Growth Investing and
Super-Performance
Stocks
Ross Haber |Head Trader - TraderLion
Why Own Growth
Stocks?
● Most people believe growth stocks are
much too volatile and too risky, despite
their super-performance potential.
● While no two investor’s risk-appetites are
exactly alike, it doesn’t mean you should
not, or cannot own growth stocks.
● Fortunately, there is a way to manage
risk such that everyone can safely own
some growth stocks in their portfolio.
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TSLA
Tesla, Inc.
Summary: Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage
systems in the United States, China, Netherlands, Norway, and internationally. The company operates in two segments,
Automotive; and Energy Generation and Storage. The Automotive segment offers sedans and sport utility vehicles. It also
provides electric powertrain components, systems, and services for electric vehicles through its company-owned service
locations, Tesla mobile service technicians, as well as sells used vehicles. Tesla, Inc. was founded in 2003 and is headquartered
in Palo Alto, California.
Sector
Consumer Discretionary
Industry
Automobile Manufacturers
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TSLA was one of the most powerful leading growth stocks of 2020. It is the clear leader in the
red hot electric vehicle space, showing triple-digit, quarter over quarter earnings growth of
140%, 300%, and 105% for the quarters ended March, June, and September of ‘20.
TSLA’s quarter over quarter revenues are far from stable, although they are certainly not
lacking, with 39% growth reported in their most recent quarter.
TSLA’s annual earnings growth has been accelerating at a furious pace since 2017. TSLA is
expected to earn $2.40/share once their final quarter is reported for fiscal ‘20, and the street is
currently looking for them to earn $3.87/share in 2021, which would be 61% growth.
Institutional sponsorship in TSLA has picked up every quarter, for the last 7 quarters and 3 of
MarketSmiths flagship funds held positions in the stock as of their most recent quarter.
TSLA broke out through $154.99 on April 27th and ran up to an all-time high of $718.72 on
December 31st for a gain of 364% in 32 weeks.
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FVRR
Fiverr.com
Summary: Fiverr International Ltd. operates an online marketplace worldwide. Its platform enables
sellers to sell their services and buyers to buy them. The company’s platform includes approximately
300 categories in eight verticals, including graphic and design, digital marketing, writing and
translation, video and animation, music and audio, programming and technology, business, and
lifestyle. The company was founded in 2010 and is headquartered in Tel Aviv, Israel.
Sector
Consumer Discretionary
Industry
Internet & Direct Marketing Retail
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FVRR was an extremely powerful leader in the retail internet group in 2020. The retail internet group
exhibited solid relative strength throughout the year, with many other high quality, high relative strength
stocks in the group confirming its move.
2020 will be Fiverr's first year of positive earnings, assuming their final report for the year is near what
the street is currently expecting. In ‘19 FVRR lost $0.50/share. However, analysts are currently looking
for them to earn about $0.27/share by the end of fiscal 2020.
FVRR’s spectacular earnings acceleration story doesn’t end here. The street is looking for a staggering
159% growth over fiscal ‘21.
FVRR’s quarter over quarter earnings showed a similar turnaround from negative to positive and have
accelerated big time over the last 2 quarters.
The acceleration in FVRR’s institutional sponsorship has been explosive over the prior 7 quarters. Not to
mention, 4 of MarketSmith’s flagship funds held positions in the stock as of their most recent quarter.
FVRR broke out through $26.98 on April 8th and ran up to an all-time high of $228.49 on December 22nd
for a gain of 747% in 34 weeks.
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How Much Exposure to Growth Should I Have?
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The answer will be different for everyone. This will
ultimately come down to your personal objectives,
goals, time horizon, risk tolerance, etc.
●
For most it often comes down to how much time
they have until invested capital is needed and their
overall tolerance for risk. No matter who you are
or how much experience you have, if you are
losing sleep, or are constantly worried about your
portfolio, then you have way too much exposure.
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Fortunately, there is a methodology for finding
these explosive stocks and managing risk, so that
anybody willing to put in the time and effort to
learn, can benefit from super-performing growth
stocks.
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Who is William J. O’Neil and What is CANSLIM?
● Studied the greatest performing stocks
since the 1800s
● Identified common characteristics they
shared before and during their large moves
● Author of “How To Make Money In Stocks”
● Combined Fundamental and Technical
Analysis
● Learned from great traders of the Past
○ Jesse Livermore
○ Nicolas Darvas
○ Jack Dreyfus
○ Richard Wyckoff
William O’Neil
Founder of Investor’s Business Daily
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CANSLIM
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C - Current Quarterly Earnings - Look for companies with at
least 25% quarter over quarter growth in their earnings and
sales for a minimum of three quarters. Ideally, look for
companies with quarterly earnings and sales that are
growing at triple digit rates and preferably accelerating.
These are early indicators of companies that may be
ready to explode in growth.
According to HTMMIS, in their model books of the 600
best-performing stocks from 1952 to 2001. 3 out of 4
stocks showed increases averaging more than 70% in their
most recently reported quarter before they began their
major advances.
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A - Annual Earnings
● Look for companies with annual earnings that
are positive and have been increasing year over
year for the last three years. Large annual
estimates are a big plus.
● Insisting on at least 3 years of annual earnings
growth will weed out the majority of the stocks
in any leading industry group. The more the
better.
● Big annual EPS estimates that are being
revised higher are a big positive.
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Examples of Earnings and Revenues/Sales
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N - New Products. New Services, New Management
● Newer companies, new products, new management, new
highs out of sounds bases.
● Find the disruptive companies that are truly changing the
way we live, work and communicate.
● Every bull market or uptrend is led higher by at least two or
three groups of well-established leadership and every new
bull cycle should be led by a fresh batch of new leaders.
Very rarely does the old leadership from a prior cycle come
back to life and the ones that do, typically take a very long
time.
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S - Supply and Demand
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How large is supply? In general it takes less demand to move
a stock with less supply. (Shares outstanding/Float)
As early as the late 90’s large-cap names outperformed
smaller-cap names for several years and since then,
emphasis has shifted back and forth between small and
large-cap stocks.
Hence, stocks of any size now fall under the CANSLIM
umbrella.
Watch out for excessive stock splits and/or oversized stock
splits like 3-for-1, or 5-for-1as they create a substantially
larger supply and will put a drag on the stock.
Insider buying - Look for companies buying their own stock
back on the open market.
There is an old saying that says “insiders sell their shares for
many different reasons, but they only buy them for one.”
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L - Leader or Laggard
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Buy the top 1-3 stocks in a leading industry group. These are the stocks with
the highest relative strength, the most explosive EPS and revenue growth,
that are making worthwhile progress out of sound bases.
Relative strength is a great tool for separating the leaders from the laggards.
According to HTMMIS, “from the early 1950’s to 2008, the average RS rating
of the best performing stocks before their major run-ups was 87. In other
words, the best stocks were already doing better than nearly 9 out of 10
others when they were starting out on their most explosive advance yet.
So, always look for the genuine leaders and avoid sympathy stock moves in
the laggards.
Every bull market or uptrend is led higher by at least two or three groups of
well-established leadership and every new bull cycle should be led by a fresh
batch of new leaders. Very rarely does the old leadership from a prior cycle
come back to life and the ones that do, typically take a very long time.
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I - Institutional sponsorship
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Institutional investors, such as mutual funds, hedge funds, pension
funds, insurance companies, bank trusts and etc. account for the
lion’s share of each day’s market activity.
Some of these companies manage hundreds of billions of dollars. So
when one of their portfolio managers decides to take a position in a
stock, it can take weeks to months for them to accumulate a full
position.
Furthermore, there are still all of the other fund managers out there
with enormous portfolios to invest that also decide to take positions
in the same stock which also require the same amount of time given
the amount of cash they are managing.
It is often very difficult for large institutions to hide their tracks,
especially when they are all trying to pile into these same stocks. It is
for this reason why heavy volume accumulation or distribution is
often a sign that big institutional players entering or exiting a specific
stock.
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Look for sponsorship that is increasing in number and consists of high quality owners. This ultimately adds liquidity and a level of support to stocks of this nature.
ZM
COUP
ENPH
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M - Market Trend
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Three-quarters of all stocks follow the direction or trend of the general market.
William O’Neil would often say that getting this part of the equation correct is
more than half the ballgame. Put another way, this means even if you are right
about every single factor discussed above, but you are wrong about the
direction of the general market, 3 out of 4 of your stocks will drop with the major
indexes, until a sustainable uptrend is in place.
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Fortunately, William O’Neil developed the follow-through day concept to identify
an important change in general market direction, from a definite downtrend to a
new uptrend.
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Keep in mind however, that the stock market is half science and half art. Hence,
this only solves the first half of the equation. The other half involves the
qualitative factors, which largely concern the overall health and breadth of the
market’s leadership.
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Understanding how to correctly interpret the action of the market’s leadership is
crucial, especially when the general market is in a correction or consolidation
mode. Healthy rotation is always the key, once the market has followed through.
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Risk Management
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Trading without a sound risk management strategy in place
is no different than gambling in Las Vegas.
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A thorough understanding of Risk Management is the
golden key to consistent success in the stock market. Yes,
it is even more important than stock selection!
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Let's say that again in different terms. You can be right on
your stock selection as little as 3 times out of 10 and still
make a fortune in the stocks market, if you cut your losses
quickly when you are wrong. That's a pretty powerful
statement! It is also the reason why we always say that a
thorough understanding of risk management is more
important than learning how to pick the best stocks.
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Importance of Cutting Losses
Developing a solid habit of cutting losses quickly will be
critical to a trader, or investor's survival in the stock
market.
Why Cutting Losses is Critical
At first, this can be a daunting task, as it goes against
human nature, namely the ego, which doesn't like to be
wrong... ever! In the beginning, it can be extremely
painful for the ego to have to face being wrong and
losing money.
Don't be fooled by that little voice in your head that
keeps telling you to hold on just a little longer until it
bounces. That is your ego and it will kick and scream to
avoid that pain. However, that is why we have strict loss
cutting rules. It only takes a few steep losses to really
hurt a portfolio as can be seen in the table to the right.
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Scenario 1
Why we use a maximum stop loss of 7-8%
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Even if you are right just 1 out of 4 times on your stock
selection, you will still survive to fight another day,
which is the most important thing.
Scenario 2
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Distribution Days
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A distribution day occurs when either the NASDAQ or S&P 500 declines at least 0.20% on heavier volume
than the prior session.
However, not all distribution days are created equally, and this is extremely important to understand.
The easiest distribution to spot is when the market clearly closes in the red for the day on heavier volume.
For example, if the NASDAQ or S&P 500 were to close down 0.87% and near its lows for the day on heavier
volume, it stands out and is easy to see.
Distribution becomes a bit more difficult to spot, when stalling also known as churning days come into the
picture. Bill (William O’Neil) referred to these days as “heavy volume, without further price progress higher.”
The tricky part is that on a stalling, or churning day, the major index doesn’t have to close down for the day.
Likewise, there are also significant accumulation days that don’t have to close up for the day.
So, how can you tell? The most important factor when it comes to interpreting price and volume action, is
where the index, or stock closed relative to the day’s range.
After 5 weeks a distribution day drops off the count.
Once the NASDAQ or S&P 500 closes 5% or more above the close of a distribution day, it no longer counts.
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Follow Through Day
A FTD can only occur on the NASDAQ or S&P 500. Only one of these major
indexes must follow-through. If an index falls below the low of its
follow-through day, it is no longer valid. In rare instances a follow-through day
can occur on day-3 of a rally attempt if volume is unquestionably
overwhelming and top-tier leaders are breaking out of constructive bases on
big volume.
FTD can also happen further out than 7 days, however, between 4-7 days is
ideal.
Key FTD Statistics
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Distribution on Days 1 or 2 after a FTD fail 95% of the time
Distribution on Day 3 after a FTD fails 70% of the time.
Distribution on Days 4 or 5 after a FTD fails 30% of the time.
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Position Sizing
$10,000 account
Objective: 5 positions in top-quality, high-growth leadership stocks. 5 stocks x 20% = 100%
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Scale into partial positions (⅓, ½) of 2-3 stocks. Progress MUST be made in order to add exposure!
Continue to add to existing positions at proper entry areas, ad/or add new positions.
It’s OK to be long 7-8 stocks in smaller size, as you let the leading stocks shape-up and guide you.
Depending on one’s comfort level, getting started with 20 to 50% of total equity is sound. Now, the
market and its leading stocks must prove themselves to you by continuing to break out and make
worthwhile progress higher. Additionally, before further exposure may be added to your portfolio, you
must be making progress.
Assuming the uptrend continues and you are making progress, further exposure should be added in a
similar manner. Conversely, if your initial buys don't work and sell stops are hit, the process starts over
again.
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Process - Putting it All Together
1. Determine general market direction. Establish that an uptrend is in
place.
2. Determine the strongest sectors and industry groups.
3. Determine the highest quality, highest relative strength names in the
strongest industry groups.
4. Create watch lists.
5. Use stock charts to determine optimal entry and exit points.
6. Set Alerts and follow your plan.
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Thanks!
Any questions?
You can find me at:
rosshaber@traderlion.com
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