Go to Jeff Salisbury LWGate Home Page.From: "Katherine Malm" <kmalm@earthlink.net>
Subject: [CANSLIM] Re: Mining criteria (was: TOO )
Date: Thu, 16 May 2002 13:00:03 -0500
Previous Article (by Subject): [CANSLIM] Homebuilders and stuff Eric Jaenike
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Hi jans,
I understand your point, but I see that my notes were not clear.
When I say "cash flow positive" I mean that the *actual* cash flow is =
positive. In ENZN's case, they *do* have a positive cash flow. Contrast =
this to AMZN, which can't seem to rub 2 dimes together and are =
consistently cash flow negative. That means that *real* dollars are =
flowing OUT of the company. If I did that long enough in my personal =
life, I'd be broke!
When I say "operating cash flow vs. EPS" I mean the operating cash flow =
(which is the earnings with one time charges, etc. added back in) vs. =
the EPS, should be close. I don't eliminate based on this, but use it to =
identify possible accounting problems, where the earnings might look =
super, but they are cooking the pro forma numbers. IBM is a good recent =
example of this. If a company were reinvesting earnings into R&D etc, =
then that would be a good thing--if and only if they don't spend more =
real cash than they take in. I know that early stage biotechs, etc. are =
famous for being cash flow negative, but I'd rather not dive in, =
especially in an uncertain market. There are a few good Tier 1 biotechs =
that are cash flow positive, earnings negative. I'm ok with that as long =
as they have financial strength and a promising pipeline. (By the way, =
since we're on biotech, there's an excellent book called "The Biotech =
Investor's Bible" by George Wolff which I've found very helpful in =
understanding this complicated industry.) Of course, none of this =
matters as long as the biotech industry group is in the dumpers!
Katherine
----- Original Message -----=20
From: Spencer48@aol.com=20
To: canslim@lists.xmission.com=20
Sent: Thursday, May 16, 2002 12:44 PM
Subject: Re: TOO (was:[CANSLIM] WebLinks)
Katherine:
Cash-Flow is a good item to check to see if earnings are at least =
equal=20
to the money coming in. However, to me it would seem that this test =
would=20
only be valid for companies that needn't invest in a lot of R&D (eg. =
consumer=20
and retail companies).
Companies with a lot of R&D (which are a % of sales, and which =
are=20
deducted from earnings as an expense and not added back in to arrive =
at=20
Cash-Flow) would seem to be an exception to your hard and fast =
Cash-Flow rule=20
(ie. Cash-Flow positive).=20
Moreover, it would seem to me that companies which are investing =
in a=20
lot of R&D would be the same companies which WON suggests are in the =
most=20
dynamic and rewarding industries (eg. technology stocks or biomed =
stocks).
I'll give you an example of a stock which has poor cash-flow, but =
has a=20
very high R&D: ENZN. One of the reasons I'm looking at it is because =
of its=20
sparkling earnings and sales (sequential, quarterly, and yearly). Of =
course,=20
the chart looks terrible, but its fundamentals (as far as I'm =
concerned) even=20
with its poor cash-flow, does not eliminate it.
jans
In a message dated 5/16/2002 12:31:05 PM Eastern Daylight Time,=20
kmalm@earthlink.net writes:
<< Patrick,
=20
You've been reading my mind!! Couldn't agree with you more. Since =
really=20
spending time getting to the heart of CANSLIM, I concluded that =
technical=20
strength combined with minimum growth characteristics and an =
identifiable=20
strategic advantage are the most important aspects. Here's how I go =
about=20
finding the candidates in more specific terms:
=20
"Must Have"
=3D=3D=3D=3D=3D=3D=3D=3D=3D
Minimum Technicals:
RS>=3D60 and <70 + RS rising--minimum starting point for watch list
RS>=3D70 (min at purchase)
Price >=3D -15% of 50dMA
Price >=3D 200 dMA
A/D =3D A, B, C (prefer A or B on purchase)
Minimum Fundamentals:
Forward growth rate >=3D15
Expected return based on Current Price, past profitability & EPS =
estimates=20
>=3D return on AAA bonds (this from VectorVest, RV>=3D1 and a simple =
measure of=20
risk/reward)
Cash Flow positive
"N" =3D identifiable strategic advantage that makes the stock and/or =
the=20
industry a "L"eader with fuel for future growth
The last two can't be easily filtered, so require due diligence. =
(Cash flow=20
is unreliable in stock screeners because you don't always know whether =
they=20
are using fiscal, trailing 12 months, prior reported year, etc.)
Sound technical pattern on break out and/or pullback entry.
=20
"Sorting/Elimination/Preference Criteria"
=
=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=
=3D=3D
Operating Cash flow nearly equal to EPS (a quick way to identify =
accounting=20
red flags)
EPS and Revs growing (prefer >=3D20%, if a turnaround, at least 2 =
quarters of=20
growth)
ROE (prefer >=3D17%)
D/E (prefer <=3D50%)
% Institutional ownership (prefer 10-40%)
At least one other stock that is a direct competitor or is in the =
same=20
industry is also in similar technical shape (only exception is when =
the=20
company's product/market is so unique that there is no obvious =
publicly=20
traded competitor )
General industry strength (prefer the same RS requirements as with =
the=20
stock--This acts more as a "draw your eye to strength" indicator for =
the=20
above condition)
These last items I don't filter for, but the more of the minimums the =
stock=20
meets, the more "points" the stock gets. All else being equal in the =
"must=20
haves", this sorts the cream to the top of the list.
>>
-
-To subscribe/unsubscribe, email "majordomo@xmission.com"
-In the email body, write "subscribe canslim" or
-"unsubscribe canslim". Do not use quotes in your email.
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<DIV>Hi jans,</DIV>
<DIV> </DIV>
<DIV>I understand your point, but I see that my notes were not =
clear.</DIV>
<DIV> </DIV>
<DIV>When I say "cash flow positive" I mean that the *actual* cash flow =
is=20
positive. In ENZN's case, they *do* have a positive cash flow. Contrast =
this to=20
AMZN, which can't seem to rub 2 dimes together and are consistently cash =
flow=20
negative. That means that *real* dollars are flowing OUT of the company. =
If I=20
did that long enough in my personal life, I'd be broke!</DIV>
<DIV> </DIV>
<DIV>When I say "operating cash flow vs. EPS" I mean the operating cash =
flow=20
(which is the earnings with one time charges, etc. added back in) vs. =
the EPS,=20
should be close. I don't eliminate based on this, but use it to identify =
possible accounting problems, where the earnings might look super, but =
they are=20
cooking the pro forma numbers. IBM is a good recent example of this. If =
a=20
company were reinvesting earnings into R&D etc, then that would be a =
good=20
thing--if and only if they don't spend more real cash than they take in. =
I know=20
that early stage biotechs, etc. are famous for being cash flow negative, =
but I'd=20
rather not dive in, especially in an uncertain market. There are a few =
good Tier=20
1 biotechs that are cash flow positive, earnings negative. I'm ok with =
that as=20
long as they have financial strength and a promising pipeline. (By the =
way,=20
since we're on biotech, there's an excellent book called "The Biotech =
Investor's=20
Bible" by George Wolff which I've found very helpful in understanding =
this=20
complicated industry.) Of course, none of this matters as long as the =
biotech=20
industry group is in the dumpers!</DIV>
<DIV> </DIV>
<DIV>Katherine</DIV>
<BLOCKQUOTE=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3DSpencer48@aol.com=20
href=3D"mailto:Spencer48@aol.com">Spencer48@aol.com</A> </DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Thursday, May 16, 2002 =
12:44=20
PM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> Re: TOO (was:[CANSLIM] =
WebLinks)</DIV>
<DIV><BR></DIV>Katherine:<BR><BR> Cash-Flow is =
a good=20
item to check to see if earnings are at least equal <BR>to the money =
coming=20
in. However, to me it would seem that this test would <BR>only =
be valid=20
for companies that needn't invest in a lot of R&D (eg. consumer =
<BR>and=20
retail companies).<BR><BR> Companies with a =
lot of=20
R&D (which are a % of sales, and which are <BR>deducted from =
earnings as=20
an expense and not added back in to arrive at <BR>Cash-Flow) would =
seem to be=20
an exception to your hard and fast Cash-Flow rule <BR>(ie. Cash-Flow=20
positive). <BR><BR> Moreover, it would seem to =
me that=20
companies which are investing in a <BR>lot of R&D would be the =
same=20
companies which WON suggests are in the most <BR>dynamic and rewarding =
industries (eg. technology stocks or biomed=20
stocks).<BR><BR> I'll give you an example of a =
stock=20
which has poor cash-flow, but has a <BR>very high R&D: =
ENZN. =20
One of the reasons I'm looking at it is because of its <BR>sparkling =
earnings=20
and sales (sequential, quarterly, and yearly). Of course, =
<BR>the chart=20
looks terrible, but its fundamentals (as far as I'm concerned) even =
<BR>with=20
its poor cash-flow, does not eliminate it.<BR><BR>jans<BR><BR><BR>In a =
message=20
dated 5/16/2002 12:31:05 PM Eastern Daylight Time, <BR><A=20
href=3D"mailto:kmalm@earthlink.net">kmalm@earthlink.net</A>=20
writes:<BR><BR><< Patrick,<BR> <BR> You've been =
reading my=20
mind!! Couldn't agree with you more. Since really <BR>spending time =
getting to=20
the heart of CANSLIM, I concluded that technical <BR>strength combined =
with=20
minimum growth characteristics and an identifiable <BR>strategic =
advantage are=20
the most important aspects. Here's how I go about <BR>finding the =
candidates=20
in more specific terms:<BR> <BR> "Must=20
Have"<BR> =3D=3D=3D=3D=3D=3D=3D=3D=3D<BR> Minimum =
Technicals:<BR> RS>=3D60 and=20
<70 + RS rising--minimum starting point for watch =
list<BR> RS>=3D70=20
(min at purchase)<BR> Price >=3D -15% of 50dMA<BR> Price =
>=3D 200=20
dMA<BR> A/D =3D A, B, C (prefer A or B on =
purchase)<BR> Minimum=20
Fundamentals:<BR> Forward growth rate >=3D15<BR> Expected =
return=20
based on Current Price, past profitability & EPS estimates =
<BR>>=3D=20
return on AAA bonds (this from VectorVest, RV>=3D1 and a simple =
measure of=20
<BR>risk/reward)<BR> Cash Flow positive<BR> "N" =3D =
identifiable=20
strategic advantage that makes the stock and/or the <BR>industry a =
"L"eader=20
with fuel for future growth<BR> The last two can't be easily =
filtered, so=20
require due diligence. (Cash flow <BR>is unreliable in stock screeners =
because=20
you don't always know whether they <BR>are using fiscal, trailing 12 =
months,=20
prior reported year, etc.)<BR> Sound technical pattern on break =
out=20
and/or pullback =
entry.<BR> <BR> "Sorting/Elimination/Preference=20
=
Criteria"<BR> =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=
=3D=3D=3D=3D=3D=3D=3D=3D=3D<BR> Operating Cash flow=20
nearly equal to EPS (a quick way to identify accounting <BR>red=20
flags)<BR> EPS and Revs growing (prefer >=3D20%, if a =
turnaround, at=20
least 2 quarters of <BR>growth)<BR> ROE (prefer =
>=3D17%)<BR> D/E=20
(prefer <=3D50%)<BR> % Institutional ownership (prefer=20
10-40%)<BR> At least one other stock that is a direct competitor =
or is in=20
the same <BR>industry is also in similar technical shape (only =
exception is=20
when the <BR>company's product/market is so unique that there is no =
obvious=20
publicly <BR>traded competitor )<BR> General industry strength =
(prefer=20
the same RS requirements as with the <BR>stock--This acts more as a =
"draw your=20
eye to strength" indicator for the <BR>above condition)<BR> These =
last=20
items I don't filter for, but the more of the minimums the stock =
<BR>meets,=20
the more "points" the stock gets. All else being equal in the "must=20
<BR>haves", this sorts the cream to the top of the list.<BR> =20
>><BR><BR>-<BR>-To subscribe/unsubscribe, email "<A=20
=
href=3D"mailto:majordomo@xmission.com">majordomo@xmission.com</A>"<BR>-In=
the=20
email body, write "subscribe canslim" or<BR>-"unsubscribe =
canslim". Do=20
not use quotes in your email.</BLOCKQUOTE></BODY></HTML>
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- -"unsubscribe canslim". Do not use quotes in your email.
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