Page 358 - How to Make Money in Stocks Trilogy

M = Market Direction: How You Can Determine It 233

powerful follow-through days keeps you from being drawn prematurely into
rally attempts that ultimately end in failure. In other words, you have rules
that will continue to keep you from getting sucked into phony rallies. This is
how we were able to stay out of the market and in money market funds for
most of 2000 through 2002, preserve the majority of the gains we had made
in 1998 and 1999, and help those who read and followed our many basic
rules. There is a fortune for you in this paragraph.

Part I Review: How to Remember and
Use What You’ve Read So Far
It isn’t enough just to read. You need to remember and apply all of what
you’ve read. The CAN SLIM system will help you remember what you’ve
read so far. Each letter in the CAN SLIM system stands for one of the seven
basic fundamentals of selecting outstanding stocks. Most successful stocks
have these seven common characteristics at emerging growth stages, so they
are worth committing to memory. Repeat the formula until you can recall
and use it easily. Keep it with you when you invest.

C = Current Quarterly Earnings per Share. Quarterly earnings per
share must be up at least 18% or 20%, but preferably up 40% to 100% or
200% or more—the higher, the better. They should also be accelerating
at some point in recent quarters. Quarterly sales should also be acceler-
ating or up 25% or more.
A = Annual Earnings Increases. There must be significant (25% or
more) growth in each of the last three years and a return on equity of 17%
or more (with 25% to 50% preferred). If return on equity is too low, pre-
tax profit margin must be strong.
N = New Products, New Management, New Highs. Look for new prod-
ucts or services, new management, or significant new changes in industry
conditions. And most important, buy stocks as they emerge from sound,
properly formed chart bases and begin to make new highs in price.
S = Supply and Demand—Shares Outstanding plus Big Volume
Demand. Any size capitalization is acceptable in today’s new economy as
long as a company fits all the other CAN SLIM rules. Look for big vol-
ume increases when a stock begins to move out of its basing area.
L = Leader or Laggard. Buy market leaders and avoid laggards. Buy the
number one company in its field or space. Most leaders will have Relative
Price Strength Ratings of 80 to 90 or higher and composite ratings of 90
or more in bull markets.