The Blue Collar Investor WeBlog

The IBD 100 is my main source for locating the greatest performing stocks. It is not, however, the only source (see chapter 16 of my book, Cashing in on Covered Calls).Another great resource can be found on the IBD Homepage (www.investors.com), the screen you enter prior to going to the Stock Check-Up link. On the left side of this page locate the heading IBD Stock Lists. Click on the CAN SLIM Select link. This is a screening system created by William O’Neil, the founder of Investors Business Daily.

This list tracks market-leading stocks that show strong earnings growth, positive institutional sponsorship (the big boys are buying this equity), excellent industry strength, and solid sales growth, profit margins and return on equity. Stocks must also meet minimum price and volume levels.

CAN SLIM is a mnemonic for the following screening criteria:

C= Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters.

A= Annual earnings should be up 25% or more in each of the last 3 years. Annual return on equity should be 17% or more.

N= A company should have a new product or service that’s fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price.

S= Supply and demand. Shares outstanding can be large or small, but trading volume should be significant as the stock price increases.

L= Leader or laggard? Buy the leading stock in the leading industry (sound familiar?).A stocks Relative Price Rating should be 80 or higher so that the price pattern of the equity is in the top 20% of all stocks.

I= Institutional Sponsorship should be increasing. Invest in stocks showing increasing ownership by mutual funds in recent quarters.

M= The market indexes, the Dow, S&P 500, and Nasdaq, should be in a confirmed up trend since 3 out of 4 stocks follow the market’s overall trend.

I will periodically check this list, eliminate those equities already on my watchlist, and run the others through my system.Certain securities which show a rather volatile chart pattern are also eliminated.From the current list, which you can access as of Sunday August 24th, I located 16 stocks that meet our system criteria, 6 of which are already on my watchlist. Here are the aforementioned equities with an asterisk next to those already on my list:

ABT

GTLS *

CLHB

CXO

CLR

DRIV

EME *

FCN

FLS *

GIS

HAL

ICLR *

ILMN

KSU *

NSC

WGOV *

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I find this resource particularly helpful during earnings season. Because we NEVER sell options when an earnings report is about to be reported, our watchlist of available stocks is reduced. This normally decreases our monthly returns (although still fabulous).Utilizing this CAN SLIM list will help expand our universe of available equities thereby increases our profits even more.

Let’s select 2 of these stocks and sell an in-the-money strike and an out-of-the-money strike. Keep in mind that we are one week into the current contract period so there has been some time decay of the premiums:

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In-the-money strike- ILMN:

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Buy 100 x ILMN @ $91.33 = $9133 (cost basis or investment)

Sell (1) IQA IR (September $90 call) @ $4.30 per share or $430 per contract

Deduct the intrinsic value of $133, leaving a net profit of $297 and reducing our cost basis to $9000

Our 1-month profit is 3.3% (297/9000) or 40% annualized

And our downside protection is 1.5% (133/9133)

Here is the option chain from the yahoo site:

CALL OPTIONS Expire at close Fri, Sep 19, 2008
 
Strike Symbol Last Chg Bid Ask Vol Open Int

80.00 IQAIP.X 12.30  0.30 11.70 12.10 31 394
85.00 IQAIQ.X 7.40  1.00 7.60 8.00 2 384
90.00 IQAIR.X 4.20  0.90 4.30 4.60 39 677
95.00 IQAIS.X 2.40  0.30 2.15 2.40 102 2,760
100.00 IQAIT.X 1.10  0.20 0.95 1.15 19 611
105.00 IQAIA.X 0.55  0.15 0.50 0.55 14 1,926
110.00 IQAIB.X 0.25  0.15 0.25 0.30 10 124

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Out-of-the-money strike- CXO:

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Buy 100 x CXO @ $33.45 = $3345 (cost basis or investment)

Sell (1) CXO IG @ $1.60 per share or $160 per contract

Our 1-month profit is 4.8% (160/3345) or 57% annualized.

Our upside potential is 4.6% (155/3345) if the stock reaches the $35 strike price.

Here is the options chain from the yahoo site:

25.00 CXOIE.X 7.40 0.00 8.30 8.90 20 345
30.00 CXOIF.X 4.40  0.20 4.30 4.70 5 650
35.00 CXOIG.X 1.65 0.00 1.60 2.00 15 593
40.00 CXOIH.X 0.50 0.00 0.40 0.70 1 123

It looks like we’ve uncovered two more gems, this time from the CAN SLIM Select List. I leave it to you to do your technical analysis to determine buy/sell points.

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Last Week’s Economic News:

Once again, the news was predominently negative. Inflation at the wholesale level was a cause for concern in July even if you exclude the higher prices for food and gas. Housing starts declined 11% in July from the previous month’s misleading level(June’s numbers were inflated due to a change in building codes in NYC where there was a rush to start construction on multi-family apartments).On a brighter note, there was a decline in initial claims for unemployment insurance.

Last week the S&P 500 declined .5% to 1292 for a year-to-date return of -10.8% continuing what has been an extremely challenging market.History tells us that better days are ahead!

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I can be reached @ alan@thebluecollarinvestor.com

I also encourage using the comments link of my blog articles to share your questions and opinions.

My best to all,

Alan