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CANSLIM Growth Stock Investing Strategy | A in CANSLIM | Annual Earnings #CANSLIM - YouTube
Channel: TraderLion
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Everyone, Richard here from traderlion.com.聽
And today, we're going to be talking about the聽聽
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"A" in CANSLIM, which stands for Annual聽
Earnings. And this is one of the seven聽聽
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key characteristics that William O'Neil,聽
the founder of Investor's Business Daily,聽聽
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determined was critical in picking the greatest聽
winning stocks of all time. And last week we聽聽
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covered the current quarterly earning, which is聽
the "C" in CANSLIM. So go ahead and check out聽聽
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that video if you haven't yet, after watching this聽
one, will be linked above and in the description.聽聽
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So first thing's first, what did William O'Neil聽
say about Annual Earnings? And, why is it so聽聽
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important? So first of all in how to make money聽
in stocks, he says, any company can report a good聽聽
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earnings quarter once in a while to make sure that聽
the latest results aren't just a flash in the pan,聽聽
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it's important to review the company's annual聽
Earnings growth. And this is true to make sure聽聽
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that there's consistency. It's not just a聽
one-off quarter. And institutions definitely聽聽
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want to see an increasing trend, and ideally an聽
accelerating trend in those annual earnings.
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And secondly, he says that you should select聽
stocks with a 25 to 50% or higher earnings聽聽
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growth rates. And that the average growth rate for聽
the biggest winners going back to the 1800s, per聽聽
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his study was 36%. So this metric is incredibly聽
important. You want to see consistent growth,聽聽
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but also very high growth, and that's what's聽
really going to drive those large stock price聽聽
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increases. And number three, from his study, three聽
out of the four big winners showed positive annual聽聽
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growth rate consistently over the past three聽
years. So, once again, consistency is incredibly聽聽
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important. We don't want to just see one quarter,聽
one year, where it's incredibly big. Consistent,聽聽
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and ideally accelerating earnings year聽
after year, that's really what's going聽聽
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to catch all those institutions and聽
get them to invest in the company.
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And number four, the earnings stability over the聽
past three years is consistent, and the earnings聽聽
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stability metric ideally is low. And a normal kind聽
of growth stock will have an earnings stability of聽聽
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20 to 25. And a more cyclical stock, which kind聽
of has fluctuations in its earnings stability聽聽
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will have about 30 or higher. So ideally, we聽
want a low metric here that shows consistent聽聽
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growth. And obviously, institutions want to聽
kind of know what to expect from their stocks,聽聽
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and a kind of a low earning stability is聽
preferred. And last we've got number five,聽聽
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obviously, O'Neil was looking for both outstanding聽
annual, as well as quarterly earnings, to get both聽聽
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pieces of that. And that's what's really going聽
to drive institutions to invest into a company聽聽
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which will drive up the stocks price. So, that's聽
kind of the main things that O'Neil says in how to聽聽
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make money in stocks about annual earnings.
And I think it's great to kind of do a brief聽聽
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slide about how earnings are calculated,聽
because I think there is some confusion here.聽聽
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It's not just an addition of all the quarterly聽
earnings, instead it's the Net Income of that year聽聽
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minus the Dividends and One-Time Costs, divided聽
by the Weighted Average Common Shares. So,聽聽
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this slide basically shows a few examples.聽
We've got Ford in 2017, Net Income, 7.6 billion.聽聽
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And you can see there's no dividends here, so you聽
just divide it. And it gets a Basic EPS of $1.91聽聽
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per share. And Bank of America is a little bit聽
different because there is a dividend here,聽聽
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so we just have to subtract that out before聽
calculating that Basic EPS. And lastly,聽聽
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we've got NVIDIA, which like a lot of other growth聽
stocks doesn't give out a dividend. And you can聽聽
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see like Ford, it's just a basic calculation and聽
division. And this is the general formula for聽聽
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the Non-GAAP-EPS. And both of these on the table,聽
as well as the formula, is from Investopedia.
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And along with the annual earnings, I also聽
want to discuss Return On Equity, which O'Neil聽聽
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mentions in the book. Basically, going back and聽
looking at the greatest winners of all time,聽聽
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almost all of them had ROEs of greater than 17%,聽
and superior companies have a ROE of 25 to 50%.聽聽
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So they're very effective with using their capital聽
and equity. And ROE is calculated right here,聽聽
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Net Income over the Shareholder's Equity.
And throughout the video, I thought we'd go聽聽
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through a few different examples starting聽
with Tesla, which kind of show the power聽聽
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of annual earnings, and how this trend can聽
really translate over to a stocks price.聽聽
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So pay attention here to both the kind of numbers聽
here, which are the EPS each year starting in聽聽
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2013, as well as the estimates for 2020, and聽
also the estimate revisions, which are indicated聽聽
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by these arrows right here. If it's a red聽
down-arrow, that means that the most recent聽聽
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revision is downwards. If it's green up-arrow,聽
that means upwards. And this screenshot over here聽聽
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was taken in the April timeframe, so right before聽
this massive 500% run that Tesla had in 2020.
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And you can see that the estimates for 2020 are聽
up 999%. The estimate revisions are downwards,聽聽
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but when you've got revisions this large,聽
this number doesn't quite matter as much.聽聽
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And you can see that not just the estimates for聽
2020 were enormous. For 2021, we had a further聽聽
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increase of almost $9, it looks like. So the聽
analysts were really kind of bullish on Tesla, and聽聽
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really that's why all the institutions and funds聽
piled into the stock, which led to this incredible聽聽
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price increase of, well, over 500%. So I thought聽
Tesla was a great example of the power of聽聽
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estimates, and you really want to pay attentions聽
to this number when it's over 50 to a 100%.
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Move on, we've got The Trade Desk, which聽
is a more subdued, but nevertheless,聽聽
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a very impressive run in 2020 compared to Tesla.聽
And over here, we've got the same earnings here,聽聽
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the estimates, and also the estimates for聽
2022. So we see a gradual increase here,聽聽
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a steady growth. You can see that the聽
earnings stability here is eight, so聽聽
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very consistent. Institutions love that, they know聽
what to expect from this company. And the return聽聽
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equity as well is at 41%. So this is kind of in聽
that 25 to 50% range of really superior companies聽聽
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who know how to really effectively manage their聽
business. However, looking here we do see at聽聽
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the estimates for 2021 are actually down from聽
2020, which might play into this basing period聽聽
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in the stocks life cycle. Although, you do see it聽
picking back up in 2022 with the estimates being聽聽
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up 27% from this previous year, and the estimate聽
revisions being up as well, which is a good sign.聽聽
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So that is TTD, I thought that was a good example.聽
Very consistent growth, and also very strong聽聽
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return equity, and very low earnings stability.
And moving on, we've got PINS, and this was taken聽聽
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just a few weeks after the huge earnings gap聽
up after they reported earnings right here,聽聽
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and had a lot of bullish things to say about聽
how they'd be monetizing their platform.聽聽
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And overall, you can see that in 2020, it was just聽
basically supposed to earn the same as in 2019.聽聽
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But at this time, analysts were kind聽
of upping their predictions for 2021,聽聽
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basically multiplying that EPS times 20. So this聽
is a very significant change. We've got estimates聽聽
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of 999%. The most recent revisions up as well. And聽
this stock basically tripled from this point. So聽聽
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once again, pay special attention when聽
you see estimate revisions this large.
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And lastly, I thought we'd finish things off with聽
a more recent example. We've got AMAT, which just聽聽
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broke out to all-time highs. And looking over at聽
the earnings, you can see very consistent growth.聽聽
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And then from 2017 to 2020, it kind of oscillated聽
between 3 to $4. And then in 2021, it's estimated聽聽
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to have kind of a breakout year. And this means聽
that it broke out of this range. And you can聽聽
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see the estimates are up 44%. Estimate revisions聽
are up as well. And then, there's further growth聽聽
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expected in 2022. And pay special attention to聽
something like this where it's a breakout year,聽聽
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because that can really lead to dramatic聽
price increases in the stock. And overall,聽聽
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looking at the return equity, it's also very聽
strong just like TTD at 41%. Earnings stability聽聽
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isn't quite as good, you can see it's a 28, so聽
it's a little bit up and down as you can see from聽聽
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the stock price here. But overall, once again, a聽
very strong record of annual earnings increases,聽聽
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and great expectation for 2021 and 2022.
So, that is a few examples of how to apply the聽聽
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"A" in CANSLIM. Essentially, you want to see kind聽
of improving earnings over the past few years,聽聽
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low earnings stability ideally, great聽
return equity, and pay special attention聽聽
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when you see that the earnings estimates for聽
this year or the next are over 50 to 100%,聽聽
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and also that the estimate revisions are up as聽
well. So I hope you guys enjoyed this video. If聽聽
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you did, please go ahead and leave a like down聽
below. Subscribe to the TraderLion channel,聽聽
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if you haven't already. And I'll聽
see you guys in future videos.
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