Author: DAVID SAITO-CHUNG
Source
So, you want to find great stocks? You might spend a lot of time scoping out what a company did in the latest quarter. And yes, that’s key.
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In fact, IBD initiates its CAN SLIM investing method of savvy investing in growth stocks by first examining current quarterly growth in earnings per share and sales. That’s the C in CAN SLIM.
But if you want to learn how to invest in the best merchandise on Wall Street, consider looking at a company through the lens of a longer-term perspective. Big annual gains in both profits and sales? Equally as important as the latest quarter or two.
We call this the A in CAN SLIM, and it’s the subject of the second part in an Investor’s Corner series on CAN SLIM.
A year-over-year increase of 25% or more in annual earnings per share, sustained over three to five years, suggests you’ve found a truly unusual company. It might have the right combination of a great new product or service, extraordinary management, and a durable business model that thrives even in economic downturns.
Also, favor gains in sales — think 20% to 25% or higher — for most companies. Longevity tends to pay off.
Top money managers like to hold big winners a long time. Gerry Frigon prefers to hold names at least five to 10 years. “I fully expect to hold them through macroeconomic cycles,” Frigon, a 21-year veteran at Merrill Lynch and head of the $400 million Taylor Frigon Capital Management, told IBD.
“Keep in mind that an annual growth record doesn’t necessarily make a company a solid growth stock,” William O’Neil, founder of Investor’s Business Daily, wrote in the fourth edition of his bestselling “How to Make Money in Stocks.” “In fact, some so-called growth stocks report substantially slower growth than they did in earlier market periods. Many growth leaders in one cycle do not repeat in the next cycle.”
How To Screen For Great Stocks
The accompanying table from June 2021 illustrates O’Neil’s point.
Using MarketSmith, IBD screened for companies meeting these criteria: average growth of earnings per share of at least 25% in the past four quarters; a minimum 40% EPS jump in the latest fiscal year; five-year compound profit growth of 25% or more; earnings of at least $5 per share in the latest fiscal year; and a Wall Street estimate of 30% EPS growth in the current year or higher.
Out of a pool of 8,718 stocks, this screen winnowed the database to 14 names.
Many of the stocks making the screen showed poor relative strength. Their charts showed resting action, not leadership for the time being.
This article was originally published June 18, 2021 and has been updated. Please follow Chung on Twitter: @saitochung and @IBD_DChung
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