Page 1026 - How to Make Money in Stocks Trilogy

The CAN SLIM Investment System 19
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C Current quarterly earnings per share (EPS)
Earnings should be strong and accelerating in recent quarters. Plus, to prove
the company has the ingredients to sustain that growth, look for solid sales
growth, a high return on equity, and industry-leading profit margins.

A Annual earnings per share
To help make sure the current quarterly growth is not a fluke, also look for
strong annual earnings growth over the last 3 years.

N New company, product/service, industry trend,
or management
Focus on companies with something “new”: An innovative product or service in
high demand, a new CEO, or a game-changing industry trend.

Think about it: If a stock’s share price goes up 100%, 200% or more, there
has to be a reason. There has to be something that is making mutual fund
managers and other big investors continue to push the stock higher.
History shows the main cause is earnings growth. And that was proven
again in the 2009–2012 bull market. The biggest winners—stocks like
Baidu, F5 Networks, Apple, Priceline.com, SolarWinds, Rackspace Hosting,
Alexion Pharmaceuticals, Lululemon Athletica, Chipotle Mexican Grill, and
Michael Kors—tended to be highly profitable companies whose earnings
growth was not only strong but accelerating as their share prices rose higher.
And they all had new, innovative products or services that made them lead-
ers in their industries.

Big Rock #3: Buy Stocks Being Heavily Bought by Institutional
Investors. Avoid Those They’re Heavily Selling.
“Institutional investors”—primarily mutual funds but also hedge funds,
banks, pension funds, insurance companies, and other large “institutions”—
account for the bulk of all trading. They provide the buying power or fuel a
stock needs to make a big, sustained upward move. And when they sell, it’s
their heavy dumping of shares that drives a stock down.
That’s why it’s absolutely critical to watch what they’re doing—and you’ll
see how to do that using IBD SmartSelect Ratings and charts when we get
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to the Buying Checklist.
For now, just understand you essentially want to ride their coattails. You
want to buy stocks fund managers and other big investors are heavily buy-