Newsletter

July 7, 2007

Are You Open to All Possibilities?

Market & Sector Review
Recession Proof Companies

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Members: I am now making myself available to members who would like to contact me and chat at different times during the trading day and evening. Sign-in to the members area for the how-to and most likely times of availability.
Are You Open to All Possibilities?

Winning traders are flexible. They look at a trade from different angles and they are not afraid to explore alternatives. Good traders know and understand they may be wrong, but being wrong doesn't bother them. It's crucial to be flexible when examining all the possibilities. If you rigidly adhere to one course of action, you may pay the price for it in terms of losses. Try to be as flexible as possible, and you'll see more profits.

The greatest obstacle to being flexible and open to different possibilities is fear. When we think we are about to experience harm, it's very important for our survival, that we mobilize our resources and focus our energy, on the source of harm. Its the same with trading when we experience fear and potential harm. When we unconsciously perceive something may be wrong, we instinctively focus our attention on the harmful agent. Rather than scanning and considering a variety of options, we restrict our attention.

Fear can sometimes play a role as we devise a trading plan. Some traders secretly fear that their plan is unlikely to succeed. Rather than carefully consider all possible adverse conditions, this trader focuses on only one possibility and develops no alternative plan of attack should an unwanted event thwart the trading plan. For example, one may anticipate a stock rising, yet secretly doubt whether the move will pan out. Out of fear, this trader may be afraid to consider and account for possible adverse events, such as earnings reports, a possible interest rate hike, or a sudden change in general market sentiment. The flexible trader, in contrast, has no fear of looking at all these possibilities, and determining which are likely. Openness to all possibilities allows the flexible trader to change his or her plans if required, and recover from a potential setback.

People are the most inflexible when they are afraid, so the best antidote is to reduce fear. Fear can be reduced by managing risk. If you know that you can survive the worst-case scenario, then you'll feel calm and relaxed. Similarly, if you trade with money you can afford to lose, you'll have little to fear and you can more easily examine all possible alternative factors that may impact your trading plan. By cultivating a relaxed mindset, you'll be less fearful and more open to looking at all the possibilities. And the more flexible you are, the more profitably you'll trade.
Market & Sector Review
Recession Proof Companies

Many of you are familiar with William O'Neil's CAN SLIM growth approach. A few years ago, the analysts and editors at Investor's Business Daily attempted to identify the characteristics of those companies that had weathered the recent economic and stock market downturn. The goal was to apply those factors going forward to identify "recession-proof" companies. The fruit of their efforts was the Stable list, which consists of companies with strong and stable long-term earnings growth.

Investor's Business Daily applies the following criteria to its database to arrive at the Stable list:
  • Share price of at least $12;
  • Five-year earnings growth of at least 10%;
  • Year-over-year earnings growth of at least 10% for each of the last five fiscal years;
  • Quarter-over-quarter earnings and sales growth of at least 10%, as defined by growth between the latest fiscal quarter and the same quarter one year prior; and
  • An "earnings stability" rate of 20% or less, which shows how a firm's annual earnings compare with the trend in earnings over the last five years—the lower the percentage, the more consistent its profit, year after year.
Strong Annual Earnings Growth

Despite the best efforts of many companies during the technology stock boom of the late 1990s to detract attention from bottom-line earnings, earnings continue to serve as a barometer of long-term viability. As its name may reveal, the IBD Stable screen looks for companies that have had strong, stable earnings growth over the last several years. To this end, the screen looks at a company's earnings growth over the long term on a year-to-year basis as well as on a quarter-to-quarter basis.

Investor's Business Daily does not explicitly state which earnings figure it uses for its Stable screen. This screen makes use of earnings from continuing operations, which ignores extraordinary and "one-time" charges and provides a better indication of a company's earnings potential going forward.

Quarterly Sales and Earnings Growth

Company fortunes can turn rather quickly, especially those in volatile industries such as biotechnology and semiconductors. For this reason, the IBD Stable screen seeks out companies that have exhibited strong quarterly growth as well as long-term earnings growth.

When looking at quarterly growth, it is important to compare the growth between same-period quarters. In other words, compute the growth in earnings or sales in the first fiscal quarter from the same quarter one year earlier. Virtually all companies undergo some level of seasonality with their sales and earnings. By examining same-quarter growth, you are limiting seasonality biases that may exist if you were comparing first quarter results to those of the second quarter.

The IBD Stable screen looks for companies that have had same-quarter earnings and sales growth rates for the latest fiscal quarter of at least 10%. The quarterly earnings filter looks for companies that have a growth rate in earnings per share from continuing operations for the latest fiscal quarter from the same quarter one year ago of at least 10%.

In the long run, sales help drive earnings. While in the short run a company can squeeze out extra earnings by increasing efficiency and cutting costs, long-term earnings growth is driven by a corresponding increase in sales. A dip in sales may also be an early warning for deeper trouble down the line. For this reason, the IBD Stable screen looks at sales growth, albeit if only for the latest fiscal quarter. Just as with the quarterly earnings screen, this criterion too looks for sales growth for the latest fiscal quarter of at least 10% over the same quarter one year ago.

Conclusion

The IBD Stable screen looks for companies that are equipped to withstand economic and stock market downturns by isolating companies that have had strong long-term growth in earnings. Furthermore, the screen isolates companies that have been able to grow earnings in a stable manner.

However, the companies that pass this or any other stock screen do not represent a recommended list. Stock screening is merely the first step in stock selection. It is important to perform additional due diligence to identify stocks that may be suitable investment or trading candidates, based on your individual criteria, risk tolerance, and financial condition.

The IBD Stable screen is included in our Growth Watch List in the Members Area.

Source: American Association Of Individual Investors!
Largest Changes In Raw Numbers (21 Days)

[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports

This section has now been eliminated as the data is available on our site via the "Today's Calendar" link on a daily and weekly basis.
Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.