Investing for the New Millennium
INM Sep '09 - No Hiding The Market's Recent Lack Of Favor For High-Ranked Shares
Tuesday, September 01, 2009 / CANSLIM.net
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Usually companies producing the strongest sales revenues and earnings increases are the best performers in the market. However, in recent months the point has been reiterated continually that what has helped the major averages rebound and rally impressively from their March 2009 lows has been a load of badly beaten down stocks bouncing back from deeply oversold levels. While that scenario presented many great opportunities for bottom fishers and bargains hunters, it did not do much but frustrate the disciplined followers of the investment system described in "How to Make Money in Stocks" by William J. O'Neil. Over time, the normal market forces will always prevail, so I remain confident that this system will serve investors well in the years ahead.
While we have grown accustomed to seeing some of the newspaper's proprietary indexes linked to high-ranked leaders outperforming the major averages in recent years, we cannot hide the fact that in recent times the market has simply not been smiling upon these companies which have better earnings track records than most. Consider the IBD 100 Index, which is currently up less than +4% from its May 6th, 2009 intra-day high, far short of the +12% rally over the same period from the Russell 2000 Small Cap Index or the +11.5% rally from the "stodgy" Dow Jones Industrial Average. Helping to further illustrate the lagging performance of high-ranked stocks, the IBD 85/85 index is another great proxy for the high-ranked area of the market where we put our focus, and yet it is actually down a fraction of a point over the same time span.
PICTURED: The IBD 85/85 index of high-ranked stocks is actually down a fraction of a point from its May 6th high!
To illustrate the bounce that many stocks with questionable fundamentals (including much talked about banks that needed taxpayer bailouts to survive) have seen in the recent period I have chosen to include a chart for the Retail/Wholesale - Office Supplies firm Office Depot Inc. (ODP). The stock is currently -88.8% off its May 2006 peak, however its rebound from $0.59 to over $5.00 helps it get a 95 Relative Strength rank while still sitting -38.6% off its 52-week high. That high rank is because the paper's relative strength ranking system puts heavier emphasis on the most recent 6-month period's price action.
Lower sales, and losses instead of earnings in 3 of the past 4 quarterly comparisons are an obvious fundamental flaw which is of concern for investors who only buy companies with strong underlying growth. So we'd have never considered bottom fishing. The rally from its lows could be looked at as a blessing for investors who might have otherwise faced a total loss on their investment in the event of a bankruptcy filing, which was the fate of another well-recognized retailer, Circuit City, not very long ago.
Yes, any 10-fold winner under the sun would make an investor happy. However, historic studies have proven that the odds of finding such winners are normally far better when focusing on companies with very strong sales revenues and earnings growth. By choosing companies with great underlying fundamental growth, investors have a good opportunity to find another big winner like past examples such as Research in Motion Ltd (RIMM), Qualcomm Inc (QCOM), Hansen Natural Corp (HANS), or Eresearch Technology Inc (ERES).
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About
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program. Mr. Gruneisen is a Registered Principal and manages a Source Capital Group Member FINRA,SIPC) branch office offering personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling the office locally at (954) 785-1990 or 1-888-237-8399 or emailing to
kgruneisen@sourcegrp.com. Further information is always available upon request. Contact us if you know anyone that may have an interest in receiving this or any of our other reports.
The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals. |
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