90s, which will generally be the case with the better selections.

In the stock screener, this is what it looks like in terms of filters:

The only filter that could not be applied is the condition that the 200-day moving average must rise for at least a month. Anyway, the vast majority of stocks will meet this by the requirements for the other moving averages. You can visually rule this out very easily and quickly if you take a look at the chart.

Direct link to the ‘Mark Minervini Trend Template Screener’.

Fundamentals that Drive Super-performance

The Trend Template is only one side of the story. As we wrote in the intro, the strength of this strategy lies in the combination of both technical and fundamental requirements.

For more information, please refer to the book - chapter 7 - Fundamentals to Focus On (starting on p117)

The company must show signs of strong and accelerated growth in terms of earnings and/or sales.

‘Big Earnings Attract Big Attention’

Quarterly results that are (much) better than what was expected by analysts (earnings surprises) attract the attention of institutional investors. They are all too eager to anticipate a further exponential rise in stock prices.

Such surprises also require analysts to positively revise their future outlook (Earnings Revisions). The upward revision of those earnings forecasts (on a quarterly and or annual basis) is a good indication of better future results for the company in question.

Mark Minervini argues that companies for which the upward revision was at least 5% or more, these actually perform better than average.

Finally, attention must be paid to profit margins. Here, too, it is mainly the trend that should be considered. Cost reduction and efficiency measures can indeed contribute to an improved profit margin, but that will be more of a temporary phenomenon.

Most of all, what you want to see are profit margins that evolve positively over a longer period. It is proof that the company has some degree of pricing power: Rising supplier costs that are passed on to the customer (increasing prices of the final product) without impacting revenue (fewer customers buying the product because of the price increase).

In a perfect world, someone with this knowledge would only look for companies that possess all of the above intrinsic qualities. For a screener like ChartMill, doing so is a piece of cake. Except that the search would probably end up with zero results.

This is also addressed in the book, which is why it is important to apply the various fundamental filters separately. That way, you will eventually be able to identify some companies that score well in several areas but that would have been irrevocably dropped if you applied all the filters at once.

Below we have added a comprehensive set of fundamental filter screens focusing separately on earnings growth, revenue growth and earnings surprises. You can customize the values used.

By filtering in multiple steps in this way, you will discover companies that show up in multiple filter combinations. It is just those companies that are interesting to consider.

In any case, every screen starts from the technical Trend Template that is never deviated from.

Screen 1: Decent Yearly Earnings Growth and Acceleration (EPS)

Basic Screen 1

• EPS Growth 3 Y at least 15%

• EPS Acceleration at least last FY

Options (added to the basic screen)

• + EPS Next Y revision (3m) at least 8% (optional - screen 1A)

This filter focuses on annualized EPS growth. This must be at least 15% annually for the past three years, and it must also have accelerated in the last full year.

• Link to Basic Screen 1

• Link to screen 1A + earnings next Y revision

Screen 2: Decent Quarterly Earnings Growth and Acceleration(EPS)

Basic Screen 2

• EPS Growth Q2Q at least 25%

• EPS Acceleration at least 2Q’s

Options (added to the basic screen)

• + EPS surprise (last 4Q) at least 2 beats (optional - screen 2A)

• + EPS Next Q revision (3m) at least 4% (optional - screen 2B)

• + Profit Margin improved 2Q’s (optional - screen 2C)

On a quarterly basis, EPS must have increased by at least 25% and growth must also have accelerated over the last two quarters.

• Link to Basic screen 2

• Link to screen 2A + earnings surprise

• Link to screen 2B + earnings next Q revision

• Link to screen 2C + profit margin

Screen 3: Decent Yearly Revenue Growth and Acceleration

Basic Screen 3

• Revenue Growth 3Y at least 15%

• Revenue Acceleration at least last FY

Options (added to the basic screen)

• + Revenue Next Y revision (3m) at least 8% (optional - screen 3A)

Revenue growth must be at least 15% annually for the past three years and accelerated in the last year.

• Link to Basic screen 3

• Link to screen 3A + revenue next Y revision

Screen 4: Decent Quarterly Revenue Growth and Acceleration

Basic Screen 4

• Revenue Growth Q2Q at least 25%

• Revenue Acceleration at least 2Q’s

Options (added to the basic screen)

• + Revenue surprise (last 4Q) at least 2 beats (optional - screen 4A)

• + Rev Next Q revision (3m) at least 4% (optional - screen 4B)

• + Profit Margin improved 2Q’s (optional - screen 4C)

Sales growth must have increased at least 25% on a quarterly basis, and growth must have accelerated in each of the last two quarters.

• Link to Basic screen 4

• Link to screen 4A + Revenue Supprise

• Link to screen 4B + Revenue Next Q Revision

• Link to screen 4C + Profit Margin

Screen 5: A combination of basic screens 1 and 3 (yearly EPS and Revenue growth and acceleration)

• EPS Growth 3 Y at least 15%

• EPS Acceleration at least last FY

• Revenue Growth 3Y at least 15%

• Revenue Acceleration at least last FY

Growth and acceleration are required for both EPS and Revenue on an annual basis.

• Link to screen 5

Screen 6: A combination of basic screens 2 and 4 (quarterly EPS and Revenue growth and acceleration)

• EPS Growth Q2Q at least 25%

• EPS Acceleration at least 2Q’s

• Revenue Growth Q2Q at least 25%

• Revenue Acceleration at least 2Q’s

A screen for companies that show quarterly growth and acceleration both in terms of EPS and revenue.

• Link to screen 6

Code 33 alert

• EPS Acceleration at least 3Q’s

• Revenue Acceleration at least 3Q’s

• Profit Margin improved 3Q’s

This term refers to companies that have seen both their earnings, revenue and profit margin grow and accelerate over the past three quarters.

• Link to code 33 screen (without adhering to the basic trend template)

• Link to code 33 screen where the trend template screening filters are also retained *(keep in mind that this occurs only rarely and the probability of 'zero' results is significant…)

Manual Review

Once a watchlist of stocks is created, they are further manually screened. In doing so, the main focus is on:

• The industry and sector to which the stock belongs. How does the stock relate to it? How does it perform compared to its industry peers?

• What are the possible drivers for further exponential growth? Are there any new products in the pipeline? Is the company about to launch a breakthrough or unique product or service? Is the company entering new markets or regions?

• What was the management's commentary and outlook when the latest results were released?

Furthermore, a comprehensive analysis of the price chart and volume follows, plus an analysis of whether the stock is liquid enough to allow for easy trading.

Predicting Key Turning Points

Be Aware of the Market Leaders

The importance of following especially the market leaders is mentioned several times in the book. However, this doesn't refer to the companies with the largest market capitalization. It does point to the companies that show the strongest growth within their sector or industry in terms of profits and sales.

Why? These are the stocks that will rise fastest on a percentage basis in premature bull markets. But precisely that initial rise causes many individual investors to avoid buying these stocks just yet, merely because they missed that initial rise. This is precisely an indication of relative strength and therefore just increases the likelihood of further exponential price appreciation...

To find such market leaders, you can rank stocks within their sector or industry based on specific criteria. Again, it pays to use multiple criteria separately and pay close attention to which stocks appear in multiple lists.

A few examples to illustrate (US stocks, minimum price $5, minimum trading volume 100,000):

• Information Technology sector only, RS-ranking over 90%, sorted by 1-month performance. Direct link

• Consumer Discretionary sector only, Consumer Durables & Apparel industry group only, RS ranking over 95%, sorted by 12-month performance. Direct link

52-week Highs and Lows

Another way to keep an eye on the market is to monitor the number of new 52-week highs and lows. You can do this for the entire market (when more 52-week highs pop up each week this indicates a general market uptrend) but in addition, it is smart to also watch this sector by sector. If you do this weekly you will quickly discover which sectors are taking the lead in a new general uptrend in the stock markets.

For example, this screen shows all US stocks from the energy sector that hit a new 52-week high in the past week.

Bottom-Up vs Top-Down approach

Mark Minervini is a big proponent of the Bottom-Up method instead of a Top-Down approach. In the latter case, you look at the general market trend and only if it is positive do you zoom in on which sectors and industries are doing particularly well. In the end, you hopefully end up with the strongest-performing stocks. The problem, however, is that by doing this you have already missed a good chunk of the upward trend.

The Bottom-Up approach assumes that the best-performing stocks are ahead of the general market trend. True market leaders reach their bottom in a bear market faster than the indexes to which they belong. They are the first to break out of stage 1 and are already in the rising stage 2 phase at a time when the general indices are still forming their bases.

The main thing to look for then is stocks that are consolidating in stage 2 and are about to break out to the upside again. These are the most ideal setups to take some initial tentative test positions and thus anticipate a new bullish market trend.

Minervini View Settings in ChartMill

Through this link, you get direct access to a Minervini View with both timeframes.

To save this view in your personal account, click on the diskette icon in the upper right corner of the stock screener page.

Enter a name for this view and then click Save:

Accessing the view from the Stock Charts page goes as follows:

And these are the steps you go through from the Stock Screener page:

Further Readings

Be sure to read 'Think and Trade Like a Champion Part 2 | Trading Strategy' which offers further explanation of the various components of the strategy and how they are transformed into a real trading method.

The article above allows you to use ChartMill to find setups that meet both the technical and fundamental requirements of this strategy. Nevertheless, we highly recommend reading the book (which consists of more than 300 pages). It will give you a much broader and more complete understanding of why these particular filters work.

The author himself also refers to several important books that have helped him in his career, being:

• ‘Superperformance Stocks’ by Richard Love

• ‘The Relative Strength Concept of Common Stock Price Forecasting’ by Robert A. Levi

• ‘Stock Market Blueprints’ by Edward S. Jensen

• ‘How to Trade in Stocks’ by Jesse Livermore

• ‘Secrets for Profiting in Bull and Bear Markets’ by Stan Weinstein

Trade Safe!

Kristoff De Turck

Co-founder - ChartMill

Disclaimer - This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.