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How to Make Money in Stocks - Summary

How to Make Money in Stocks - Summary

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Published by ahmedzino
This summary is the personal opinion of Fernando Boccanera based on his reading of O’Neil’s book. It is furnished to you as a fellow investor and not in any professional investment advisory capacity. You should consult with a qualified investment advisor for specific investment recommendations suitable to your personal circumstances.
This summary is the personal opinion of Fernando Boccanera based on his reading of O’Neil’s book. It is furnished to you as a fellow investor and not in any professional investment advisory capacity. You should consult with a qualified investment advisor for specific investment recommendations suitable to your personal circumstances.

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Published by: ahmedzino on Sep 13, 2011
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How to Make Money in Stocks
2
nd
Author: William O’NeilSummarized by Fernando Boccanera on 2005/8/1 – Version 1
Individual investors
Have advantages over institutions
Can invest in only the very best stock
Can get in and out at any time
Institutional Investors
Can only buy companies with large supply of stocks, which usually under perform
Are limited to a narrow set of stocks because of their stated strategy
Can not move in and out of a stock quickly because of the size of their trades
CAN-SLIM Method in a Nutshell
Buy only stocks of companies with superb growth, whose stocks are performing superbly.
Buy and sell at the right time based on proven patterns
CAN-SLIM Method
C – Current Quarterly Earnings – The higher, the better A – Annual Earnings Increases – Significant GrowthN – New products, new management, new highsS – Supply and Demand – Volume drives demandL – Leader or LaggardI – Institutional Sponsorship – Follow the leadersM – Market Direction
C=Current Quarterly Earnings
Research has shown that super performing stocks had substantial earnings in the quarter or two beforea major price advance. 3 out of 4 best stocks over 40 years had earnings increase > 70% in the latest quarter compared to the same quarter the year before. The one in four that didn’t, did so in the very next quarter.
EPS increase in the latest quarter should be at least 25%
EPS increase in the latest quarters should show accelerating growth
Next quarter EPS estimates
o
At least 15%
o
Increase should be more than latest quarter 
Sales growth should be acceleration and in-sync with EPS increase
Signs of financial trouble:
o
Large sales increase but low EPS increase might mean company:
Issued shares (diluted)
Took large charge
o
One-time earnings
Page 1 of 17
 
This summary is the personal opinion of Fernando Boccanera based on his reading of O’Neil’s book. It is furnished to you as a fellow investor and not in any professionalinvestment advisory capacity. You should consult with a qualified investment advisor for specific investment recommendations suitable to your personal circumstances.
 
o
Cost reduction measures
Page 2 of 17
 
How to Make Money in Stocks – Summary
A=Annual Earnings Increases
Annual EPS ideally should have increased every year for the past 3 years
Latest annual EPS increase of at least 25%
Next annual EPS increase estimate at least 15%
IBD’s EPS rating measures EPS growth against all other stocks
o
It factors the last 2 quarters and the last 3 years
o
Historically, the best performing stocks had EPS rating > 80
ROE at least 17%
Annual cash flow per share = 25% > actual EPS
IBD’s EPS stability < 25
N=New Products, new Management, New Highs – Buy point
Paradox: What seems too high in price to the majority usually goes higher and what seems cheap usually goeslower.
Search for companies that have important new products or services, or that are benefiting from newmanagement or new industry consolidation
Stocks close to or making new highs after a consolidation show strength
S=Supply and Demand – Volume drives demand
Supply and demand move the market, more important than any analyst opinion.
Shares float = Total shares outstanding – shares closely held.
Management should own > 2% of shares
Look for companies buying their own stock back, EPS will grow.
Low debt-to-equity ratio
L=Leader or Laggard
Should buy leaders, number 1 in their particular field
The leader:
o
Is not the largest or the one with the most recognized brand name
o
Is the one with the best quarterly EPS growth, ROE, profit margin, sales growth and priceincrease
Avoid sympathy stocks, the ones you like for no good reason
IBD’s relative price strength (RPS) rating:
o
Measures price performance against all other stocks for the past 52 weeks
o
Best performing stocks from 1950-2000 had RPS average = 87
RPS at least 80
Give preference to the top 2 or 3 stocks in an industry group (leaders)
I=Institutional Sponsorship – Follow the leaders
Institutions account for more than 70% of the activity in most leading stocks. They are the sustainedforce behind most important price moves.
Too much sponsorship can cause a massive sell-off when a stock tops
IBD’s SPON Rating measures institutional sponsorship. It ranges from A (best) to E.
Look at quantity and quality of sponsorship
o
At least 10 institutional owners
o
Number of institutional owners should be increasing
Page 3 of 17

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