Finding Superstocks
The hot and hardworking intern at Trading Goddess blog has a nice post about a book which, I have talked about a lot.
The Investor's Business Daily , CANSLIM method is just a restated form of the above book. For individual investors looking to outperform the market, growth stocks offer one of the best opportunities. Trading these stocks is easy. The rewards are many fold.
Inspired by Frank Cappiello's New Guide to Finding the Next Superstock, I decided to summarize some of his insights.
Each year there are stocks that do better than the stock market averages. In many cases spectacularly better. More importantly, there are stocks that year-in and year-out outperform the market as a whole in good as well as bad markets.
Those excellent performers possess the following common characteristics:
1. Small market capitalization (compared to the industry average)
2. Sales, growing much faster then the annual inflation
3. Gradually increasing and accelerating EPS
4. Rising profit margins (higher than the industry average).
5. ROE higher than the industry average and the market average.
6. Relatively low debt ratio
7. Gradually increasing P/E multiple
8. Low, but increasing institutions’ holdings
By being careful and disciplined about the stock’s selection, timing in its purchase will not be a significant factor in the long run. Put the other way, the right stock bought at the right time means fantastic price performance. The right stock bought at the wrong time results in substantial price appreciation over time. However the wrong stock will always be a disaster.
The Investor's Business Daily , CANSLIM method is just a restated form of the above book. For individual investors looking to outperform the market, growth stocks offer one of the best opportunities. Trading these stocks is easy. The rewards are many fold.
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3 comments:
I've read most of this book, I just want to specify that by small they mean 50 to 500 million, however Frank mentions that above 200 million you're more likely to find institutional buyers, while closer to 50, you may not have the institutions buying to catapult the stock...
I think the book was written in the 70s though, and the seperation between rich and poor has grew (more $ for institutions) so I think the 50 to 500 million range can probably be expanded a little to something more, but I'll let you decide on that one.
Can anyone name some stocks that fit all of these?
Right now the closest I've found is SIMO as it's only got 17% institutional ownership, yet it's ownership has increased for I think 10 straight Qs, it's relatively small but just outside the 500M cap range
It's got high sales growth (35%)
It's got high profit margins, high for semiconductor, increasing EPS high ROE for a semiconductor, 0 debt,
Not sure if I'd call it gradually increasing PE, but there Certainly is low but increasing institutional ownership...
As far as Timing goes, although not necessary, it's formed a double bottom and I'm looking for it to break out into a new 52wk high soon, Not sure about the timing for the sector just yet.
I'm looking at a few others so I'll let you know If I find more that fit these qualifications.
TNH is way too big for this at 2.3B but it's worth mentioning as insider ownership is 73% and institutional ownership is at a low 5.8% of shares leaving for 26% of shares that float, and earnings accelerate as well as have the power to make it move, sales is good, and of course Dan Zanger likes it.
The basic concept is still valid. One needs to internalize the concept and adapt and makes ones own system based on it.
CANSLIM is one way to do it. Boucher method is another way to do it. Peter Lynch is another way to do it. Martin Zweig is another way to do it. Richard Love method is very good way to do it.
If you use IBD 200, it picks these kind of stocks anyway. Or one can run GARP screen and do it.Buying earnings breakouts is another way, that way you get in right at start of rally.
The basic concept of buying growth companies early in their growth cycle is one of the best way to make money for individual investors. It is tried, tested and proven way to outperform the market. Plus it is easy, involves no rocket science and you can safely ignore the macro noise. That is of you really want to make money.
Mike,
The 50-500 million Cappielo mentions is revenue, not market cap.
Tim
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