Review of the Level 1 Material
Buy Low, Sell High vs Buy high and sell higher
· At or near the 52-week high
· Leading stocks in leading groups
· Proper base structures
· During a confirmed market uptrend
· Average price of a leader before its run? $32
Buy on the Dips vs Always buy on the way up and never buy on the way down
· Average decline of a leader is 72%
· Only 1 out of 8 leaders will return to lead in the bull market cycle
Buy & Hold vs Hold a leader for the run, then sell
· A leader’s run lasts 12-15 months
Buy stocks with low P/Es vs Never use P/Es for buying
· P/E is an end result, not a predictor
Fundamentals vs Charting
Charts reveal
· Institutional demand
· Overall health of your stock
· Best time to buy & sell
Types of Base Patterns
1. Cup-with-Handle
2. Double Bottom
3. Flat Base
4. Saucer-with-Handle
5. Base-on-Base
6. Ascending Base
7. High Tight Flag
CANSLIM
C = Current Quarterly Earnings
- Recent earnings growth of at least 25%
- Would like acceleration over the past 3 quarters
A = Annual Earnings Growth of at least 25% over the past 3-5 years
- Sales: Minimum 25%
- Margins: Best in the industry
- Return on Equity (ROE): 17%
N = New
- New Products or Services
- New Price Highs
- New Condition in the industry
- New Management
- New or Newer companies
- 75% of leaders had an IPO within 8 years of their biggest move
S = Supply and Demand
- Shares outstanding + big-volume demand
- Smaller number of shares outstanding will move faster than a large number of shares outstanding
L = Leader vs Laggard
- Buy leading stocks
- EPS, sales, price performance, whatever
- Leading industry group
I = Institutional Sponsorship
- Look for 2-3 quarters of rising sponsorship
- At least 10 funds
- Stocks on the Move
M = Market
- Buy during a confirmed market rally
- All bets are off when the market is in a downtrend
- 3 of 4 stocks follow the general market trend
Using the newspaper – Investors Business Daily
EPS Rating
· Measures a company’s earnings over the past 3-5 years
· Good for researching the “C” and “A” in CANSLIM
Relative Price Strength
· Measures stock’s price performance over latest 12 months compared to all stocks
· Good for researching the “L” in CANSLIM
Industry Group Relative Strength
· Compares 6-month price performance of industry performance to other industry groups
· Rated on an A+ to E scale
· Good for the “L” in CANSLIM.
SMR
· Sales + Profit Margins + Return on Equity
· Sales growth over the last 3 quarters
· Pre-tax and after-tax margins
· Uses A to E scales
· Good for researching the “C” and “A” in CANSLIM
Acc/Dis
· Tracks relative degree of institutional buying/selling in stock over last 13 weeks
· Rated on A to E scale
· Good for researching the “S” and “I” in CANSLIM
SmartSelect Composite
· Combines all SmartSelect ratings into one rating
Vol % Change
· Measures how much a stock traded on a given day vs its 50 DMA
· Good for tracking institutional demand and for the “S” in CANSLIM
The Big Picture
· Read for the “M” in CANSLIM
Info Sources
· IBD Stock Checkup
· IBD Archives
Places to go in IBD
· IBD 100
· IBD Big Cap 20
· Your weekly review
· CANSLIM Select List
· The New America
· Stocks on the Move
· The Big Picture
· Mutual Funds Top Buys
· Top Earnings
· Follow the Leader
· Screen of the Day
· IBD extra! Newsletter
· Media Center
· IBD Forums
· IBD Time Saver Table
85/85 Index
· Price above $15
· Stock price within 15% of its 52-week high
· EPS and relative strength rating of 85 or greater
· Average daily trading volume of 10,000 shares or more
Cup-with-Handle
· Prior run-up of at least 30%
· Correction of 20%-30%
· Handle forms in upper-half of pattern
· Volume dries up in handle
· 7 weeks minimum length from peak at start to breakout
· 65 weeks maximum length
7 point Base Checklist
· Prior Uptrend
· Type of Base
· Length of Base
· Essential characteristics of base
· Volume dry-up/shakeout
· Identify buy point
· Breakout (50%> Volume surge at buy point) – do not buy 5% above the breakout point
Double Bottom
· Prior run-up of at least 30%
· Second leg down undercuts first leg
· Volume and volatility may be high in 2nd bottom
· 7 weeks minimum length from peak at start to breakout
Flat base
· Prior run-up of at least 30%
· Corrects less than 15% throughout base
· 5 weeks minimum
Reasons for Selling
· Protect Capital
o Cut losses at 8% from purchase price
· Lock in Profits
o Sell on weakness; institutional selling, break below key support, gap down
o Sell on strength; take profits when stock has risen 20%-25% from buy point (except: if stock rallies 20% or more in first 3 weeks – if so hold 8 weeks.)
· Distribution in the General Market
o Change in market direction
o Distribution days in key indexes
o Market cycle
Common Mistakes
· Miss breakout
· Excessive 8% losses or big losses
· Sell too soon
Suggestions
· Always trade in sync with the market
· Never buy on rumors or tips
· Evaluate your portfolio
· Contain your emotions
· It’s all about education
Doug Roberts Page 4 7/2/2008