Page 1074 - How to Make Money in Stocks Trilogy

60 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

are when you’re reading this, here’s the key question to ask: Is the stock
you’re reviewing benefiting from a significant new industry trend, and is it
one of the companies leading that change?

New Price High
Here’s another “new” thing you should know about the best stocks: They
usually start their big moves as they hit or close in on a new price high (i.e.,
the highest share price the stock has hit over the last 52 weeks).
We’ll talk more about that when we get into charts in Chapter 6, “Don’t
Invest Blindly,” but just keep this in mind: Stocks hitting new lows tend
to go lower. Stocks hitting new highs tend to go higher.
Translation: Don’t go “bargain” hunting for beaten down stocks—chances
are they’ll go even lower. Instead, focus on stocks showing strength as they
move upward to new price highs.

New Does Not Mean Unproven
You’re not looking for companies making promises of a revolutionary new
product or service. Those may pan out, they may not.
You’re looking for companies with new products already on the market
showing strong demand. That demand is reflected in the company’s funda-
mentals we noted earlier: Rising sales revenue, high profit margins, and
accelerating earnings growth.
Whether it’s a young company making its initial public offering (IPO) or
an established outfit with a new product, make it prove itself by showing
CAN SLIM traits before you buy.

The Facebook Fiasco
Look at what happened to Facebook when it debuted in 2012. It was a new
IPO in a new and growing industry—social media. And it was the dominant
player in that space. So it got high marks for “new” but did not pass the rest
of the Buying Checklist.
Remember how we saw that big, accelerating earnings growth is the #1
factor to look for—and that you want to see particularly strong EPS growth
over the last three quarters?
Facebook showed the exact opposite. Just prior to its IPO, it posted three
consecutive quarters of decelerating earnings, dropping from 83% to 17% to
9%. Sales growth was also trending down.