Page 1088 - How to Make Money in Stocks Trilogy

74 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

■ ✔ Share price above $15

We’re all human. It can be tempting to chase low-priced stocks, thinking
they offer the most potential for a big gain. But they’re usually cheap for a
reason: Weak (or nonexistent) earnings growth, lackluster sales, or a lack of
new and exciting products. Because of that, they have a hard time attracting
institutional investors, and we’ve already seen how important it is to have
rising institutional sponsorship.
So the two takeaways here are:

1. Avoid cheap, low-priced stocks.
2. Don’t be afraid to buy seemingly “high-priced” stocks with a share price
of $50, $100 or more.
Focus on the CAN SLIM traits, not the “high” share price.
When Priceline started a 182% run in 2010, it was already trading around
$270 per share. And Apple may have seemed expensive when its share price
hit $150 in July 2009. But less than three years later, it had climbed to $644.
Not all CAN SLIM stocks have triple-digit share prices. SolarWinds
launched its 137% move in 2011 from a share price around $25. The prices
for these three stocks were different, but their winning profiles were the
same: They had the CAN SLIM characteristics.
By definition, CAN SLIM stocks are the fastest-growing, most profitable
companies on the market. Just as you can’t buy a Mercedes for the price of
a Chevy, CAN SLIM leaders tend to command a higher share price and a
higher P/E ratio than inferior stocks (Chapter 2).
So focus on the CAN SLIM traits . . . don’t chase cheap stocks . . . and if
all the other checklist items are in place, don’t worry if the share price seems
high.

■ ✔ Average daily volume of 400,000 shares or more

“Volume” refers to the amount of shares a stock trades in a given period
(e.g., in a day or week). Stocks that have a low average daily volume are said
to be “thinly” traded.
You want to avoid thinly traded stocks for the same reason you want to
steer clear of low-priced ones: Institutional investors tend to avoid them, so
you should too. Plus they tend to be more volatile.