More books for growth investors Part 1 | stockbee


More books for growth investors Part 1

In my previous post I talked about two books on growth investing for those interested in becoming growth investor. While those two books provide you with template for trading growth stocks, there are many more books on growth investing. If you are serious about making money, you can go through these books as they offer other ways of trading growth stocks.

Frank Cappiello's New Guide to Finding the Next Superstock

There are stocks and then there are super stocks, there is a stock market and there is a super stock market. And they barely know each other. That is the central premise of Frank Cappiello's book on growth investing. Super stock according to him is a stock of small growing company which will beat the market significantly. His book was published before O'Neil book. It also gives a approach to trading growth stocks.
All the things he finds about growth stock are more or less same as what the CANSLIM approach emphasizes in stock selection. He found 9 characteristics common to super stocks.

  1. Small to medium size
  2. Rising unit sales volume
  3. Rising pretax profit margins
  4. Above average and improving return of shareholders' equity
  5. Strong earnings per share growth relative to other stocks
  6. A low payout ratio with rising dividends
  7. Low debt ratio
  8. Low institutional holdings
  9. Increasing price earnings multiple

The Little Book That Makes You Rich- A proven market beating formula for growth investing

Louis Navellier in his book gives a formula for beating the market using growth investing. There are many flavors of growth investing and this book presents one of the approach to selecting growth stocks for investing purpose.

At the heart of the Navellier system are eight variables he has found useful in selecting growth stocks. They are:

1. Earnings revisions
2. Earnings surprises
3. Sales Growth
4. Profit Margin Expansion
5. Free cash flow
6. Earnings Growth
7. Earnings Momentum
8. ROE

These factors are very similar to CANSLIM factors. Obviously he has added more nuances to it, but at the end it is similar to IBD approach. The book leaves many details out and so you will have to rely on the accompanying website to replicate exactly the authors ranking.

Finding the Next Starbucks- How to identify and invest in the hot stocks of tomorrow

This is another recent book on growth investing about which I wrote many months ago.

Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow by Michael Moe, is a new book on investing in growth stocks. This weekend over few Starbucks lattes I finished reading this book. CANSLIM strategy retold is one line summary of this book.

The author describes in detail his firms methodology to identify and invest in stars of tomorrow- the fastest growing, most innovative companies in the world. The idea like in any growth investing is to find small, unknown companies , with lots of growth potential ahead of them. If you find and invest in such company early, you benefit when the company is discovered and the opportunity becomes widely recognised. The author gives examples of companies like Starbucks, Apollo Group, Dell, and so on to illustrate his point.

The central premise of the author based on his analysis of past data is that in the short run variety of factors influence stock price- geopolitical events, funds flow, interest rates and so on. But in the long run only one thing influences stock price- Earnings Growth. In the long run, a company's price will be 100% correlated with its earning growth. Earning growth drives stock price. That is the central message of the book.

One of the pitfalls of growth investing is for every Starbucks, you have 10 or even 1000 duds which do not live up to expectations. The author offers an elaborate methodology to try and identify such stocks. That is where the book varies a bit from the CANSLIM method popularised by William O'Neil. This is where the book also loses its focus and makes the CANSLIM method needlessly complicated.

Many of the items on the laundry list of checklist to find tomorrow's winners is nice sounding rhetorical word plays:
1 Be right on fundamentals
2 Be proactive, not reactive
3 Be rigorous , but do not have rigor mortis
4 When wrong, admit it
5 The cockroach theory
6 Investment ideas are about information and insight
7 4 P (people, product, potential and predictability)
8 Use 5 independent sources for each stock you invest in
9 Find 3 main reason for a stock to move up or down
10 Be passionate about investing, but dispassionate about the investment

Many of these things sound nice but are not really actionable. To further complicate the effort, the author proposes a framework for identifying megatrends. Hind sight is a very wonderful thing all the megatrends identified by the author suffer from this bias. Plus the question to be asked is , is it at all necessary. If earnings drive price then that is what you should track. A large part of the book is devoted to these megatrends..

All in all the book basically is a variation of the CANSLIM style investing concept. It tries to improve on it and in the process makes it more complicated. The book would have benefited a lot from good editing to make it crisper.

The author has a website where he offers free newsletter and research on growth investing.

Monster Stocks- How they set up, run up, top and make you money

It is basically another take on growth investing. Much of the book is rehash of CANSLIM method. However I still recommend it for growth investor as the lessons from this book will come in handy once this bear market gets over. The real monster moves happen after a bear market. After the 2000-2002 bear maret when market started rallying after start of Iraq war, there were over 500 stocks up 200% plus in less than a year. If you go back and look at the stocks from that period you would see several straight vertical moves with very few corrections on individual stocks. A period like that can be incredibly profitable for DT, IBD 200 and EP methods.

Here is a gist of the book.

  • A monster stock is basically a stock that doubles in price in 4 to 18 months. Many of them will go up 3, 4 ,5 or 10 times plus in short time periods.
  • If you want monster returns, you should know how to identify and handle the next monster stock.
  • Book covers some monster stocks that appeared in last 10 years (1997-2007)
  • Monster stocks are growth companies, most trade on Nasdaq, have new and innovative products and above average earnings and sales growth . When they catch the attention of big money investors, the huge demand from these players leads to them making monster moves in short time frames.
  • Each major up move in overall market leads to emergence of such monster stocks.
  • Eventually all such stocks top and often the top in such stocks coincides with new downturn in overall market.

    Recognize a monster stock at right time, sit with it for right amount of time and then sell it at correct time. That in short is the way to monster returns.
    "It only takes a few monster stock, if you handle them correctly, to improve your life financially" Jim Roppel.

No comments: