Ross’s 5 minute summary:
There are 9 mechanical screens to help you perform the CANSLIM method.
C = Current Quarter Earnings [3 screens in this section]
Up 18-20% over the same quarter 1 year ago (and positive earnings this quarter) excluding special one time events.
Look for increasing RATE of growth in quarterly EPS (consider selling stock if has slowing growth rate for 2 quarters in a row).
Same quarter sales growth greater than 25% (or at least accelerating over the last 3 quarters)
Earnings growth rate from quarter 1 year ago compared to latest quarter should be higher than similar quarter 1 year earlier.
A = Annual Earnings Increases [2 screens in this section]
Annual EPS must increase in each of last 3 years
Recommend annual growth rate of 25% over last 3 years. Consensus earnings estimate for next year should be higher tan actual earnings of current year.
ROE of 17% or better preferred.
N = New Products, New Management, New Highs [1 screen in this section]
Stock should be within 10% of 52 week high price.
Stock making new highs on big volume worth looking at.
A stock making a new high after undergoing a period of price correction and consolidation is especially good / interesting.
S = Supply and Demand
Stocks with large percentage of ownership by top management are good.
Stock buy back plans are good.
Look for companies with a lower debt-to-equity ratio or companies lowering the debt to equity ration over the last few years.
L = Leader or Laggard [1 screen in this section]
Buy among the best 2 or 3 stocks in a group.
Relative Strength of 80% or better. I.e. the price performance for a given time and their percentage ranking among all stocks.
Buy among best 10-15 groups out of nearly 200.
I = Institutional Sponsorship [2 screens in this section]
Numbers of shares purchased should be greater than or equal to the number of share sold by institutions over the last quarter
Recommend that least 10 sponsors, and prefer that the best ones be increasing their ownership.
M = Market Direction
Do NOT fight the trend. Determine if you are in a BULL or a BEAR market.
Understand the general market averages every day.
Try to be 25% in cash when market peaks and begins major reversal.
Heavy volume without significant price movement MAY signal a top.
Follow market leaders for clues on strength.
Divergence of key averages/indexes point to weaker/narrow market movement.
9 Mechanical Screens are:
(1) EPS growth last quarter vs. year ago.
(2) EPS growth prior quarter vs. year ago.
(3) Sales growth last quarter vs. year ago.
(4) Annual EPS growth rate – 3 years
(5) Long term EPS growth estimate
(6) Price as percentage of 52 week high.
(7) 52 week relative strength percentile.
(8) Institutional share holders – number of.
(9) NET institutional share purchased.
Final caveat – do NOT buy breakouts in a BEAR market.
You can buy William O’Neil’s Canslim methodology from Amazon at the following link:
Ross’s 5 minute summary:
STEP ONE: Market Direction
3 out of 4 stocks follow the trend of the market.
The market leads the economy (not the other way around).
Note price action AND also volume.
If price is rising and volume is rising day to day and week to week market is Accumulating.
When selling overtakes buying it is called Distribution.
First day of Distribution is when indexes (S&P 500, NASDAQ comp, DJIA) close down from day before but on volume that is higher.
3-5 days of Distribution over 2-4 weeks is enough to turn market from UP to DOWN trend.
Another measure is if market stalls on big volume.
Another measure is individual (market leaders) stocks – when they top market is topping too.
A RALLY is confirmed by the 4th day’s action of increased volume and closing up in price (in 7 trading days).
STEP TWO: 3 to 1 Profit/Loss Plan
Sell when stock reaches 20-25% gain.
Sell when stock falls 7-8% from purchase price.
STEP THREE: The Best Stocks at The Best Time
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Earnings Per Share (EPS) up 25% or more in last quarter over 1 year ago.
Earnings growth should be accelerating in recent quarters. A steadily growing company that suddenly starts doing significantly better. This acceleration should have started 6-8 quarters ago (at most).
Annual earnings should be increasing by at least 25% for the last 3 years.
Sales should be up 25% or more in one or more recent quarters or at least accelerating in their percentage change for last 3 quarters. Must have BOTH strong sales and improving earnings.
After tax profit margin in most recent quarter should be a new high (or close) and among the very best in the industry. Outside of retail, margin should be 18% or better.
Return On Equity (ROE) should be 15% or more. The higher the better.
Growth companies (and Technology companies in particular) should show cash flow 20% higher than annual EPS.
In BULL markets, EPS and Relative Strength should be 90 points or higher (ranked in O’Neil’s website www.investors.com).
Stock’s industry group should be in top 20 industry groups (out of 197 groups).
The stock should have institutional sponsors and the number of sponsors should be increasing quarter by quarter for several quarters. The best performing funds should have made recent purchases.
Stock buyback 5-10% if possible or at least lots of management ownership.
Understand the story of the company.
Pick the number 1 company in its industry. Number 1 in EPS growth, ROE, margin, sales growth and relative price performance.
Chart Patterns:
(a) “cup and handle”
Stock moves down 5-7 weeks (left side of cup) round out at bottom for few weeks move up on right side to within 10-15% of old high. Plot then moves sideways drifting into handle. Trade volume in lower part of handle and for a week or two at bottom of cup dries up to very low levels (this means not much selling).
Buy in a BULL market after the handle – stock has moved back up to within 10-15% of old high.
Strongest patterns occur when prior up trend was 30% or more on large volume over many weeks.
Correction throughout pattern is typically 25-40%. Pattern should not correct more than 2.5 times the correction in the overall market.
(b) “saucer”
Similar to cup and handle but shallower in depth of correction – at least 6-8 weeks. Often with a handle. Handle pullback is no more than 8-12% (20-30% in a BEAR market).
(c) “double bottom”
Chart looks like a W with second leg down being lower.
Buy when break above middle peak and when volume is 50% above average (use 3 month moving average on a weekly chart) lower volume breakout will not be successful.
(d) “flat base”
Sideways chart, not correcting too much (10-15%).
2nd stage base after stocks initial advance of 20-25% (and retained this advance).
Usually occurs over 5-6 weeks.
(e) “ascending base”
Occurs after stock has broken out to cup or double bottom. Generally 9-16 weeks duration with 3 10-20% pull backs.
Each pullback low ends at slightly higher level, each rally goes a little bit into new highs.
Short term general markets sell offs are usually the cause of the pull backs.
STEP FOUR: When to Sell
Sell after 20-25% gain or 7-8% loss
Take MANY profits
However if fundamentally sound and in a strong BULL market and stock is up 20% in 1, 2 or 3 weeks THEN hold for 8 weeks from its initial buy point. Then review.
Chart Patterns:
(a) “climax top”
A stock that has risen for many weeks suddenly takes off. Has a much larger weekly price spread than in previous weeks. Day to day price will run up 7 or 8 out of 10 days and one of those days will be the biggest 1 day gain.
(b) “exhaustion gap”
A stock that is moving up suddenly (after 8 weeks) gaps up. The real top is only days away….
(c) “trend lines”
Draw a line along 3 major lows and anther along 3 major highs.
Start line after it comes out of first base.
Lines should cover months not just weeks so that you identify a major trend.
SELL when stock breaks through upper trend line (even intra-day) immediately.
A good indicator is Relative Strength (RS). When a stock breaks out of a buy point near or into new high ground the RS line should also break new high ground. If the RS line breaks before the price does then even better. If the RS line breaks long after or doesn’t break this is a bad sign signaling weakness. SELL.
STEP FIVE: Portfolio Management
Diversify in time not in number of stocks. I.e. buy some stock then add to position when it has moved up 2-3%. Make sure you commit fewer dollars to the second purchase so you don’t run up your average cost too fast.
Do NOT make second purchase if stock is up more than 5% and ONLY in BULL markets, never in BEAR markets.
Always follow up what is working and cut what is not.
Short sell when stock drops below 10 week MA line on large volume. Take your profit after 20-30%
Short after the 3rd or 4th rally of 10-20% starts to fail and stock falls below 10 week MA line on big volume.
Stock should always be 4-5 points above a previous low before shorting, otherwise you’ve missed the move and the short will be too expensive.
Sector concentration should typically be 25-30% per sector. Once you gain LOTS of experience this can rise to 50%
Generally you can add to a market leader after it is out of its base on its first two price pull backs to its 10 week MA line.
You can purchase William O’Neil’s book yourself at the following link:
Ross’s 5 minute summary:
For Phil Town Rule #1 is “Never Lose Money” which is great if you can follow it. He suggests the following for investing. Consider the 4 Ms. Meaning, Moat, Management and Margin of Safety.
Meaning: Understand the business
Be willing to own for 10 years not just 10 minutes.
Make a list of your passions, your talents, where you spend / earn money.
Where that list all intersects is where you should be investing.
Moat: A predictable business is good. What protection does the business have?
1) Brand – pay more because you trust it. I.e. Harley Davidson
2) Secret – patents. I.e. Intel
3) Toll – exclusive control of the market. I.e. Utilities
4) Switching – to switch is too much trouble. I.e. H&R Block/Microsoft
5) Price – cheapest producer. I.e. WalMart
The more moats a company has the better, the more sustainable. The ‘big 5’ numbers will help you figure these out as well.
Management: Think like an owner and driven, truthful and with a vision of where they want the company to go. Look at CEO ownership.
Margin of Safety: Buy $1 of value for 50 cents.
Big 5 Numbers are, in order of importance:
(1) Return on Investment Capital >= 10% per year for 10 years in a row.
(2) Equity (book value) growth rate >= 10% per year for 10 years in a row.
(3) Earnings per share growth rate >= 10% per year for 10 years in a row.
(4) Sales (revenue) growth rate >= 10% per year for 10 years in a row.
(5) Free cash flow growth rate >= 10% per year for 10 years in a row.
Compare 10 years ago, 5 years ago and last years numbers to make sure that business is not slowing down.
We want it OBVIOUS that all looks well. If you are not sure do NOT invest. Move on.
Balance Sheet is where to find info on Equity and Debt.
Income Statement is where to find info on Sales and EPS
Cash Flow Statement is where to find info on Cash and Dividends.
Debt: Zero is best. However if company can pay it all off in the money it saves in one year then OK to invest.
Maximum debt load is 3 years savings
Should be looking at total long term debt and also current free cash flow.
Next Phil says you need to calculate the ‘sticker price’ of the company. I.e. what the company should be worth. To do this you need 4 numbers:
(A) Current EPS.
(B) Estimated future EPS growth rate.
(C) Estimated future PE ratio.
(D) Minimum rate of return (which Phil suggests is 15% – this is the required return on your investment).
Step One: Grow the current EPS at the estimated EPS growth rate to obtain future EPS.
Step Two: Multiply future EPS by future PE to obtain Future Market Price.
Step Three: Shrink Future Market Price by minimum acceptable rate of return = 15% (you can do this by dividing by 4 he says).
You can get these numbers from MSN Money or Yahoo Finance for free (on US companies at least)
Future EPS growth rate can be calculated from historical Equity Growth Rate. ALSO check analysts’ professional earnings estimate – and use the lower number.
Future PE – rule of thumb is double the growth rate. ALSO use historical PE from MSN Money ‘Key Ratios’, ‘Price Ratio’ average the 5 year high / 5 year low. Use the lower number (i.e. the double or the historical PE)
This gives you the ‘sticker price’
***NEVER PAY STICKER PRICE***
Margin of Safety is never pay for more than 50% of the sticker price.
When to sell:
1) When business is no longer wonderful (see big 5 numbers).
2) When price is above sticker price.
You can buy the same company again when at least 20% below sticker price or if you spot another business with a better Margin of Safety.
Check the TOOLS for entry/exit points. The tools show you what the institutions are doing and allow you to get ahead of them.
Tool 1: MACD set at 8-17-9
Tool 2: Stochastic set at 15-5
When it crosses up through 20th percentile it is a positive signal.
When it crosses down through the 80th percentile it is a negative signal.
Tool 3: Moving Average set at 10 days.
When price crosses above 10 day MA buy. When price crosses below 10 day MA sell
IMPORTANT: Pull the trigger on your trade when all 3 tools say the same thing (either buy or sell).
Phil Town’s last tidbit: Look at Insider Trading.
If many executives are unloading 30% or more of their personal holdings this is a bad sign indicating that the insiders don’t have much faith in their company.
You can buy Rule #1 for yourself from Amazon at:
Personally I found that it was very difficult to find a company that would satisfy the requirements of the ‘big 5′ numbers. Of course I was looking during a very down period in the market overall (summer 2009) and consequently I got discouraged and stopped looking for ‘wonderful’ stocks. However the book is very positive and makes you believe that anyone can do it like Phil Town does. He has a very inspirational story of his personal success, going from next to nothing as a river guide living out of a tent to becoming a millionaire. Also clues you into all the really excellent resources that are available on the net for free. I still look at Yahoo Finance every day.