Mastering the “A” in CANSLIM: Annual Earnings

Hey everyone, Richard here from TraderLion.com! Today, we're diving deep into the "A" in CANSLIM, which stands for Annual Earnings. This critical aspect of the CANSLIM investing strategy, developed by William O'Neil, the founder of Investor's Business Daily, can help you pick out the greatest winning stocks of all time!

If you haven't checked out our last video covering the "C" for current quarterly earnings, make sure to do so—it's linked above and in the description!

Why Are Annual Earnings Important?

Let's kick things off with some insights from William O'Neil on annual earnings and their significance:

• Consistency is Key: O'Neil emphasizes that any company might report good earnings for a quarter now and then. However, it’s vital to evaluate the company's annual earnings growth over time to ensure there’s consistent performance.
• Target High Growth: Aim for stocks with 25 to 50% or higher earnings growth. O’Neil’s research indicates that the average growth rate for the biggest winners back to the 1800s is a remarkable 36%!
• Track Record Matters: Three out of four big winners had consistent positive annual growth rates for the previous three years. Gaining the trust of institutions means showing consistent, ideally accelerating earnings.
• Earnings Stability: Look for an earnings stability metric ideally between 20 to 25 for growth stocks, while cyclical stocks should be around 30 or higher.
• Both Annual and Quarterly Counts: O'Neil stresses the importance of outstanding annual and quarterly earnings as a means to attract institutional investors.

Calculating Annual Earnings

Calculating annual earnings is often misunderstood. Here's the formula:

Annual Earnings = (Net Income - Dividends - One-Time Costs) / Weighted Average Common Shares

Examples

Understanding Return on Equity (ROE)

Another critical aspect of the CANSLIM strategy is Return on Equity. O'Neil notes that almost all top winners have ROEs greater than 17%, with superior companies boasting ROEs of 25 to 50%. A higher ROE indicates effective use of equity, calculated as:

ROE = Net Income / Shareholder's Equity

Real-World Examples of CANSLIM Growth Stocks

Tesla (TSLA)

Let’s start with a powerhouse: Tesla. Analyzing their annual earnings shows impressive growth, with estimates for 2020 soaring by 999%. Analysts were bullish, and this enthusiasm led to a staggering 500% price increase!

The Trade Desk (TTD)

Next, The Trade Desk demonstrated consistent performance, with an earnings stability metric of 8 and ROE at 41%. This steady growth inspired institutional confidence, even if initial estimates showed a dip. Always pay attention to the uptick in estimates!

Pinterest (PINS)

After a significant earnings gap up, Pinterest’s projections for 2021 were bullish, leading to a tripling of stock price from that point! Their estimates and revisions signify crucial factors to consider.

Applied Materials (AMAT)

Lastly, Applied Materials revealed consistent growth that led to a breakout year in earnings. With a 44% estimate increase and a strong ROE of 41%, this company showcases what to look for in the CANSLIM strategy.

Key Takeaways

In summary, to master the "A" in CANSLIM, remember these golden rules:

• Look for improving annual earnings over the years.
• Aim for low earnings stability.
• Check for strong return on equity.
• Watch for notable earnings estimates and revisions!

Thanks for joining us today! If you found this video insightful, don’t forget to hit that like button and subscribe to the TraderLion channel for more valuable content. See you all in the next video!