The A In CAN SLIM Stands For Awesome Annual Profit Growth
A single great quarter does not always a good growth stock make. Investors shouldn't buy a stock on the basis of the most recent quarterly results alone. Also, look for three to five years of solid earnings growth.
Specifically, look for growth rates over those time frames of 25% to 50% or more.
That's truly hard for a company to do.
Only those on a superb growth track can produce that kind of result.
IBD makes it easy to determine annual growth by publishing the three- to five-year annualized EPS growth rate for all stocks that have minicharts in the paper, on IBD Stock Checkup at Investors.com, or on Leaderboard and in MarketSmith.
IBD uses a statistical method called least squares regression to compute the growth rate. It's just a way of fitting the data to come up with a single number, and IBD's computer does the work for you.
If a company has a five-year annualized growth rate of 25%, that means the normalized growth rate each year over the past five years was 25% as calculated by IBD's method. Only companies with something special — a hot new product, the conquest of new markets or a CEO who knows how to supercharge growth — can produce that kind of result.
Related to annual earnings growth is the stability of earnings growth. Other things equal, you want a company growing at a steady rate.
IBD's proprietary Earnings Stability Factor provides the data — and rates companies on a 0 to 99 scale. It's different from other IBD ratings in that low numbers correspond to steady earnings growth.
A steady growth company might have an Earnings Stability Factor of 5 or 15.
Companies over 30 are less dependable.
Sometimes you'll find a stock with a 25% growth rate and a single-digit Earnings Stability Factor.
These types of companies might not have the growth potential of a faster-growing company, but they often rise at a steady pace without scary sell-offs.
They might also ride along the north side of their 50-day moving average for months without breaking it.
During bear markets or serious corrections, look for stocks that continue to grow rapidly while building a base.
The combination of a depressed stock and continued fast earnings growth turns the stock into a coiled spring.
When the market finally turns upward, the stock can explode higher in price.
As many as 40% of winning stocks are turnarounds. They might have lost money for a year or more, possibly because of a recession or poor execution. Look for high earnings growth for two quarters.
After the 2008 financial crisis, the best candidates had annual earnings growth that topped that of the precrisis market.
The table above shows highlights from a screen called "Fastest Growing Companies Top 150" that is built into the MarketSmith platform.
Generic-drug maker Lannett (LCI) tops the list with a five-year annualized growth rate of 337%. It's pretty hard to maintain that rate for five years. And it's no surprise that Lannett has been one of the best performing stocks of the past several years.
