How to Make Money in Stocks Summary (C3): Accelerated EPS

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Throughout history, big earnings often lead to big rises in share prices.

That’s why the ‘C’ in CAN SLIM stands for “Current big or accelerating quarterly earnings and sales per share.”

When following the CAN SLIM system, the stocks you select should show at least a 20% increase in the most recently reported quarterly earnings per share compared to the same quarter the previous year.

Comparing it to the previous quarter is not sufficient because that doesn't take into account seasonal fluctuations. It must be compared to the same quarter in the previous year.

Finding stocks with this type of growth is not easy, but they are out there. But remember, you are looking for the exceptional, and the exceptional, by definition, is not common.

The percentage change in EPS is the most important thing for stock selection.

Calculate the EPS by dividing the company’s after-tax profits by the number of common shares outstanding.

The higher the percentage, the better.

Although EPS is very important, it doesn't work alone. You must consider all aspects of CAN SLIM.

Companies will almost always put a positive spin when releasing their earnings reports. It makes sense. They want to keep shareholders happy. But you must see through the smoke and mirrors.

Don’t worry about the company’s total net worth income, sales, or other shiny words. It is very possible for all these things to be up while the EPS is down.

The key metric for you to focus on is the EPS percentage in relation to that of the same quarter the previous year.

Also, do not be influenced by huge one-time gains. There may be a spike in earnings from activities such as the sale of real estate, but these are not recurring profits. Subtract them from the report.

You can look ahead to the next couple of quarters by checking those same quarters from the previous year.

Perhaps you will see that the company may experience unusually large or small earnings.

Also check consensus earnings estimates (combining estimates from a large group of analysts) to ensure a positive future outlook.

Many older corporations have management who are more focused on maintenance than growth. It is best to avoid these until the top executives are replaced.

Besides the EPS, there are other ways to track a stock's earnings.

Determine how many times in recent months analysts have raised their estimates.

You can also look at the percentage by which the earnings reports have beaten estimates.

Improving quarterly earnings should always be accompanied by sales growth of at least 25% for the latest quarter.

If both sales and earnings have accelerated over the last three quarters, hold your position.

Also check to see if the after-tax profit margins of the latest quarter are near new highs and among the top in their industry.

Finally, also check other stocks in the same industry. You should be able to find at least one other impressive stock.

Even top companies can have a bad quarter, but if you see two consecutive quarters with a decline in growth in the order of two-thirds or more, it’s time to get concerned.

For example, dropping from 100% earnings growth to 30%.

Plotting the most recent twelve months earnings each quarter on a logarithmic sales graph will clearly show acceleration or deceleration of quarterly earnings. Once inch on the price or earnings scale represents the same percentage change.

By comparing earnings to the previous quarter on quarter you can see if there is an overall trend of acceleration or deceleration.

There are several places you can find current earnings reports.

• Investor’s Business Daily (IBD)
• Daily Graphs
• Daily Graphs Online

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