New management, a new product cycle or entrance into new markets can be a fantastic catalyst for companies and their shares. It’s an issue that came up recently in relation to the transition at Google (NASDAQ:GOOG), where Larry Page is taking over as chief executive while Eric Schmidt was kicked upstairs to the executive chairman slot (with a $100 million stock grant as a goodbye gift.)
At the time of the news, I mentioned that “new” was the N in “CANSLIM,” and several subscribers wrote in to say that they had never heard of that acronym. So here’s the deal.
CANSLIM is the acronym for a seven-point trading strategy developed by William J. O’Neil, following his study of all stock markets of the past 50 years. The strategy, which includes both fundamental and technical touch points, was detailed in one of my favorite books about trading, How to Make Money in Stocks: A Winning System in Good Times or Bad. I always recommend this book to new investors because it written very directly and includes a lot of timeless, practical wisdom.
The strategy’s goal is to discover great stock picks in the earliest stages of significant price advances as a stock emerge from a base. It’s not a matter of momentum investing, it’s a matter of using price and volume action to help alert you to the best fundamental stories.
The letters in CANSLIM stand for: Current earnings growing; Annual earnings growing; New product or service; Supply and demand tilted toward demand; Leader in a leading industry; Institutional sponsorship increasing; Market Indexes in upswing.
Of all these, I believe the secret weapon is something new, because it’s the catalyst for everything else, but each of these elements is important. Observe that “value,” is nowhere to be found in this list. That’s because O’Neil believes, as I do, that value is largely just a ghost story and has no real impact on the one thing that truly matters to investors — spotting a security likely to rise in price.
Just knowing that Intel (NASDAQ:INTC) is very cheap and Netflix (NASDAQ:NFLX) is very expensive would have done no one any good over the past two years as the former stagnated and the latter soared. The reality is that Netflix is growing earnings and revenue fast, and quickly moving into new markets with new products, while Intel grew much more slowly and sadly missed chances to move quickly into new markets.
One of the lesser known stocks on our list that is emblematic of the CANSLIM approach is Balchem (NASDAQ:BCPC), the $1 billion maker of specialty chemicals for food and drug manufacturing.
This is a company that grew earnings and revenue steadily through 2008 by 15%, no matter what bombs were bursting in credit market, home sales, industry and technology. In late 2008, the company’s chief executive announced another great quarter with the comment: “This record third quarter, despite numerous difficult business conditions, demonstrates the value of our neatly diversified business. Our strategic acquisitions, with cross business motivation and integration, are increasing our global presence, and off-setting certain softness in some U.S. markets.”
Balchem was more buoyant than 95% of its peers in that period, but it didn’t send a really clear technical signal until supply waned in relation to demand in October 2009, allowing shares to lift up out of that the long base marked on the chart.
Once a stock lifts to a new high it often seems at the time to casual observers that the move is over, but it is usually just getting started because it has wrestled free from the grasp of selling shareholders. Once it hit that new high — another important “new” — it was off to the races for all of 2010 and now again in 2011.
Respect the new. It never gets old.
For more insights like this, check out Jon Markman’s daily short-term newsletter, Trader’s Advantage, and long-term investment letter, Strategic Advantage.
