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Stock Market Screening
Wouldn't it be great if we had a magic crystal ball that would tell us just what was going to happen to the price of a stock over the next two years so that we did not have to conduct any stock market screening. Well we don't have a crystal ball that will predict the future all though we do have the opposite, the past "HISTORY". Due to the powers of the internet you and I have the ability to obtain effective stock market research position by conducting positive stock market screening. With the correct stock market screening you can download, for free, years of financial data on any company that is traded publicly. Although this is the opposite of the future if approached correctly utilizing the principles of investment strategies and stock market screening this can be used to our advantage to help establish an effective stock market research position.
The term "Lift-Off Stock" is a term that I use to describe a stock that is ready to take off in price and continue to do so over the next year or two. What is ironic about the term is the fact that while lift-off stocks do exist how do we conduct stock market screening to identify them at the beginning of their price increase? Well I bet I know what you are thinking. Now that you have this huge power of access to financial company data you can down load all the historical financial data for hundreds of companies that are all traded publicly. Then you would use the theories of stock portfolio management to identify all the companies that have had lift-off to the price of their stock. Once you have completed this you would find what they all had in common with their financial data just before and prior to lift-off. I bet you are now thinking "FANTASTIC" well make sure that you call me as soon as you finish compiling all your data. You see the problem with this plan is the amount of time, man-power, money and resources you or I would need to accomplish this is simply way beyond my means.
There is an individual though who I assume had the same idea, Investors Business Daily publisher "William J. O'Neil". And there is one huge difference between Mr. O'Neil and myself, and that is that he did have the time, man-power, money and resources at his disposal to accomplish this because that is exactly what he did. Mr. O'Neil & Co. had been analyzing stock since the 1950s with the use of computers. Due to this he had compiled a huge amount of fundament and financial data on thousands of stocks. Mr. O'Neil took the data of these stocks from the years 1953 through 1993 and identified 500 stocks that had the highest gains during this 40 year period. He then analyzed the data to identify what all these stocks had in common before they started, what I previously defined as "Lift-Off".
Now I will get back to Mr. O'Neil's findings later in this article but first I what to point out the importance the principles of investment strategies carry with regards to stock portfolio management. When we purchase stock we are purchasing a percentage of ownership in that entity. Just as a mortgage company will check our credit before lending us the money for that purchase, we should also check the credit of a company that is a candidate for future investment prior to investing. And just as a credit company has set up guidelines that determine whether or not they will lend you money so should you set up guidelines that any entity must meet before you will invest in them. If you do this with a quality amount of research and thought based on your personal financial situation you will greatly improve your return while reducing your risk for that ultimate goal of optimum return vs. risk formulation. Now there are several very good stock portfolio management strategies that have been developed and you should by all means know them fundamentally, Mr. O'Neil has developed one of them that we are going to cover. What you must do is identify which principles of investment strategies will best fit your personal financial goals and status with as little tweaking as possible. It is ok to adjust our chosen stock portfolio management strategy to fit our personal situation as long as we monitor them and make adjustments for those tweaks that are not effective. This process of adjustments is covered in my Successful Online Portfolio Management e-course in which the simple process of setting up and analyzing your investments with Excel spreadsheets is explained.
Now back to Mr. O'Neil and his findings. O'Neil identified seven characteristics that were all found in the top stock performers and then combined them all into a strategy he call "CANSLIM". He first introduced CANSLIM in his best-selling book, "How to Make Money in Stocks", I believe now to be in its 3rd edition. The foundation of CANSLIM is based on a momentum investment strategy. A momentum strategy is one that consists of fast earnings growth with a strong price chart. But O'Neil also included several requirements that are not associated with a momentum strategy. The seven financial requirements for the CANSLIM investment screening strategy are as follows:
C - (Current Quarterly Earnings) Current quarterly earnings compared to the same quarter of the previous year must have a growth of 18% or more.
A - (Annual Earnings Growth) A stock must have an annual earnings growth of 25% or more over the previous year.
N - (New High Price/Share) The stock selling price must be at or close to a new share price high.
S - (Supply VS. Demand) Shares of stock outstanding must be no more than 25 million.
L - (Leader in Industry) 12 - Month Relative Strength must be 80 or higher.
I - (Institutional Ownership) Institutional Ownership is the percentage of shares of stock outstanding owned by institutions i.e. mutual funds, pension plans, insurance companies, etc. O'Neil wanted percentage of shares outstanding held by institutions to be low, although he does not give a parameter for this I would suggest anywhere from 5% to 35%.
M - (Market Direction) O'Neil advises against using the CANSLIM strategy in a weak market because momentum stocks go down when the market drops. There are several theories on what determines a weak market for momentum stocks and you should come to your own conclusion. One that I particularly like is using the Russell 2000 Index 200 day average as a benchmark. If the Russell 2000 is trading below its 200 day average then it is considered a weak market if above it is a strong market.
This is a stock portfolio management screening strategy that I like, with a few alteration, to use when looking for lift-off stocks. If you would like to know more about the CANSLIM principles of investment strategies read the book "How to Make Money in Stocks" by William J. O'Neil in which these strategies are covered in much more detail. One thing that I would like to point out is this, while the CANSLIM strategy is a very legitimate strategy worth your time to look at, there are several other very legitimate strategies also and you should develop a basic understanding of them as well to ensure that you develop a strategy that is based on your personal financial situation. Remember we should have a portfolio of diversification which not only includes different entities classifications but also different risk structures based on what our individual goals are and how our personal financial structure is composed.
Scott G. Henderson and Strategic Resolutions, LLC do not have nor have had any affiliation with Investors Business Daily and the CANSLIM organization and does not represent any entity associated with them. The contents of this article are entirely the opinions of Scott G. Henderson and he has received no compensation from these entities or any entity associated with them.
About the Author: Scott G. Henderson, BSEE/MBA, has written many articles about the subject of financial portfolio management. He holds a Bachelor of Science degree in Electroninc Engineering and a Masters degree in Business Administration. After years of personal experience, education and research he spent over 18 months writing and developing the educational curriculum Successful Online Portfolio Management. You can visit his web site at http://www.OnlineInvestmentGuide.com