Re: [CANSLIM] Investing 101

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: Re: [CANSLIM] Investing 101
Date: Wed, 24 Jul 2002 09:25:31 -0500
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Hi Charley,

To answer you question....yes and no.

It's a subtle point, but let me see if I can do a better job of =
explaining it than yesterday.

Fundamentals First Approach: Screen stocks for all CANSLIM required =
fundamentals. That's a list of about 15 criteria including ROE, D/E, =
margins, revenues, earnings, growth in earnings and revenues, etc. (It's =
a lengthy list) Then look for technicals to confirm.

Pro: you get superior fundamentals and then wait for a good technical =
entry. You've met all the suggested CANSLIM criteria.

Con: It's a big mistake to take a set of fundamental criteria based on =
the *average* fundamentals of winners in the past. While it may seem =
appealing, the truth is that the 20% this and 50% that which everybody =
takes as a checklist is simply the *typical* for high quality stocks. In =
reality, because fundamental reporting lags and accounting rules can =
obfuscate the reality of business (good and bad, BTW), you really have =
to look at fundamentals in context. For example, a company may have a =
bathtub quarter because of extraordinary events. Should we eliminate the =
stock for one bad quarter in a string of winners? What if a company is =
turning around, having beefed up their strategic planning and execution, =
bringing on a new CEO, etc? Bottom line is that if you *start* with a =
list of fundamental requirements that are too stringent and based on =
averages, then you are missing "high quality" companies. Bottom line is =
than you should never let an *average* become a *minimum.*

If you instead screen first for technicals, then you know right away =
that supply and demand are acting a certain way. In other words, "what =
is working right now?" It may turn out that what is working right now is =
not CANSLIMish at all (cyclical, fallen angels bouncing, etc.) and you =
may choose to stay away. BUT....if you are always screening for what is =
technically healthy, then you *know* what is working and you will not be =
blinded to groups and/or stocks that do indeed have excellent =
fundamentals, but may not meet each and every average criteria. I think =
of it as reading "the preponderance of evidence" on fundamentals and =
evaluating it in context during due diligence. Far more important to =
evaluate "N" for sustainable growth potential, then verifying excellent =
execution through a read on the fundamentals.

Last point is on group RS. I have an entire library of IBD articles over =
time that essentially say that you should always look first at =
technically healthy stocks and *then* look for confirmation that at =
least one other stock in the industry is technically healthy. If you =
wait until the entire group has high RS, then you will miss the leaders' =
moves. Here's one from the other day, which was a followup to an IBD =
article from the 15th:

Ask Bill O'Neil
=20

Q: On the July 15 Winning Ways column, IBD said it's more important to =
see other stocks in the industry group with high relative price strength =
than a high Industry Group Relative Strength Rating for the entire =
group. Why? - Submitted from Red Creek, N.Y

=20

A: The majority of leading stocks are in leading industries. Studies =
show 37% of a stock's price movement is directly tied to the performance =
of its industry group. Another 12% is due to the strength in its overall =
sector. Therefore, roughly half of a stock's move is due to the strength =
of its respective industry. But note that just because the relative =
strength of the group is on the low side, does not necessarily mean the =
group is bad. Sometimes, there are only a few true leaders in a group. =
If the group happens to be large or it is just beginning a move, the =
group relative strength rating may be skewed to the low side. This is =
why it's important to see other stocks in the same group with high =
Relative Price Strength Ratings rather than a high rating for the entire =
group itself.


Katherine
  ----- Original Message -----=20
  From: Chazmoore@aol.com=20
  To: canslim@lists.xmission.com=20
  Sent: Wednesday, July 24, 2002 8:58 AM
  Subject: [CANSLIM] Investing 101


  Katherine: Yesterday, while commenting on the need to constantly be =
revising our prospect lists, you went on to observe that the stocks that =
go up are those with core CANSLIM characteristics, and then observed =
that technicals should lead the way to the winners. I always enjoy your =
comments and usually print them for future reference, but I must confess =
I feel like the student who dosed off in class and missed a key test =
question.=20

  To me, good fundamentals mean the company is in excellent financial =
health with a light to moderate debt load, and has been very profitable =
for at least four or more quarters. CANSLIM, IBD, and DGO lets us =
determine these facts very quickly. Then with a little research we can =
perform the fine tuning.=20

  Technically, the Group Industry Relative Strength, the Price Relative =
Strength, and the Accumulation/Distribution Rating gives us clues as to =
when it may be safe to buy.=20

  The actual purchasing moment is determined by an analysis of the price =
chart, as we look for a break out from a prior resistance level.=20

  Is this the point you were making? Find the best companies then wait =
for the technicals to tell us when to enter the market?=20

  I think I missed something because you concluded by saying we should =
not start with fundamentals to find good quality candidates.=20

  Charley=20

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<DIV>Hi Charley,</DIV>
<DIV>&nbsp;</DIV>
<DIV>To answer you question....yes and no.</DIV>
<DIV>&nbsp;</DIV>
<DIV>It's a subtle point, but let me see if I can do a better job of =
explaining=20
it than yesterday.</DIV>
<DIV>&nbsp;</DIV>
<DIV>Fundamentals First Approach: Screen stocks for all CANSLIM required =

fundamentals. That's a list of about 15 criteria including ROE, D/E, =
margins,=20
revenues, earnings, growth in earnings and revenues, etc. (It's a =
lengthy list)=20
Then look for technicals to confirm.</DIV>
<DIV>&nbsp;</DIV>
<DIV>Pro: you get superior fundamentals and then wait for a good =
technical=20
entry. You've met all the suggested CANSLIM criteria.</DIV>
<DIV>&nbsp;</DIV>
<DIV>Con: It's a big mistake to take a set of fundamental criteria based =
on the=20
*average* fundamentals of winners in the past. While it may seem =
appealing, the=20
truth is that the 20% this and 50% that which everybody takes as a =
checklist is=20
simply the *typical* for high quality stocks. In reality, because =
fundamental=20
reporting lags and accounting rules can obfuscate the reality of =
business (good=20
and bad, BTW), you really have to look at fundamentals in context. For =
example,=20
a company may have a bathtub quarter because of extraordinary events. =
Should we=20
eliminate the stock for one bad quarter in a string of winners? What if =
a=20
company is turning around, having beefed up their strategic planning and =

execution, bringing on a new CEO, etc? Bottom line is that if you =
*start* with a=20
list of fundamental requirements that are too stringent and based on =
averages,=20
then you are missing "high quality" companies.&nbsp;Bottom line is than =
you=20
should never&nbsp;let an *average* become a *minimum.*</DIV>
<DIV>&nbsp;</DIV>
<DIV>If you instead screen first for technicals, then you know right =
away that=20
supply and demand are acting a certain way. In other words, "what is =
working=20
right now?" It may turn out that what is working right now is not =
CANSLIMish at=20
all (cyclical, fallen angels bouncing, etc.) and you may choose to stay =
away.=20
BUT....if you are always screening for what is technically healthy, then =
you=20
*know* what is working and you will not be blinded to groups and/or =
stocks that=20
do indeed have excellent fundamentals, but may not meet each and every =
average=20
criteria. I think of it as reading "the preponderance of evidence" on=20
fundamentals and evaluating it in context during due diligence. Far more =

important to evaluate "N" for sustainable growth potential, then =
verifying=20
excellent execution through a read on the fundamentals.</DIV>
<DIV>&nbsp;</DIV>
<DIV>Last point is on group RS. I have an entire library of IBD articles =
over=20
time that essentially say that you should always look first at=20
technically&nbsp;healthy stocks and *then* look for confirmation that at =
least=20
one other stock in the industry is technically healthy. If you wait =
until the=20
entire group has high RS, then you will miss the leaders' moves. Here's =
one from=20
the other day, which was a followup to an IBD article from the =
15th:</DIV>
<DIV>&nbsp;</DIV>
<DIV>
<DIV>Ask Bill O'Neil</DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt">&nbsp;<?xml:namespace =
prefix =3D o=20
ns =3D "urn:schemas-microsoft-com:office:office" /><o:p></o:p></P>
<P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><B><I>Q</I></B>: =
<SPAN=20
style=3D"mso-bidi-font-size: 10.0pt">On the July 15 Winning Ways column, =
IBD said=20
it's more important to see other stocks in the industry group with high =
relative=20
price strength than a high Industry Group Relative Strength Rating for =
the=20
entire group. Why? <B><I>-&nbsp;Submitted&nbsp;from</I></B> <B><I>Red=20
Creek,</I></B> <B><I>N.Y<o:p></o:p></I></B></SPAN></P>
<P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><B><I><SPAN=20
style=3D"mso-bidi-font-size: =
10.0pt">&nbsp;<o:p></o:p></SPAN></I></B></P>
<P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><B><I><SPAN=20
style=3D"mso-bidi-font-size: 10.0pt">A: </SPAN></I></B><SPAN=20
style=3D"mso-bidi-font-size: 10.0pt">The majority of leading stocks are =
in leading=20
industries. Studies show 37% of a stock's price movement is directly =
tied to the=20
performance of its industry group. Another 12% is due to the strength in =
its=20
overall sector. Therefore, roughly half of a stock's move is due to the =
strength=20
of its respective industry. But note that just because the relative =
strength of=20
the group is on the low side, does not necessarily mean the group is =
bad.=20
Sometimes, there are only a few true leaders in a group. If the group =
happens to=20
be large or it is just beginning a move, the group relative strength =
rating may=20
be skewed to the low side. This is why it's important to see other =
stocks in the=20
same group with high Relative Price Strength Ratings rather than a high =
rating=20
for the entire group itself.</SPAN></P></DIV><A=20
href=3D"http://www.investors.com/editorial/feature.asp?v=3D7/24"></A></DI=
V>
<DIV>&nbsp;</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=3DChazmoore@aol.com=20
  href=3D"mailto:Chazmoore@aol.com">Chazmoore@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> Wednesday, July 24, 2002 =
8:58=20
  AM</DIV>
  <DIV style=3D"FONT: 10pt arial"><B>Subject:</B> [CANSLIM] Investing =
101</DIV>
  <DIV><BR></DIV><FONT face=3Darial,helvetica><FONT size=3D2>Katherine: =
Yesterday,=20
  while commenting on the need to constantly be revising our prospect =
lists, you=20
  went on to observe that the stocks that go up are those with core =
CANSLIM=20
  characteristics, and then observed that technicals should lead the way =
to the=20
  winners. I always enjoy your comments and usually print them for =
future=20
  reference, but I must confess I feel like the student who dosed off in =
class=20
  and missed a key test question. <BR><BR>To me, good fundamentals mean =
the=20
  company is in excellent financial health with a light to moderate debt =
load,=20
  and has been very profitable for at least four or more quarters. =
CANSLIM, IBD,=20
  and DGO lets us determine these facts very quickly. Then with a little =

  research we can perform the fine tuning. <BR><BR>Technically, the =
Group=20
  Industry Relative Strength, the Price Relative Strength, and the=20
  Accumulation/Distribution Rating gives us clues as to when it may be =
safe to=20
  buy. <BR><BR>The actual purchasing moment is determined by an analysis =
of the=20
  price chart, as we look for a break out from a prior resistance level. =

  <BR><BR>Is this the point you were making? Find the best companies =
then wait=20
  for the technicals to tell us when to enter the market? <BR><BR>I =
think I=20
  missed something because you concluded by saying we should not start =
with=20
  fundamentals to find good quality candidates. <BR><BR>Charley</FONT>=20
</FONT></BLOCKQUOTE></BODY></HTML>

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