For couple of years in investing and making money in the stock market, I’ve been hearing several golden questions that hasn’t been changed. Questions like; ” What are the best stocks to buy today” or ” Is it the right time to buy this particular stock?” Different people but similar things in mind. Unconsciously, they just want to know if any secret formula on picking a winning stock still exist. It is the same reason on why you are reading this article today. After finishing this blog, you will surely have an idea how to do it on your own.
William J. O’neil, the author of the best-selling book “How to make money in stocks”, crafted a very effective strategy which is called “CANSLIM”. The acronym might sounds like a boring government agency but I’m very confident to share this to you because I was able to apply it myself even in my earlier years in investing. I can guarantee that it is simple, smart, and easy.
CANSLIM stands for current earnings, annual earnings, new things, supply and demand, leader, institutional ownership, and market direction. What I like best in this strategy is that he was able to prove that Fundamental and Technical Analysis can work together hand in hand. Think of it as a combination of value, growth,fundamental and a touch of technical analysis.
How much money are coming in?
Company’s consistent earnings are the basis that attracts investors and financial institutions to put their money in. Our main goal here as retail investors is to make sure that the quarterly earnings for the year is accelerating. It should be bigger than previous quarter and also bigger than the same quarter the previous year.
For example, comparing the earnings report of January-March (First Quarter) of 2016 to January-March (First Quarter) of 2017. A negative earning is a bad indicator and a sign that they are not making money on their business that specific quarter. As much as possible the company has to move-up 17-20% earnings as a rule of the thumb. However, some stocks can give surprising profit as high as 50% which is really astounding.
In the Philippines, SM Prime Holdings (SMPH) is considered one of the best stocks that is performing very well in terms of providing surprising net income. It has consistently increased per year from 16.2 Billion in 2012- 23.8 Billion in 2016 and reported 149% increase since January this year.
For the last 9 months in 2017, The strong growth in earnings has driven the stock by 26.9% from its closing price of 28.35 pesos/share. You can track the quarterly reports of these stocks in the Philippine Stocks Exchange website or their app PSE edge.
A- nnual Earnings
How consistent it is in providing good profit?
Annual earning is also something to really watch for. The company should show that it is moving-up for the last 5 years or accelerating. A company that has demonstrated strong earnings annually is a sign of a good business and can give you a solid choice for a winning stock.
In a nutshell, it has to move-up at least 25%-50% from its annual’s income growth for the past five years. These figures show meaningful progress.
Megaworld Corporation (MEG) the largest Business Process Outsourcing offices and township developer in the country. Their developer team were the people behind Eastwood in Quezon City, New Port City in Pasay ,and Mckinley Hill in Fort Bonifacio. Megaworld shares for the past 5 years have increased by 129% from 2.45 Billion in 2012 to 5.60 in 2017, generating a compound annual return of 18%.
A good company should always have something new for it to be able to attract investors. It is often exciting to know a company that has recently undergone a change which plays a vital role to its success.
It could me new management team, a new product, a new market, or when a stock price hits a new all time high record. Positive changes, business news, and insider news that are happening to companies will be taken by the investors as good news to hold the stocks for long.
A stock that breaks a 52-weeks high (equal to one year) can be a great catalyst that the stock will be even get more appealing to the public. You will always be updated when you check PSE disclosures through their website. To view it, you can click it here.
S-upply and Demand
Supply and demand governs all market activities. Having said that, it is easier for smaller firms to show excellent gains because they have only smaller outstanding shares. To make it simpler, large companies requires much more demand than smaller company to show similar gains.
As you can observe, most of the blue-chip stocks today are lagging and seems not moving-up that much. According to William O’neil, 95% of the largest gains in share price had less than 25 million outstanding shares when the gains were realized. This should be a small and reasonable number. Investors applying this method are not looking for older companies with a very large capitalization.
Macroasia Corporation (MAC) is the top performing stock in 2017 hitting 774% gain since January. It is a small-cap stock considered as a third liner, but it became a favorite stock for the public when it started to display surprising and consistent return. Now, it seems to never end. People don’t want to stop buying.
There are those stocks that are leading in terms of gains and there are also stocks that are mediocre or lagging behind. Choose top 5 stocks of its industry that are taking the lead and that have provided great gains. In addition, buy stocks that are also able to bounce back from its previous short-term corrections.
This display a good momentum and consistent strength. The idea is to separate the contenders to winners. Buy market leaders, avoid laggards. According to O’neil; “Forget cheap stocks; they are that way for a reason”.
Basically, a company needs to have an institutional sponsors to pass this certain criteria. Big institutions are often identified as market-movers like foreign institutions, mutual funds, hedge funds, insurance companies, other financial entities and the likes. The idea is that, the stock worth investing needs to have at least three-ten institutional ownership.
Buy stocks with at least a few institutional sponsors who have better-than-average recent performance record. The company itself should have the majority of the shares. A company that has a large portion owned by institutions is not a good thing because when it is too much owned by these entities, any bad news could spark a heavy a sell-off and would badly affect the stock price. Recently, some small-cap stocks and their investors have suffered heavy losses when the stock price went down drastically due to institutions pulling out their hot money.
The market determines whether you win or you lose, so learn how to discern the market’s overall market’s direction and interpret the general market’s index like price and volume changes and action of the individual market leaders.
Finally, buy stocks that are bullish and having momentum or recently recovered from downtrend and about to go up. I personally avoid stocks that are downtrend and ranging.
You can use Directional Movement Index (DMI) to determine if the stock is on strong uptrend or even the use of Moving Average would give you an idea on where the stock is standing.
Do you want to learn more after reading this blog? You can also read this article THE POWER OF PARABOLIC PLAY: TRADING THE MOMENTUM.
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