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Home > Finance > Stock Market > Stock Market Screening
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Stock Market Screening
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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.
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