News
"A Vital Source for the CANSLIM Investor" 

Tuesday,  August 31st, 2004 | 11:54 PM
September 2004
Volume 7, Issue 9
 

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If The Market Is To Go Higher, We'll Need This Important Ingredient
As I anticipated, the market continues to bounce. BUT...I am seeing just as many negatives as positives at this point. Do not ignore either.

Let's start with the negative and end on a positive note.

It is negative that this whole move has been occurring on declining volume. In fact, Friday's volume takes us back into 1998-type volume. I am trying not to be too negative about this. After all, this is the summer. After all, there is another convention going on right now. After all, there is worry of terrorism. BUT...why was there heavier volume when the market dropped? I am not saying volume won’t just show up...and to the upside. I am just saying that light volume moves are negative...AND RECENT VOLUME HAS BEEN A JOKE.

The percentage of stocks in good technical shape, while improving, is still way below bullish readings. The same goes for groups.

Margin debt is contracting...and badly. I have pointed out on many past occasions the direct correlation between expanding margin debt and rising markets.

While more names are showing up on my screens for buying, there remains a clear lack of leadership in the market.

On the positive front:

As I stated, more names are showing up in quality bases and some are even breaking out. The problem though is breakouts are occurring on light volume.

The DOW and S&P have risen above their respective 50-day averages. The real key will be breaking above their longer-term 200 day averages...which are just a stone's throw away.

FINANCIALS have been acting better. This will be an important ingredient that must continue if the market is to go higher.

All in all, it is a mixed bag. The best thing to do is exactly what I have told you to do...probe. If things continue to work...terrific.  If things start to fail...back off. I have heard everything from the market is going up 15% by the end of the year to the action is like 1987. Pay no attention. We have proved time and time again that you do not need to predict anything.  Just let the day-to-day action in the market be your guide. When volume shows up, whichever way the market goes with it, we will go with it...and we should not be so worried about being a little late. If there is another leg up, stocks will first have to repair the damage that has occurred this year before heading higher. Maybe that's what is going on right now.

- Gary Kaltbaum

Editor's Note:  We appreciate Gary Kaltbaum (who is not a daily contributor to CANSLIM.net's coverage of the markets) for providing our cover story this month.  CANSLIM.net strongly encourages its members to listen online to Gary Kaltbaum's "Investor's Edge" radio program live 5-7PM EST, or download from the archive of recent shows.

CANSLIM.net's most timely buy candidates are analyzed by our experts in great detail in the "Stocks to Watch in This New Market "section.

Note: Links above (in Leaders column) refer to write-ups on previously featured stocks.

- CANSLIM.net News Staff

Even though I had made my hotel reservations months earlier, I had to react appropriately to the situation. It really wasn’t my choice to go, but the hotel operator was required by law to tell all guests to check out. Do you think you would want to miss out on revenue like all of those hotel owners? Do you wonder why they are legally required to send paying customers away? Could it be that too many people would otherwise not take the approaching storm seriously?

You are probably wondering why this column is sounding more like a weather report than a market forecast. Well, here is my analogy – maybe you made plans and decided a while ago that you were going to invest in the stock market, intending to have an enjoyable experience (a profitable one, of course!), but the market environment was not conducive to your plans. What did you do, evacuate or try to ride out the storm? Think about that and think about how much wiser it is to seek shelter from a vicious storm.

"Hopefully we will not face more devastating market declines"

Daily monitoring of the overall market helps us to pick up on warning signals. It also lets us recognize when the coast is clear. Lately the market’s weather has been calm. This has been an improvement over the stiff headwinds that investors were fighting in July and early August. But our concerns include the possibility that the present period of calm is just the eye of the storm - the storm could be only halfway through passing over with more ugly weather to come.

Hopefully we will not face more devastating market declines. There are actually some signs of improvement that go beyond the Nasdaq’s follow-through day on August 18th. Lately the Advance/Decline line on the NYSE has been breaking out to new highs. The Nasdaq’s Advance/Decline line has been turning up from its deep lows. This shows investors a sign that the sheer number of stocks that are acting better has been improving. The light volume rallies for the major indices get lots of talk, but very few market analysts are pointing out the underlying improvement in the market’s breadth. This is one of the factors that influenced the decision to publish a Special Report featuring ten stocks that are among the most ideal CANSLIM-based buy candidates to watch.

Rather than rushing out right away and hurrying to try to repair the damage that your portfolio may have suffered in the first part of 2004, I am one to suggest staying put in a safe place (i.e. cash or money market equivalents) for the most part until there are more compelling reasons to move more aggressively into the market again. We know that there is not a lot of market leadership now and there is definitely a lack of volume. Things may be calm, but in some ways it is calm like a friend of mine from Jamaica described in telling stories about Hurricane Gilbert in 1991, when there was maybe a half hour of calm as the eye of the storm passed over. People went out and started to walk around the neighborhood to inspect the damage, and then many were caught off guard when the other half of the storm suddenly blasted them. You’d think they would have known better, but there were many people who were hurt or killed because they went out and took foolish risks.

Kenneth J. Gruneisen - A Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers 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. Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Quarterly Comparisons Versus The Year Earlier
Quarter:	07/31/03		10/31/03		01/31/04		04/30/04
Earnings:	0.21 vs 0.20	+5%	0.18 vs 0.13	+38%	0.26 vs 0.24	+8%	0.30 vs 0.23	+30%
Sales ($Mil):	33.6 vs 32.7	+3%	36.8 vs 28.4	+30%	41.1 vs 34.4	+19%	46.9 vs 32.8	+43%

Profile: Cantel Medical Corp. is a healthcare company providing infection prevention and control products, specialized medical device reprocessing systems, water treatment systems, sterilants, diagnostic imaging and therapeutic medical equipment primarily focused on endoscopy, hollow fiber membrane filtration and separation technologies for medical and non-medical applications and scientific instrumentation.  Strength from other issues in the Medical - Systems/Equipment group and the fact the group presently ranks in the top 33% of IBD's 197 Industry Groups is a nice reassurance it is a leader in a leading group of stocks.  It has a well-established annual earnings growth record and respectable earnings increases in quarterly financial reports that earn it a top 10% EPS rank. 

What to Look For and Look Out For: Clearing its pivot point on at least 50%+ above average volume would be a technical buy signal.  Watch for a confirmation day of additional gains on high volume for a nice reassurance.  Pull backs toward prior chart high closes in the $25.70 range may be expected to find support, however deterioration under them and a close under its August 28th low close of $24.35 would be cause for concern.  The 50 DMA then starts to come into play as another important support level to see that it fight to stay above, whereas a breakdown and violation on high volume would be technical sell signal.  

Technical Analysis: Volume was intense during its June-July advance, but in recent weeks it had dried up while the stock consolidated and hovered perfectly above its 50-day moving average line.  The past couple of days' gains have also shown volume picking up, but not yet spiking to 50%+ above the average daily trading volume which is the proper guideline to follow for a buyable technical breakout.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Quarterly Comparisons Versus The Year Earlier
Quarter:	09/30/03		12/31/03		03/31/04		06/30/04
Earnings:	0.40 vs 0.28	+43%	0.35 vs 0.29	+21%	0.30 vs 0.24	+25%	0.47 vs 0.37	+27%
Sales ($Mil):	106.5 vs 43.7	+144%	101.5 vs 88.7	+14%	119.5 vs 86.1	+39%	134.3 vs 106.4	+26%

Profile: Headwaters Incorporated develops and commercializes technologies that enhance the value of coal, gas, oil and other natural resources. Through its proprietary Covol Fuels process, the Company adds value to the production of coal-based solid synthetic fuels primarily for use in electric power generation plants. The Company wholly owns Industrial Services Group, Inc. (ISG) and Headwaters Technology Innovation Group, Inc. (HTI). ISG is a manager and marketer of coal combustion products in the United States and Canada. ISG also develops, manufactures and distributes value-added bagged concrete, stucco, mortar and block products that utilize fly ash through its construction materials segment. HTI conducts research and development activities directed at catalyst technologies to convert coal and heavy oil into environmentally friendly, high value liquid fuels. In addition, HTI has developed a process to custom design nanocatalysts that could be used in multiple industrial applications.  Strength from other issues in the  Energy group and the fact the group presently ranks in the top 11% of IBD's 197 Industry Groups is a nice reassurance it is a leader in a leading group of stocks.  It has a well-established annual earnings growth record and respectable earnings increases in quarterly financial reports that earn it a top 5% EPS rank. 

What to Look For and Look Out For:  The recent breakout was a technical buy signal that could mark the beginning of a much more significant rise, however it may be due to consolidate a bit before continuing with the existing upward trend.  On dips back toward support it may be possible to purchase at a better price, but chasing it much further above its pivot can be risky.  Any reversal leading to declines under $28.00, where it ran into resistance on August 2nd, would be cause for concern.  A break under its upward trend line and/or 50 DMA would be considered a technical sell signal.

Technical Analysis: The strong volume behind gains on August 23 & 24 helped it power to new high closes, then follow-through action on the 30th helped it power to new all-time highs, clearing a 5-month base that resembles a cup-with-handle(s).  Note that on pullbacks in July and August it held above its 50 DMA beautifully, a sign of institutional support.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Quarterly Comparisons Versus The Year Earlier
Quarter:	09/30/03		12/31/03		03/31/04		06/30/04
Earnings:	- 0.12 vs 0.07	N/A	- 0.19 vs - 0.08	N/A	0.09 vs - 0.25	N/A	0.32 vs - 0.22	N/A
Sales ($Mil):	495.7 vs 490.2	+1%	604.1 vs 481.0	+26%	584.2 vs 552.1	+6%	748.8 vs 538.7	+39%

Profile: IMC Global Inc. is a producer and distributor of crop nutrients to the United States and international agricultural communities, as well as a manufacturer and distributor of animal feed ingredients to the industry. The Company mines, processes and distributes potash in the United States and Canada, and is the majority joint venture partner in IMC Phosphates Company, a producer, marketer and distributor of phosphate crop nutrients and animal feed ingredients.   In January 2004, IMC signed a definitive agreement with Cargill, Incorporated to combine it's and Cargill's Crop Nutrition businesses to create a new publicly traded company, Newco.  Strength from other issues in the Chemicals-Fertilizers group and the fact the group presently ranks in the top 11% of IBD's 197 Industry Groups is a nice reassurance it is a leader in a leading group of stocks.  It has a well-established annual earnings growth record and respectable earnings increases in quarterly financial reports that earn it a top 20% EPS rank. 

What to Look For and Look Out For: The recent breakout was a technical buy signal that could mark the beginning of a much more significant rise.  Any reversal leading to declines under $14.50 would be cause for concern.  A break under its 50 DMA would be considered a technical sell signal.  Oil prices on the decline lately have been helping many chemical companies show improvement, however a return to crude oil's recent highs or more could have a negative effect on the group as well.

Technical Analysis: Since gapping up on July 27th to rise above its 50 DMA the stock had been making gradual progress toward earlier highs.  Today's breakout on four times average daily volume allowed it to clear a 5-month base and actually reach new 3-year highs.  A look at the 3-Year chart shows a larger cup-with-handle like formation.

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Quarterly Comparisons Versus The Year Earlier
Quarter:	09/30/03		12/31/03		03/31/04		06/30/04
Earnings:	0.31 vs 0.25	+24%	0.26 vs 0.22	+18%	0.37 vs 0.25	+48%	0.46 vs 0.29	+59%
Sales ($Mil):	258.3 vs 238.1	+9%	251.6 vs 219.3	+15%	284.2 vs 235.8	+21%	310.1 vs 249.1	+24%

Profile: Fastenal Company is engaged in the wholesale distribution of industrial and construction supplies. As of December 31, 2003, it operated 1,314 store sites located in 50 states, Puerto Rico, Canada, Mexico and Singapore. In addition to the stores, Fastenal also operates in-plant sites. An in-plant site is a selling unit located in or near a customer's facility that sells product solely to that customer. Product categories include threaded fasteners and miscellaneous supplies, different types of tools, metal cutting tool blades, fluid transfer components and accessories for hydraulic and pneumatic power, material handling and storage products, janitorial and paper products, electrical supplies, welding supplies (excluding welding gases), safety supplies and raw materials (metals).   Strength from other issues in the Retail/Wholesale - Building Products group and the fact the group presently ranks in the top 20% of IBD's 197 Industry Groups is a nice reassurance it is a leader in a leading group of stocks.  It has a fair annual earnings growth record but admittedly not up to the highest standards.   Still it has shown accelerating sales revenues and earnings increases in recent quarterly financial reports that earn it a top 10% EPS rank. 

What to Look For and Look Out For:  The stock has been in an ongoing upward trend, but a buyable new breakout requires for it to clear its pivot point with a spike in volume at least 50%+ above its average trading levels.  New highs alone would be good, but investors have reasons to be cautious without a volume increase that would be a sign of institutional demand accompanying the breakout.  Meanwhile, a violation of recent chart lows in the $58.50-$59.00 range and/or its 50 DMA would be considered a technical sell signal.

Technical Analysis:  The stock has been building a 7-week base and it has been consolidating in an orderly fashion above its 50 DMA.  An earlier gap up and big gains on July 13th came with very high volume as the company announced strong earnings and a dividend.  

Let’s consider now the historical performance of the 31 Industry Groups through the September-to-December period from 2000 to 2003, i.e., just before the recent business cycle bottom that reached its trough in November of ’01 (National Bureau of Economic Research). Of course, our goal is to find groups and their respective membership stocks that have performed significantly better than the market over this period, just as we begin to enter another chapter.

The table lists by Industry Group the average return by year, the excess return over the S&P 500, the summed excess return over the 2000-to-2003 period, and selected companies (with quality fundamentals) within each group. The Automotive Industry Group, for example, outperformed the S&P in each of the four years by a total of 32.2%, and MPX, HDI, and TM are the quality member stocks within that group. The chart also depicts the total return of the 31 Industry Groups.

As a statistician, I often question the significance of these patterns. It is one thing to see a pattern but quite another to assess its significance and therefore its usefulness. Using a statistical approach known as “Resampling,” I determined that one might expect a total return at or above the 32.2% level 8.2% percent of the time by chance alone (and at or above a 30.9% return 9.6% of the time by chance alone). These top three groups are significant enough to have a root cause and, therefore, significant enough to project a recurrent theme.

- Richard W. Miller, Ph.D.

In order to effectively review your finances it is important for you to set the correct ambiance so that you may concentrate and evaluate your situation correctly. I recommend – and I’m being serious here - Mozart, tea or coffee, and a quiet place where you are ALONE. Too many distractions and you won’t be able to complete this financial workout.

The first step to is to calculate all your monthly expenses and all your monthly income (after taxes). I prefer to round up the expenses and round down income. I do this to be on the safe side. Again, make sure you only include income after taxes since it is a more realistic figure. If you end up with a refund from the IRS, then great!

If you wish to start right now, you may click on the following ProfitAchiever worksheet that I created to facilitate your evaluation. This worksheet is quite simple. It allows you to list your monthly expenses on the left and all your income on the right.

As you are jotting down your expenses, make sure you include your monthly retirement contributions. Remember to pay yourself first, be it $10 or $100 per month! Also, don’t forget to add up those extra “little things” we tend to ignore yet need to include. That fancy cup of Joe at Starbucks, beauty salon visits, nights out with friends, and other entertainment. These daily or sporadic expenses can tend to be a big chunk of your expenditures.

After you have honestly come up with all funds going out and coming in, it is time to do the final math. Don’t panic, the number might hurt, but it won’t bite. If the final profit or loss calculation is substantially on the plus side, then you may not have as much worry. Yet, I always recommend a review of all of your expenses and finding more ways to reduce them even more.

If your profit and loss calculation is to close to the “breaking even” point or if it is on the negative side, then this is where you have to take a deep breath, exhale slowly, and commit to reducing as many expenses as possible. You can make this event be like a contest against others! Whoever reduces the most expenses gets some type of prize. Reward yourself according to the amount of money you actually place on the plus side! This is a prize-winning event that a whole family, a group of friends, or even a company may have on a quarterly basis! To increase the incentive, make sure the prize is significant.

"Live below your means and you will always feel like a king or queen,
have financial independence, and gain more self-esteem. Guaranteed!"

For example; I was constantly paying more for my cell phone time even though I was trying to cut down. I was spending an average of $25 to $35 more than my base plan every month! I then decided to change to a plan that was more expensive because it offered extra minutes. For the past few months I have not paid anything extra! The new $39 plan versus the $19.95 plan has actually put money in my pocket! Here are a few other ways you may reduce your monthly expenses:

• Refinance high interest rate debts (car, home, credit cards)
• Transfer all credit card debts into a single lower-rate card, especially if you have the ability to transfer all into a 0% card! Make sure you always pay on time so that your credit scores improve and you may obtain a credit line increase. You may also contact your creditors and ask them for a reduction in your rate due to your circumstances. They prefer to get paid than to not get paid or lose a customer, so they may work with you. You may also contact an agency that will help you restore your credit and eliminate your debts. Consumer Credit Counseling Services is one that I recommend.
• Brown bag it and stop spending money eating out. You can eat at home, save your money, and put off until later going to a fancy restaurant.
• Decrease the amount of money you spend on vices. Vices are expensive!. Make a budget for setting aside a fixed amount of money in a separate compartment of your wallet or purse and make sure you don’t spend more than the allocated amount. In my purse I have a small pouch where I keep a fixed amount per month for those daily or weekly extra items. If there is any money left over at the end of the month, I deposit that into my travel savings account and put the same amount into that pouch again next month. This is something that you can do with all your expenses.
• If you love to buy books and subscribe to magazines, then visit the library more often. At the same time you get to go out and meet new people.
• Why pay for Internet access if you can get it for free? Many coffee houses (such as Panera Bread) are now offering free Internet access.
• Don’t forget those dollar stores. Buy a wide variety of non brand names and get brand-name items at a serious discount!

It is very important that you take the time to carefully review your expenses. You will be amazed at amount of money you will come up with!

Once you have worked to reduce expenses, then you can find ways to increase income. This might be something as ambitious as a part time job or even a small, side business. The primary difficulty with increasing income is time.

Now, compare your old profit and loss number to your revised profit and loss number. How much money where you able to extract? Remember that this number will increase even more if you increase your income! Stick to the plan if you are happy with the new number and make sure you continuously find ways to reduce expenses and increase your income.

This section is for those individuals that are having more serious financial problems. My solution is a little more drastic, but it will solve current money problems until you get back on your feet again. I will base this solution on a hypothetical situation:

You lost your job or plan to get a new job the following month
You have no income
You don’t have much saved to pay your bills
You have good credit and the ability to obtain a line of credit and/or a 0% credit card

1. Find out what amount of credit you have available with a 0% credit card(s). Also, see if you can obtain a line of credit where you will be charged an interest rate on the amount of money you use not the entire amount you are approved for.
2. Call your creditors, let them know of your situation and ask them to give you a smaller payment plan or some extra time before you make your next payment.
3. Calculate the amount of money you need for all your expenses or your most crucial expenses for the next 3 months (or more if you have the available credit). Pay them all off with the 0% card or line of credit so that the monthly payment for the combined payment is less than the separate payments. If you are able to do this you might be amazed as to how small this combined payment will be!

A good way to avoid bad situations is to make sure that all your expenses can be met with the income you would earn from a part-time job or ½ the income you currently make. This way you will save for your future and never go wrong! Do you really need the fanciest car and biggest home right now?

Live below your means and you will always feel like a king or queen, have financial independence, and gain more self-esteem. Guaranteed!

Soraya Nasrallah, obtained her Series 7 license in 1992, and has served in the capacity of Sales Assistant, Head of Operations Department, and Stockbroker.  Contact Soraya Nasrallah via email at snasrallah@sourcegrp.com or by phone at (954)785-1990 for assistance you with your portfolio. She will be pleased to offer ideas that suit your investment needs, and she can help you achieve the gains you have been searching for.  Miss Nasrallah has just introduced a new educational program called InvestorWiz! specifically created for teenagers and novice investors, incorporating stock market basics with CANSLIM in a colorful and picturesque format. It is the perfect gift for those who just don’t know much about the world of stocks and investing! Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

The wisdom of the CANSLIM method becomes apparent when one understands that there are powerful emotional undercurrents that roil through the markets. The “M” in CANSLIM factors in the overall market, including those emotional undercurrents. While it might seem obvious, it bears repeating – when the market is down, it’s very difficult to find good stocks. When the market is going up, the rising tide tends to lift all boats.

One of the biggest factors in the market in the next two months is the Presidential election. The pundits and commentators are all scratching their collective heads and waxing poetic about politics, Wall Street, and the economy. Technicians are chewing through numbers in an attempt to digest the emotions and psychology of the overall markets in this political season. Regardless of the analysis you use, the important “M” is just as much about emotion and psychology as it is about statistics. Fortunately, as Richard Miller pointed out in his story this month, there are some statistical patterns that emerge which can possibly be exploited for gain.

Thankfully, CANSLIM.net is non-political, just as the overall CANSLIM methodology is non-political. From a stock analysis point of view we really don’t care who wins the White House in November. We simply want to see a healthy bull market, even if an anarchist sits in the Oval Office. Who knows, perhaps the investing public might have a positive emotional response to an anarchist in the Oval Office.

The only events that are causing an emotional response in these offices are the active hurricanes and tropical storms that are popping up with troubling regularity. CANSLIM.net is based in South Florida, a part of the country that is always vulnerable during hurricane season. Even as we prepare to go to press (the online press, that is), we are watching hurricane Frances. While it is likely that this storm will turn north before striking our area (famous last words), there is always the possibility that a weather-related catastrophe might strike our offices. We don’t get emotional about our stock picks, but we would shed more than a few tears if we lost our homes and offices.

Andrew C. Hansen
Editor, CANSLIM.net
editor@canslim.net

CAN SLIM (written here as "CANSLIM" or "Canslim:) is a registered trademark of William O'Neil + Co. CANSLIM.net is not owned nor affiliated with William O'Neil + Co. or any of their subsidiaries including The Investor's Business Daily newspaper.