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Advertiser partners include American Express, U. Bank, and Barclaycard, among others. With thousands of publicly traded companies to choose from, you may wonder how you can single out a handful of stocks that have the potential for significant capital gains.
What is this approach? How profitable is it and who invented this unique stock trading system? Below, you will find a detailed description of this high-growth investing system that uses both fundamental and technical analysis , and how you can utilize it.
Before getting into the details of the method itself, it is important to learn a little about the founding father and his reputation for success. But is his method really profitable in the long-term? The first is a quasi-fundamental scan of picking high-growth stocks that involves quantitative and qualitative criteria; some aspects of which are tangible, while others are not. Does this all sound pretty complex?
How much profit did the company make this reporting quarter? Now, compare that number to the same quarter last year. Remember to compare the same quarter period but in separate years , since some stocks are cyclical and will have high and low profit periods.
As an example, compare the 4th quarter of with the 4th quarter of Now compare the 3rd quarter of with the 3rd quarter of This means that growth is consistently accelerating, raising the chance of the stock going into runaway mode. The annual earnings should also be growing aggressively between years.
Compare the full year of earnings per share to the full year of If the growth rate is actually accelerating between years, this is even better.
Here are the primary examples to watch out for:. One of the most basic concepts in economics is supply and demand.
When there is more supply than demand, prices drop. If demand exceeds the available inventory, prices rise. You want to see a massive surge in volume as the stock goes upward to show that large forces want shares, and there is not enough supply to go around.
Large volume price advances reveal a shortage of supply with a steady stream of buyers. Small, anemic volume has the opposite effect. While the supply could be experiencing a short-term restriction, thus allowing prices to drift upwards, the lack of volume betrays that demand is also tepid. If more sellers appear, there may not be a group of bulls waiting to soak up the shares. Float size should also be taken into consideration. A small float size can create a fast-moving — albeit more volatile — stock.
A larger float with too many shares can create a bloated stock that has difficulty moving up. If the share float — or the amount of outstanding shares readily available — is under 25 million, it could help provide additional lift when buying ensues.
This is very similar to the idea of momentum-based trading. How do you know if your stock is a leader or a laggard? Relative Strength not to be confused with the Relative Strength Index rates all stocks according to price performance. A stock with a RS rating of 50 means it traded at the market average.
Thus, your winning stock has high momentum and has higher odds off outperforming over the following year. Institutions buying stocks can provide strong support to share prices. Basically, the Market Direction is in reference to bull and bear markets. You should only buy when a confirmed bull is in play, and you should sell stocks during bear markets.
How can you tell the difference? If too many high volume selling days distribution days occur in a short period of time, this may signal that institutions are selling their positions and a bear market is just around the corner. Conversely, a market bottom can usually be spotted sometime after the third day of a bull rally. On one particular day, the market will surge a couple percent or more with abnormally high volume. This approach has generated abnormally high returns compared to the market on average.
It starts with a U-shaped trading pattern. The stock price goes down, bottoms out, and rises back up. This should be a nice gradual U-shape and not a sharp V-shape where the price spikes down and back up rapidly. After the U-shape trading pattern which resembles the cup , the stock is almost set to make new highs. But before a stock can propel to the moon, it needs to shake out some of the nervous shareholders and weak hands.
This shakeout occurs as the price pulls back slightly into what is called the handle. Volume dries up on this short-lived price pullback. It is at this point that the stock is ripe for you to invest in before regaining its strength and breaks out to new highs. At either a pivot point, or at new highs, you can buy this stock as it goes into breakout mode.
He first has a list of top stocks based on the CAN SLIM approach, then trades them when prices form a reliable bullish pattern as they gear for a potential breakout. You can then increase that amount as you become more familiar with it. Keep in mind, even founder William J. Therefore, the increase of potential reward requires guts of steel, lightning quick reflexes, and much practice.
This is a sophisticated model that can experience some significant volatility. As a result, it is best-suited for an experienced investor. Kurtis Hemmerling is a personal finance enthusiast that has been putting his passion into writing since His goal is to demystify the investment world to benefit the readership of Money Crashers.
The Father of CAN SLIM Before getting into the details of the method itself, it is important to learn a little about the founding father and his reputation for success. Here is a letter by letter breakdown of the acronym. C — Current Quarterly Earnings How much profit did the company make this reporting quarter? A — Annual Earnings The annual earnings should also be growing aggressively between years. Here are the primary examples to watch out for: Perhaps the company is making an exciting new product.
Imagine when holographic TVs finally come out, or if a solar paneled car was approved for mass production by a large auto manufacturer. Even a new product that has the market cornered, such as a new cure for some type of cancer, could be just the product to help a company grow quickly. A bright new set of minds could join a company in the form of new management. Sometimes all it takes is a forward-thinker to turn a profitable business into a rocketing one that turns a company around.
Xerox could have taken the commercial world by storm with their Alto computer system that included the first mouse and graphical user interface. Sometimes you have a new condition or circumstance. Perhaps a new market, such as China, is opened up, or a new law comes into effect promoting green energy.
This change of circumstance could aid certain stocks, like the ones with exposure to China, or the producer of a paint that provides solar power energy. A new price high can also be just the cause necessary to have a giant effect. Counter-intuitively, when a stock reaches a new height, it can be a very good time to buy. As new price highs are achieved, the stock will often make a high volume breakout. Former resistance levels are broken, bulls start buying, and the stock receives high-profile coverage on many stock market analysis and research sites that list 52 week, or new record highs.
S — Supply and Demand One of the most basic concepts in economics is supply and demand. L — Leader or Laggard? I — Institutional Support Institutions buying stocks can provide strong support to share prices. Look for multiple institutions. It is also recommended that the stock have at least 3 to 10 institutions investing in it. Institutions with better ranking funds are preferable to little-known groups with under-performing funds. C — Current Earnings: The last 2 quarters, starting with the most recent, had 42 cents per share diluted and 43 cents per share respectively.
The same quarters one year earlier had earnings of 31 cents and 25 cents. A — Annual Earnings: S — Supply and Demand: Volume for this stock has picked up since signaling high demand. The float, however, is a little high at 30 million shares, but still close to the recommended I — Institutional Support: M — Market Direction: We are not in a bull market as of the writing of this article March Therefore I cannot recommend buying it right now.More...