In stock trading, “Top Dogs” are the market leaders that show strong potential for growth and resilience, often outperforming in both good times and bad. These stocks embody characteristics like relative strength, high revenue growth, and alignment with disruptive themes. This lesson will teach you how to identify and focus on Top Dogs to enhance your trading strategy by sticking with high-quality, high-potential stocks.

What Makes a Stock a Top Dog?

• Best-in-Breed Concept: Top Dogs are the “best-in-breed” stocks within their respective sectors. They’re leaders in terms of relative strength, fundamentals, and potential for further growth. By focusing on Top Dogs, you concentrate on high-quality stocks that are more likely to outperform.
• Why Only Trade Top Dogs? These stocks attract institutional interest, and their strong metrics reduce risk by aligning with broad market strength. This strategy helps avoid low-performing stocks that may not have lasting momentum.

Core Characteristics of Top Dogs

• Relative Strength: Top Dogs consistently outperform the broader market, showing resilience even when the market declines. If a stock is underperforming the market, it’s unlikely to be a Top Dog.
• Early-Stage Bases: Stocks in earlier-stage bases (like stage one or two) often have more room to grow. Stocks in later-stage bases may have already experienced substantial institutional buying, reducing the pool of potential new buyers.
  • Example: A stock like Shopify had multiple bases as it grew, but entering early-stage bases provides more opportunity. IPO stocks breaking out of a stage one base between 6–18 months post-IPO often have strong potential, as they’re still “undiscovered” by larger institutions.
• High Volume: Top Dogs typically display high volume during bases or breakouts. High volume signals institutional interest, as large buyers push up demand.

The Power of Market Themes and Simplicity

• Identifying Big Themes: Top Dogs usually align with major market themes—areas experiencing growth or transformation. This could include tech innovation, healthcare advancements, or consumer trends.
  • Disruptive Potential: Companies with disruptive models or technologies often grow faster by capturing market share. Examples include “Buy Now, Pay Later” in the financial sector (e.g., Affirm) or accessible fitness solutions like Peloton.
• Simplicity in Product: The most successful companies offer simple, understandable products or services that have viral consumer appeal, making them easy for both investors and consumers to understand.
  • Example: Zoom’s widespread use in virtual meetings during COVID made its product appeal clear, helping it capture a large audience quickly.

Fundamental Criteria: Focusing on Sales and Earnings Growth

• Revenue Growth as Priority: Strong revenue growth signals that a company is capturing market share and expanding. Ideally, look for revenue growth of at least 40% year-over-year, with triple-digit growth (100%+) indicating an exceptional Top Dog candidate.
  • Example: Zoom and Livongo both exhibited triple-digit revenue growth, contributing to their strong performance and helping them sustain upward momentum.
• Earnings Growth Confirmation: While high revenue growth is key, earnings growth shows the company’s potential to become profitable. However, newer companies may reinvest revenue to scale before prioritizing profit, as seen with Amazon’s growth strategy. Look for consistent earnings growth over three quarters, particularly in cyclicals where earnings spikes can result from cost-cutting rather than organic growth.

High Beta and Liquidity for Dynamic Movement

• High Beta: Stocks with high beta move more aggressively than the market, which is ideal for active traders seeking stocks that can “rip.” These names have volatility, allowing for greater potential gains in a shorter period.
• Uniform Liquidity: Liquid stocks are easier to trade in and out of without experiencing drastic price swings. The best Top Dogs move smoothly and predictably, reducing the risk of slippage and unpredictable spikes or drops.
  • Example: Tesla is a high-beta stock that offers plenty of liquidity, which supports large trades without significant market disruption.

Higher Price Points: Why They Matter

• Advantages of Higher-Priced Stocks: Higher-priced stocks ($50–$100+) often represent established companies with substantial institutional support. They also allow for tighter stops, reducing potential losses while retaining strong growth potential.
  • Example: A high-priced stock like Google allows traders to control risk with a small percentage stop while still offering robust growth.
• Avoiding Penny Stocks: While penny stocks can yield large returns, they are often less stable, with low institutional backing and higher risk. Top Dogs typically have the advantage of larger institutional sponsorship and more predictable movement.