All trading strategies are designed to attain investment returns, whether in a long or short term market. Out of hundreds of techniques available online, the personality and the trading style of the trader should go together in order to achieve better results. With the appropriate strategy and discipline, trading success is just around the corner.
As mentioned, there are a lot of trading strategies you can choose from. If you have mastered one, you better stick to it. If you haven’t used one, there’s no other way than do a trial and error until you meet the perfect strategy.
Philosophy of CAN SLIM
Most of the professional traders have considered using CAN SLIM strategy for the past few years. It is a philosophy developed by William O’Neil from its prominent finance book “How to Make Money in Stocks.”
CAN SLIM is an acronym which stands for Current Earnings, Annual Earnings, New Product or service, Supply and demand, Leader or laggard, Institutional sponsorship and Market direction. This a system formulated to identify the leading stocks prior to the major price movement with considerations on both tangible and intangible aspects of the stocks.
In implementing this strategy, the trader must comprehend the practice of technical and fundamental analysis. It involves major trading fundamentals, consolidation of prices, losses and gains. Part of it includes the pre-advance periods which are considered buying points coming from the price consolidation bases.
Breaking down the Strategy
The latest quarterly earnings of the stock provide a significant role in the price movement in the coming sessions. Mr. Oneil suggested that the winning stocks have upbeat quarterly earnings per share results before any price hikes.
Earnings per share (EPS) is the ratio which gauges the amount of net income earned per share of stock outstanding and serves as a sign of the profitability of the company. It matters that the EPS of the stock in the recent quarter has rallied year-over-year. The accelerating earnings from the previous quarters can eventually lift the stock. Ideally, the current earnings should be up to 25 percent.
In case the EPS of the stock was found to be competitive enough, the other stocks in the same field must be taken into consideration. The blowup of the earnings of the stock in the same industry may cause a breakout sooner or later.
On January 26, Microsoft posted strong fiscal second quarter earnings. The software giant jumped from 63.70 to 65.88 in the following day. Microsoft disclosed non-GAAP earnings of $0.83 per share, ahead of analyst consensus of $0.79.
O’neil had a few reminders for the investors.
“If you want to further sharpen your stock selection process, before you buy, look ahead to the next quarter or two and check the earnings that were reported for those same quarters the previous year. See if the Company will be coming up against unusually large or small earnings achieved a year ago.”
“Most investors are impressed with what they read, and companies love to put their best foot forward. Even though this corporation may have had all-time record sales, up 20%, it didn't mean much. You must be able to see through slanted published presentations if you want the vital facts. The key factor for the winning investor must always be how much the current quarter's earnings are up in percentage terms from the same quarter the year before.”
After the current earnings, it is a must to take a look of the annual earnings of the company. As Mr. O’neil would put it, each year's annual earnings per share for the last five years should show an increase over the prior year's earnings. The continuous annual earnings increase may spur meaningful growth and may take the stock into a new high ground.
Preferably, there should be around 25 percent increase or more in each of the last three years or even just a commendable annual growth in each of the last five years while the annual returns on equity must hit at least 17 percent or above.
The yearly earnings give a detailed report on the total income and highlights of the company in a certain fiscal year. Investors usually juggle the information provided to determine the value of the stock.
Take a look at the annual revenue and net income of Microsoft for the past few years.
Revenue from 2002 to 2016
Net Income from 2012 to 2016
Note: Revenue refers to the gross amount earned from selling goods or providing services during the period shown in the heading of the income statement. Earnings means the net amount earned after deducting the cost of goods sold, expenses and losses; sometimes referred as net income.
Microsoft posted a consistent upbeat annual revenue report, except last year when the company came short from $93.58 billion in 2015 to $85.92 billion in 2016. On the other hand, the net income receded from 22.07 billion in 2014 to 12.07 billion in the following year. The total earnings in 2016 revived the confidence of the investors in the company.
In the last five years, Microsoft showed a significant movement in the stock market. Reflecting the encouraging annual financial data, the stock begun to trade from 26.00 in 2012 and ended at 63.00 in 2016. Apparently, there were downtrends in the middle of each year, but still the stock performed better during the succeeding year. These data should be part of the investors’ plates prior any market decision.
CANSLIM strategy stands by the idea that a company should always have new ideas to boost the growth of earnings and to eventually achieve a new high for pricing. Market players typically get interested in everything that is new. It could be new products, new management, new owners and even a new stock price peak. Although there could be risks in entering major changes, investors tend to quickly jump on the positive side in every venture of a company.
Like any other software companies, Microsoft consistently conducts extensive updates of its products and services or in some cases brings the most advanced technology in every product it does. Microsoft carried the Windows Operating System for years now. Every update of this OS will definitely leave an impact on the stock. The company is also the maker of the phenomenal XBOX video game consoles and Surface tablet.
Before Microsoft IPO debuted in 1986, the company unveiled Windows as a graphical operating system shell for MS-DOS on November 1985. Various versions came up almost every other year, from Windows 2.0, Windows 3. x, Windows 9x and Windows NT. In the following years, Windows XP, Windows Vista and Windows 7 gained huge popularity.
Here’s how the stock reacted to the release of the new operating systems.
The remaining part of the strategy will be discussed in the next article. That will comprise of the Supply and demand, Leader or laggard, Institutional sponsorship and Market direction. Right now, take time to master the first three aspects of the strategy and be ready for CAN SLIM Strategy Part2. Check FSM News daily and receive relevant market information.
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