C = Current Quarterly Earnings

ajaskey · Feb 1, 2005

Members are free to post discussion comments/questions related to this topic in this thread. Posts in other topic areas will be moved to the correct topic thread.

Look for stocks with huge current earnings increases
-Three of four big gainers had large increases the quarter before the big run started.
-The remaining big gainers usually showed a big growth increase the quarter after the run started.
-Understand that very few stocks will meet this criteria.
-Only consider those that do have large current earnings growth.
Look for misleading earnings reports
-Compare the current quarter with the corresponding quarter from the previous year. Ignore press releases comparing anything else.
Omit one-time extraordinary gains from reported EPS.
Set a minimum level for current earnings increases
-Use 18-20% as a minimum Q/Q growth rate. The higher the better.
Look for accelerating Q/Q earnings growth.
-The acceration does not need to be in the previous quarter. Anytime in the last 10 quarters has moved stocks. Of course, the more recent the acceleration the better.
-Two quarters of Q/Q earnings growth deceleration is a warning sign.
-As a secondary check, look to see if at least one other stock in the corresponding industry has quality Q/Q growth of earnings.
Look for sales growth to backup earnings growth.
-The best stocks show at least a 25% Q/Q growth of sales
-OR, at least growth acceleration in the last three quarters

dbphoenix · Feb 1, 2005

I've been attempting to discuss CANSLIM under a repressive fundamentalist regime for the past several years, so I'm somewhat out of touch with the vox populi.

What I'm wondering -- given the dramatic deterioration in esteem given "earnings" over the past ten (or more) years -- is how many people still focus on earnings, how many give equal weighting to earnings and sales, how many give greater emphasis to sales. For now, I'm not considering all the other measures that O'N has come up with, nor, given their limitations, do I want to get into a poll. Rather I'm trying to get a sense of what CANSLIM traders look at these days with regard to earnings and/or sales.

ajaskey · Feb 1, 2005

Great post, Db. That's the kinda stuff I've been looking for over the last few years. In the lead post of each thread I will summarize O'Neil and CANSLIM. The summary will be an evolving process since I am not "the" expert. As someone points out something I missed I will add to the summary. As we hit upon key subtopics not completely covered by O'Neil, I will add those to the summary also - although making it clear what is O'Neil and what is new.

Andy

ajaskey · Feb 1, 2005

dbphoenix said:
I've been attempting to discuss CANSLIM under a repressive fundamentalist regime for the past several years, so I'm somewhat out of touch with the vox populi.

What I'm wondering -- given the dramatic deterioration in esteem given "earnings" over the past ten (or more) years -- is how many people still focus on earnings, how many give equal weighting to earnings and sales, how many give greater emphasis to sales. For now, I'm not considering all the other measures that O'N has come up with, nor, given their limitations, do I want to get into a poll. Rather I'm trying to get a sense of what CANSLIM traders look at these days with regard to earnings and/or sales.

Now to answer your question...

Since we don't know if the company is exaggerating, mistaken, or lying, I search for the basic CANSLIM fundies from HTMMIS and assume nothing. Once I mechanically filter those stocks which have superior fundies, I look to the following areas to get a warm fuzzy about the quality (acknowledging no number is a magic bullet).

Growth of the following to make sure that other parts of the income and balance sheets are growing as a reasonable rate vs. earnings. I look at growth of cash from operations, net income, pre-tax income, book value, and cash per share. There are no magic growth rates here. I only want to see if the accountants are not moving money from one entry into earnings. O'Neil only cited sales and cash per share as items to note, but I assume that was because HTMMIS was written when it took too much time to calculate all these growth rates by hand. Based on watching stocks and noting these additional growth rates, I have noticed the best performing stocks have the best growth rates in all categories.

I have another calculation that I can't remember the formula off the top of my head, but it looks at my version of free cash flow vs. net income. This is not exact, but I look at sales minus a fixed amount for taxes and minus interest expenses and divide that by net income. The best companies have multiples greater than 2 or 3. The really weak ones, the ones to avoid, have a number that is less than 1.0. One problem companies run into is paying a low tax rate and then having earnings tank when they hit a normal tax rate. By subtracting a fixed percentage amount from all companies (I think I use 35%) I can see those that will have earnings problems at some point when tax rates increase. (Some companies even add to earnings by having positive cash flow of taxes.)

The final check is really with the chart. If a stock has great earnings and a low PE, I know the market doesn't believe the numbers. If the RS isn't among the best, I also can tell the market knows something I don't.

Note: I plan to start a thread in the future in which everyone can describe their entire CANSLIM process. For now I would like to stick to discussing the individual pieces before we try to put it all together.

Andy

dbphoenix · Feb 1, 2005

ajaskey said:
Now to answer your question...

Since we don't know if the company is exaggerating, mistaken, or lying, I search for the basic CANSLIM fundies from HTMMIS and assume nothing. Once I mechanically filter those stocks which have superior fundies, I look to the following areas to get a warm fuzzy about the quality (acknowledging no number is a magic bullet).

So the first cut to determine your universe, before you apply the tests detailed in the rest of your post, is the usual earnings, sales, and whatever else he lists in the most recent edition of HTMMIS?

ajaskey · Feb 1, 2005

dbphoenix said:
So the first cut to determine your universe, before you apply the tests detailed in the rest of your post, is the usual earnings, sales, and whatever else he lists in the most recent edition of HTMMIS?

Yes. My filters are not hard bounds to the HTMMIS/CANSLIM numbers. For example, I look for a positive ROE which tells me the company has earnings. I've noticed that the high ROEs don't come in many cases until the quarter after the stock has made it's initial move. Plus there are so many ways to calculate ROE and it can change from the time earnings are released to the time the 10Q/K shows up. This is probably why O'Neil considers ROE and similar metrics as secondary criteria.

For "C", current quarterly earnings. CANSLIM wants the growth rate to increase. But I only filter for 25% growth and then can quickly check if this current growth is greater than the previous. I also look to make sure the estimated growth is greater than the current - or at least close as a positive surprise will make real rates better than estimates.

I have much fuzzy logic in my filters which are not meant to find every CANLSIM stock and remove all bad stocks. The filters just cut the universe down to between 50-200 stocks, depending on the market conditions.

After that, to be honest, I use RS to tell me which stocks are going to move. I putzed around with "great fundies" and a good chart and an RS around 93 and they never went anywhere. Except in rare occasions, the stocks with RS greater than 95 (and 98-99 are the best) will be the stocks that make the big runs when the market turns from weak "M" to strong "M".

I do look at the growth rates and my cash flow calculation before I buy. Stocks with the weaker fundies after my initial screen will go up in a good market. But the best stocks usually have the best growth rates and ALWAYS have the best RS.

Andy

ajaskey · Feb 2, 2005

A link to my filtered list is posted on the Watch List thread. A link to the fundies in Excel format is also there. I can't promise to update it every day, but it is valid for a couple weeks without an update.

Here are links to my list sorted in RS order and group in 10s for Stockcharts.com candleglances. The fundies will give you an idea of the type of stocks that make it thru may daily scans.

Growth Stock list at http://ajaskey.wso.net/investor/GrowthReport.html

For complete list and fundamental data, see http://ajaskey.wso.net/investor/Growth_List_Rpt.xls. Most of the column headings should be easy to figure out.

Andy

ajaskey · Feb 3, 2005

Watch for first post updates

I have started to update the letter threads initial posts. Check these occassionally to see if anything was added as it doesn't show up as a new post if an old one is edited. When I complete the first pass of the first post, I will ask for comments/question and we can really get this discussion started.

I will be cleaning up the threads over the weekend to make sure only the correct topic is discussed in each thread.

Andy

ajaskey · Feb 4, 2005

The first post of this thread contains the main ideas for the "C" criteria - Current Earnings. Post your comments, thoughts, or questions about "C" in this thread. If I have missed anything I will add it as it comes up. If we have any significant observations based on "C" I will add those to the post also.

Andy

ajaskey · Feb 4, 2005

Here are the Q/Q earnings from stocks on my mechanically generated Growth List. When one of the top RS stocks looks to be in a buy position, I glance at this go see if I should investigate further.

These are sorted by RS.

Growth List Earnings

ajaskey · Feb 7, 2005

My comments/observations on these:

Look for stocks with huge current earnings increases
-Three of four big gainers had large increases the quarter before the big run started.
-The remaining big gainers usually showed a big growth increase the quarter after the run started.
-Understand that very few stocks will meet this criteria.
-Only consider those that do have large current earnings growth.

I see this time after time on historic charts. Many times the breakout run occurs before or immediately after earnings. The only way to find most of these stocks is to actively screen for growth based on forward estimates. It won't find all stocks, but will find enough to keep you in business. Note: some stocks do not have estimates and must be found through other screens.
.
Look for misleading earnings reports
-Compare the current quarter with the corresponding quarter from the previous year. Ignore press releases comparing anything else.

I do use sequential rolling 12m gains and this works well. Compare the sum of earnings from Q8-Q5 with Q4-Q1. The next quarter drop the old Q8 and slip everything over one quarter.
.
Omit one-time extraordinary gains from reported EPS.

This is the most difficult thing to do. I have found rules of thumb.
- Used diluted CONTINUING earnings from data sources. Note: they could be wrong on the CONTINUING part so reading the 10Q/K is probably the best thing to do.
- Make sure the tax rate isn't about to increase and reduce after-tax earnings as sales increase.
- Eliminate any smallcap/microcap that isn't a simple build 'em and sell 'em business model -- the Peter Lynch principle.
.
Set a minimum level for current earnings increases
-Use 18-20% as a minimum Q/Q growth rate. The higher the better.

I've noticed that current growth rates should be good, but are no guarantee. Forward growth rates (based on estimates) will points out which will continue the high growth rate in the future.
.
Look for accelerating Q/Q earnings growth.
-The acceration does not need to be in the previous quarter. Anytime in the last 10 quarters has moved stocks. Of course, the more recent the acceleration the better.
-Two quarters of Q/Q earnings growth deceleration is a warning sign.
-As a secondary check, look to see if at least one other stock in the corresponding industry has quality Q/Q growth of earnings.

I misunderstood this for a long time and only wanted those with acceleration in the most recent quarter.
.
Look for sales growth to backup earnings growth.
-The best stocks show at least a 25% Q/Q growth of sales
-OR, at least growth acceleration in the last three quarters

Cash from operations is another metric to monitor for this. Sometimes, money from a financing operation ends up in the sales numbers. I guess it is legal but I don't understand it. The growth of cash from operations can be monkeyed around with too, I suppose. But it has tipped me off a number of times to stocks that were getting too creative with their accounting.

ajaskey · Feb 13, 2005

Here is my current GrowthList sorted in RS order. The data is the section for "C". Notice how all the stocks that make it on my GrowthList are not necessarily CANSLIM stocks. I use this spreadsheet to quickly determine which are CANSLIM and which are not.

The columns contain the ticker symbol, the last 4 quarters or diluted continuous EPS, the estimates for the next two quarters, and the growth rates from corresponding quarters the year before.

Code:

[B]Ticker   Q4    Q3    Q2    Q1    Q0  Q-1    Q84   Q73   Q62   Q51   Q40  Q3-1
[/B]AAPL    0.12  0.16  0.26  0.70  0.42 0.42   200%  220%  136%  312%  250%  163%
OS     -1.67  0.28  0.52  1.87  0.92 0.88 -1385%  182%  126%  337%  155%  214%
DCAI    0.05  0.03  0.04  0.09  0.00 0.00    25%   50%   33%  125% -100% -100%
FORD    0.08  0.05  0.14  0.20  0.00 0.00   167%   67%   75%  567% -100% -100%
TONS    0.73  2.07  2.17  2.37  0.00 0.00   329%  989%  886%  208% -100% -100%
CTT     0.01  0.42 -0.02  0.14  0.00 0.00   104%  567%   83%  133% -100% -100%
SIM     0.22  0.18  0.37  0.32  0.00 0.00   100%  200%  236%  300% -100% -100%
PARL    0.18  0.22  0.21  0.23  0.00 0.00  1700%  100%  163%   53% -100% -100%
GDP     0.02  0.09  0.13  0.20  0.20 0.20   200%  900%  225%  300%  900%  122%
BLUD    0.04  0.07  0.10  0.09  0.19 0.19   -50%  -22%   25%   29%  375%  171%
ISRG   -0.16  0.02  0.14  0.17  0.15 0.23   -14%  117%  180%  242%  194% 1050%
MIPS    0.03  0.06  0.07  0.08  0.08 0.08   130%  135%  150%  700%  167%   33%
PRFT    0.03  0.04  0.04  0.05  0.05 0.07   138%  500%  300%   67%   67%   75%
EZPW    0.23  0.02  0.22  0.37  0.30 0.10    92%  200%  -39%   61%   30%  400%
BXG     0.26  0.17  0.47  0.54  0.00 0.00    13%   89%   52%   50% -100% -100%
RES     0.11  0.20  0.26  0.35  0.33 0.35   375% 1900%   63%  289%  200%   75%
TOL     0.62  0.89  1.31  2.22  1.65 1.70     2%   24%   46%   87%  166%   91%
KWK     0.11  0.12  0.15  0.16  0.26 0.27    10%  -20%  400%   45%  136%  125%
BYD     0.19  0.20  0.23  0.40  0.44 0.47   217%  -20%  229%  233%  132%  135%
SWN     0.41  0.67  0.56  0.71  0.88 0.00   141%   34%  115%  137%  115% -100%
TSRA    0.09  0.19  0.30  0.69  0.18 0.24   -76%  -10%  650%  886%  100%   26%
BRY     0.48  0.47  0.68  0.82  0.88 0.88    50%    0%  209%  134%   83%   87%
MTH     0.96  0.89  1.30  1.88  1.35 1.42    66%   14%   40%   66%   41%   60%
WCC     0.23  0.44  0.43  0.38  0.31 0.51   130%  175%  139%   81%   35%   16%
PHS     0.71  0.80  0.94  0.76  0.88 0.95   -26%  -17%    9%  111%   24%   19%
UBB     0.38  0.36  0.39  0.42  0.84 0.86   375%   24%  -40%   20%  121%  139%
HYDL    0.34  0.39  0.61  0.64  0.53 0.64    21%   44%   79%  178%   56%   64%
BEBE    0.09  0.14  0.19  0.39  0.13 0.19   900%  133%   90%   70%   44%   36%
SGTL    0.18  0.23  0.46  0.52  0.25 0.37   112%  667% 1050%  148%   39%   61%
CMN     0.17  0.20  0.20  0.20  0.23 0.23     6%   33%   43%   67%   35%   15%
NIKU    0.10  0.04  0.04  0.10  0.13 0.13   -84%  300%  129%  150%   30%  225%
LSS     0.28  1.11  0.91  1.15  1.00 1.22   200%  447%  252%  197%  257%   10%
NX      0.26  0.73  1.51  0.78  0.89 1.42    -4%    4%   18%   50%  242%   95%
XXIA    0.05  0.06  0.07  0.11  0.10 0.12   150%   50%   75%  175%  100%  100%
TRGL   -0.02  0.31  0.11  0.12  0.00 0.00    93%  933% 1100%  140%  100% -100%
BTU     0.40  0.63  1.76  1.07  0.76 1.50  2100% 3250%  403%  168%   90%  138%
DNR     0.27  0.40  0.34  0.32  0.50 0.51    -4%   18%  278%   19%   85%   28%
FLSH    0.11  0.14  0.16  0.24  0.17 0.21   650% 1500% 1600%  300%   55%   50%
CNC     0.24  0.25  0.26  0.27  0.31 0.34    20%   14%   18%   17%   29%   36%
NVDA    0.14  0.12  0.03  0.15  0.15 0.19   -53%    0%  -79%  275%    7%   58%
AEOS    0.49  0.34  0.40  0.77  0.45 0.47    -9%  278%  264%  450%   -8%   38%
FFEX    0.04  0.11  0.19  0.20  0.00 0.00    33%  375%   27%  100% -100% -100%
TIE     0.62 -0.10  0.12  1.37  0.00 0.00   202%   88%  130%  821% -100%  100%
CETV    0.32  0.18  0.19 -0.23  0.00 0.00   900%  158%  129%   12% -100% -100%
FMD    -0.06  0.68 -0.08  1.12  0.68 0.69  -186%  162%  -33%   93% 1233%    1%
MEE    -0.03  0.16  0.03  0.02  0.29 0.47    77%  633%  160%  109% 1067%  194%
GEF    -0.15  0.37  0.65  1.21  0.74 0.74 -1500%  285%  306%  404%  593%  100%
ROV     0.12  0.36  0.52  0.79  0.23 0.47  1100%  300%   33%   25%   92%   31%
JOE     0.16  0.29  0.28  0.37  0.27 0.35   -11%  142%   -3%    0%   69%   21%
ROK     0.41  0.66  1.57  0.65  0.65 0.66    58%   -1%  376%  124%   59%    0%
FFIV    0.16  0.20  0.43  0.26  0.23 0.31   433%  300%  760%  136%   44%   55%
INT     0.50  0.52  0.58  0.59  0.70 0.70    16%    8%   18%   20%   40%   35%
HUM     0.41  0.50  0.52  0.29  0.49 0.50   116%   16%   37%  -29%   20%    0%
WLL    -0.02  0.51  0.72  0.70  0.82 0.86  -111%   28%   89%   63% 4200%   69%
LYO    -0.08  0.02  0.28  0.08  0.46 0.82    89%  105%  204%  118%  675% 4000%
CDIS    0.23  0.35  0.46  0.59  0.60 0.61  1250%  133%   92%  146%  161%   74%
BEV     0.07  0.19 -0.14  0.19  0.18 0.18   113%  850% -380%  171%  157%   -5%
CRS     0.43  0.73  0.80  1.28  0.89 1.38   617%  217% 8000%  327%  107%   89%
IFOX    0.09  0.05 -0.01  0.10  0.18 0.17   126%  113%   98%  126%  100%  240%
POT     0.50  0.68  0.69  0.88  0.78 0.00   900%  127%  148%  184%   56% -100%
NTAP    0.11  0.10  0.13  0.15  0.17 0.17    83%   43%   63%   15%   55%   70%
JLL    -0.20  0.16  0.47  1.52 -0.12 0.38    17%  420%  104%   33%   40%  138%
RYL     1.03  1.51  1.66  2.17  1.36 1.81    43%   48%   38%   32%   32%   20%
CME     1.35  1.66  1.72  1.64  1.78 2.09    75%   61%   85%   89%   32%   26%
PCO     0.66  1.55  1.58  1.69  0.85 1.62    10%  237%  105% 1307%   29%    5%
BZH     3.52  4.31  5.82  4.70  4.38 5.29    24%   43%   39%   38%   24%   23%
TOO     0.52  0.15  0.04  0.33  0.20 0.20   -28%   15%  100%  120%  -62%   33%
WITS    0.02  0.06  0.11  0.17  0.12 0.14   104%  125%  200%  289%  500%  133%
SGR     0.05  0.16  0.17  0.18  0.23 0.23   -75%   60%  -32%  117%  360%   44%
CMCO   -0.10  0.23  0.16  0.15  0.22 0.28    82%  667%   60%  200%  320%   22%
UTHR   -0.15 -0.09  0.18  0.27  0.27 0.27   -25%   36%  264%  550%  280%  400%
MRVL    0.07  0.05  0.10  0.15  0.23 0.23   170%  150%  233%  275%  229%  360%
SKX    -0.33  0.18  0.21  0.15  0.25 0.25   -43%  -18%  450%  200%  176%   39%
PTRY   -0.71  0.66  0.63  0.58  0.15 0.67  -446%  100%   91%  142%  121%    2%
KBH     1.75  2.40  2.84  4.42  3.35 3.33    40%   24%   22%   34%   91%   39%
UPL     0.24  0.25  0.23  0.35  0.44 0.40   380%  127%  130%  169%   83%   60%
ELK     0.31  0.42  0.37  0.71  0.55 0.74    41%    0%  -27%  103%   77%   76%
AES     0.12  0.10  0.20  0.16  0.20 0.17   -48%  -58%  100% 1500%   67%   70%
CTSH    0.13  0.14  0.17  0.18  0.21 0.23    86%   75%   70%   50%   62%   64%
UNFI    0.17  0.21  0.23  0.24  0.26 0.26    21%   40%   92%   41%   53%   24%
AVL     0.30  0.40  0.30  0.28  0.00 0.43     7%  130%   20%    0% -100%    7%
SHFL    0.11  0.14  0.17  0.18  0.27 0.18    22%   40%   31%   29%  145%   29%
CBG    -0.26  0.05  0.16  0.88  0.03 0.39  -767%  -58%  133%  650%  112%  680%
CNX     0.36  0.29 -0.13  0.74  0.69 0.76   800%  123%  -86%  422%   92%  162%
PSYS    0.19 -0.03  0.28  0.30  0.34 0.34   -37% -130% 2800%  100%   79% 1233%
MDC     1.38  1.87  2.36  3.17  2.02 1.98    59%   87%   56%  109%   46%    6%
WBSN    0.22  0.24  0.29  0.33  0.31 0.34    29%   33%   61%   74%   41%   42%
TALX    0.28  0.01  0.27  0.33  0.35 0.29     8%  -95%   17%   83%   25% 2800%
JOYG    0.01  0.23  0.20  0.24  0.48 0.32   114%  667%  122%   20% 4700%   39%
VMSI   -0.12  0.15  0.34  0.23  0.26 0.38  -155%   67%   70%   21%  317%  153%
LSTR    0.13  0.29  0.35  0.40  0.26 0.33   -13%   38%   84%   67%  100%   14%
PQUE    0.05  0.07  0.09  0.08  0.10 0.10    67%   40%  325%  700%  100%   43%
XTO     0.40  0.40  0.54  0.66  0.77 0.69    33%   60%   23%  154%   93%   73%
ATU     0.35  0.30  0.30  0.71  0.67 0.67    21%  -27%  -27% 7000%   91%  123%
HOV     0.87  1.06  1.33  2.06  1.52 1.53    28%   33%   25%   47%   75%   44%
SPF     1.21  1.72  2.16  4.01  1.70 2.36    61%   37%   26%   72%   40%   37%
LEV     0.63  0.87  0.68  0.66  0.80 0.00    15%  295%   58%   32%   27% -100%

ducati998 · Apr 26, 2005

Investor's Business Daily
Leading Stocks Show Big Growth In EPS, Sales In Recent Quarters
Monday April 25, 7:00 pm ET
Jonah Keri

With the market staging a follow-through day last week and a few stocks inching toward breakouts, now's the perfect time to review the building blocks of investing.
For IBD users, that means revisiting the investing method forged by decades of research: CAN SLIM.

Today we look at the C in CAN SLIM: Current earnings and sales growth.

Great earnings and sales growth are the lifeblood of a successful stock. Institutions favor companies with innovative products, strong distribution channels and sharp management. Those factors come together in the best companies to deliver goods and services that customers want. Create enough interest in a firm's wares, and robust profit and revenue growth usually follow.

IBD looks at recent quarters on a year-over-year basis to weigh the strength of a firm's earnings and sales growth. A company that achieves 25% or better growth is showing the kind of power you want to see in a winning stock.

Another sign of strength occurs when a stock shows accelerating growth. If you see results progress from 20% to 30% to 40%, that's a sign of an emerging leader. You'll often see this kind of growth occur before a stock breaks out of a sound base and takes off to big price gains.

SRA International (NYSE:SRX - News) went public at $18 in May 2002. Stocks less than eight years removed from their IPOs often offer the greatest potential for big fundamental growth and the resulting gaudy stock price gains you'd expect from a leader.

In this case, the Fairfax, Va.-based firm was hitting its stride, providing IT services to government agencies in the national security, health care and civil government fields.

After rising more than twofold during the market's 2003 rally, SRA etched a new base.

On the accompanying chart, you can see sales growth accelerated as the base formed, from 36% to 37% to 42%. Earnings growth remained solid throughout, ranging from 23% to 27%. When SRA broke out in August 2004 (point 1), it sported a 94 Earnings Per Share Rating, 71 Relative Price Strength Rating and an A grade for SMR Rating.

Earnings and sales growth surged to 55% and 54% the next quarter, then 58% and 54% three months later as SRA carved another base. The stock, highlighted in The IBD 100 and other sections of the paper several times in recent weeks, shot out of its base on Monday (point 2).

C = Current Quarterly Earnings

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