Growth Stocks
Growth stocks are companies that
are experiencing accelerating earnings and sales growth on a quarter to
quarter basis as well as over an extended period of time. Understand that a
company can boost its earnings per share (EPS) results by cutting costs, and
occasionally, by divesting money-losing operations. But such strategies can
go just so far. Over prolonged periods of time, strong rates of EPS growth
start with strong rates of sales growth, which is why its inclusion in the
formula is necessary to spot growth stocks early on in the process.
In order to qualify as a Growth
stock the company needs to have the following characteristics:
·
The companies effective tax rate
is greater than 24%.
·
The EPS (earnings per share)
growth rate for the current quarter is greater than the trailing twelve
month (TTM) EPS growth rate.
·
The TTM sales per share growth
rate (SPS) is greater than the thee-year cumulative average SPS growth rate.
·
The TTM EPS growth rate is
greater than the TTM SPS growth rate.
Momentum Stocks
Momentum stocks are turbo
charged growth stocks. The earnings of these companies are growing at
increasingly higher rates. Momentum stock investing can be very rewarding
but be forewarned that it is also very risky. A bad quarter or negative
earnings warning can see the stock's price plummet very rapidly.
In order to qualify as a
Momentum stock the company needs to have the following characteristics:
·
The companies effective tax rate
is greater than 24%.
·
The EPS (earnings per share)
growth rate for the current quarter is greater than the trailing twelve
month (TTM) EPS growth rate.
·
The TTM sales per share growth
rate (SPS) is greater than the thee-year cumulative average SPS growth rate.
·
The TTM EPS growth rate is
greater than the TTM SPS growth rate.
·
The price/earnings growth rate
(PEG Ratio) is less than 1.
Value Stocks
Value stocks are companies that
are trading at a discount in the market relative to its future earnings
potential. Typically these companies have had a series of problems, which
has caused them to fall out of favor. The trick in selecting these stocks is
to identify those whose problems were temporary, the core fundamentals of
the company remain strong and the negative situation is turning around.
In order to qualify as a Value
stock the company needs to have the following characteristics:
·
Price to earnings ratio (P/E)
ratio well below that of the market.
·
The total assets of the company
exceed $50,000,000
·
The price is less than 4 times
the book value.
·
The current ratio is greater
than 1.
·
The price to cash flow is less
than 12.
·
The percentage of long term debt
is less than 25% of the companies capitalization.
·
The price to trailing twelve
months sales per share is less than 6.
CANSLIM Stocks
Developed by William O'Neil of
Investor's Business Daily, CANSLIM is a method of screening for stocks based
on the folllowing seven characteristics. It should be noted that typically,
only 2% of the database will qualify as buy candidates using these screening
applications. Also, when the Market Edge "Market Posture" is bearish, there
will not be any selections since the M part of the formula requires a
favorable market environment.
In order to qualify as a CANSLIM
stock the company needs to have the following characteristics:
·
C=Current Earnings: Quarterly
earnings per share are up 25% or more.
·
A=Annual Earnings: Five year
average compounded earnings growth rate is greater that 24%.
·
N=New Highs: The stock is within
15% of making a new 52-week high and is breaking out of a period of
consolodation.
·
S=Shares Outstanding: The number
of shares outstanding is less than 50 million shares and there has been a
recent increase in trading volume.
·
L=Leading Stocks: The company is
a market leader reflected by a Relative Strength Value (RSV) of 80 or
higher.A RSV of 80 means that the stock outperformed 80% of all other stocks
in the data base during the past year.
·
I=Institutional Ownership:
Institutional sponsorship should be minimal but there should be at least one
major institution with a sizeable position in the stock.
·
M=Market Conditions: The Market
Edge "Market Posture" should be Bullish.During periods when the posture is
bearish, there will not be any selections.
Short Sale Candidates
Short Sale Candidates are former
Momentum stocks whose earnings have stopped growing at an increasingly
higher rate. Investing in momentum stocks is risky since when the momentum
reverses the stock's price can plummet very rapidly. Momentum stocks are
great on the way up but once they disappoint they can become good short sale
candidates.
In order to qualify as a Short
Sale Candidate the company needs to have the following characteristics:
·
The EPS (earnings per share)
growth rate for the current quarter is less than the trailing twelve month (TTM)
EPS growth rate.
·
The TTM EPS growth rate is less
than the TTM SPS growth rate.
·
The price/earnings growth rate
(PEG Ratio) is greater than 1.
Bottom Fishing
A Bottom Fishing approach is
designed to identify stocks that have been beaten down for whatever reason
and are trading at or close to their 52-week low.This can be a dangerous
strategy since statistics show that the majority of stocks that are making
new 52-week lows continue to make new lows as the company's troubles become
apparent to the street. The ideal situation is to isolate stocks whose
fundamentals are improving, are trading near their lows but have been under
accumulation for a period of time as the smart money crowd establishes
positions in anticipation of a
In order to qualify as a Bottom
Fishing stock the company needs to have the following characteristics:
·
The Close is above 10.
·
The Close is within 20% of its
52-week low.
·
The current ratio is greater
than 1.
