RE: [CANSLIM] Interesting IBD Rating for ELON

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: [CANSLIM] Interesting IBD Rating for ELON
Date: Fri, 16 May 2003 09:31:51 -0500
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Top of Thread: Re: [CANSLIM] Interesting IBD Rating for ELON "Patrick Wahl"
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Hi Joe,

One of the difficulties with using the IBD's Composite (Overall) score is
that they don't provide transparency with respect to the weightings they
place on each of the factors comprising the final score. That doesn't
invalidate its usefulness, but just points out that it's difficult to
understand how the scoring is done and whether or not you would personally
place the same weight on each factor.

WON generally states that he considers the earnings growth to be the most
important factor in determining the growth qualities of a stock, and despite
the many other fundamental guidelines he provides in the rest of the CANSLIM
letters, this was the one that was used to zoom in on the "best" stocks for
many, many years (e.g. EPS/RS = 85/85 or better). Later, the IBD added SMR
(sales-profit margins-ROE) as an additional fundamental ranking, and now
they've come up with the composite score which combines the stock's
fundamentals, technicals, group fundamentals and group technicals into one
big package.

While the EPS is given as a tool, WON has never advocated eliminating a
stock from consideration if the preponderance of evidence suggests that it
could be a winner. Patrick's BRCM is a great example and I have a binder
full of others. In an Investor's Corner article dated 5/24/2 entitled "Not
Every Stock Is Perfect", it states:

      "IBD has dozens of rules on how to buy a stock. They cover a company's
growth rates, the level of activity among big investors and the stock's
trading patterns. The rules are strict because you want to buy the
highest-quality goods. In the market, quality wins.
       Yet don't get too carried away with the rules. Exceptions do occur.
In certain markets, some factors take on greater importance than others. At
other times, other factors call the shots. Rarely does a good stock own
every single trait that all the very best winners of the past had.
       So as you build your watchlist, avoid being too rigid or mechanical."

With a ranking mechanism like EPS you also have to be careful. Take an
extreme example, if *every single stock* had *all* the desirable CANSLIM
earnings growth rates, you're still going to have to rank them from best to
worst, assigning 99 to some and 37 to others. Does it mean that the one with
37 didn't have the desirable growth rates? Not in this case. It simply means
that it *ranked* behind others in some small way. Also, the EPS is a little
slow to recognize turnaround situations. If the company had some down years
and is recently pulling out, I see that as a good thing. Even WON in HTMMIS
gives guidelines for turnarounds. Unfortunately, the EPS measurement doesn't
kick in as quickly as the actual earnings turnaround, so the EPS score will
stay low much longer than technical action in the stock would indicate.

In a broader sense, when it comes to the fundmentals as a whole, again WON
suggests looking at the preponderance of evidence to ascertain whether a
stock should be considered further. In a recent "Ask Bill" , the question
was "Many stocks breaking out lack some of the fundamentals you look for,
such as ROE of 17%...Do you wait for "perfection" or do you weight the pros
and cons and go for it?" The answer was "Generally, we will weigh the pluses
and minuses if the stock is not a perfect fit and "go for it," as you say."

Finally, when selecting candidates for purchase, I've always believed that
technical action should speak first for the stock. The strength in the
price/volume pattern over time is what should draw attention first, because
even if fundamentals are great, without solid technicals and basing action
providing a low-risk entry, it's not really worth bothering with the stock.
I've always thought that the way the IBD presents the "20 rules" is a bit
misleading, because it makes it seem as though each of the guidelines should
be followed at all times and in tandem, when in fact, this has never been
WON's approach. He is much more interested in whether the stock is telling a
good story overall, not whether it fits neatly into an iron cage of a box.
In another "Ask Bill", the question was "Is it more efficient to do
fundamental analysis of companies and then look for favorable chart
patterns, or to find chart patterns and then check the fundamentals?" The
answer was "It is critical to analyze both the fundamentals and charts of
any stock you consider buying. But as a screening method to find ideas, you
may find it easier to start by first looking at the charts. The stock's base
and technical characteristics are what help you decide when to buy. Also,
charts often signal major trouble or a new rally in a stock before the
fundamentals do. Once you've identified stocks with good bases or breakouts,
analyze the company's earnings, sales, margins, etc."

So, all in all, I'd look at the quality of ELON's current base, then look at
the preponderance of evidence fundamentally, then look at the industry to
see how the group is behaving overall, and then check to be sure ELON is the
best the group and/or the market has to offer.

Katherine

- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Patrick Wahl
Sent: Thursday, May 15, 2003 5:05 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Interesting IBD Rating for ELON


On 15 May 2003 at 12:51, Joe McCall wrote:

>  How important really is the EPS and other
> fundamental ratings?

I think EPS is fairly important, unless you have a reason to disregard it,
which can happen.  As an example of when to ignore the EPS, back in the
good old days, Broadcom, before it started its big move up, had an EPS
rank of about 70, although earnings were growing at 100% or more per
quarter.  Because the EPS is calculated by taking into account a number
of quarters, it will lag when a company has a positive change of fortune,
so in those cases, I think you can probably not worry too much if the EPS
rank is low.

- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Joe McCall
Sent: Thursday, May 15, 2003 11:51 AM
To: canslim@lists.xmission.com
Subject: [CANSLIM] Interesting IBD Rating for ELON


After looking at ELON in IBD Stock Checkup (which showed up as #5 on today's
CwHCharts Chart Selector), I was a little surprised that it received an IBD
Overall Rating of 96, but its EPS rating was only 37.  The Group Fundamental
Ratings also received a lowly 19.  I don't even think the chart looks that
great.  The RS line is rising, but the handle is sloping up with decreasing
volume.

What does anyone think about this?  How important really is the EPS and
other fundamental ratings?

Thanks,

Joe McCall




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