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Stocks - The Short Term Investor Point of View

There are various ways for the short term investor to play the market.  I'll be describing the risk adverse way of play stocks in the short term.  In the short term, any stock has the ability to move up and down.  The definition of short term is different for different people.  For some, one minute is short term, while for other, an hour is considered short terms.  For still others, a day is short term, while for yet others, a week or a month is short term.  Your definition of short term will determine what types of stocks you will own, and when you will buy and sell.  My knowledge of the short term investor (what I would like to introduce as traders)  is marginal at best, so I will leave this to the experts to advise.  Let me give you a guide to my definition of short term investment.

For those who are interested, my short term investment is largely based on the CANSLIM method, which is the means advocated by www.investors.com.  Based on this approach, my definition of short term is 8 weeks, which gives me the clue of whether the stock I am holding should be a long term holding or not. 

Fundamentals play the critical role in the CANSLIM method.  Let me go into detail how I pick stocks based on the CANSLIM method.

1.    Annual Revenue growth for past 5 years > 25%

2.    Annual Profit growth for past 5 years > 25%

3.    Quarterly Revenue growth for past 5 quarters (compared to same quarter the previous year) > 25%

4.    Quarterly Revenue growth for past 5 quarters (compared to same quarter the previous year) > 25%

5.    ROE > 18%

6.    ROA > 5%

7.    Current ratio >= 1

What is the meaning of these terms, and why do I place my decision on them?  Lets go into them one by one:-

1.    Annual Revenue growth for past 5 year > 25% - Revenue refers to the gross income generated through sales of goods/ services, as well as any investments.  Revenue growth refers to the rate of increase in revenue as compared to the previous year.  A company with revenue growing consistently at a rate of 25% or more shows a consistent growing company, which means a high potential for price increase.  Usually, this company is either eating up market share in a mature market, or capturing market share in a developing market, both of which signifies increasing market value.

2.    Annual profit growth for past 5 year > 25% - Profit refers to nett income after accounting for operating expenses.  Profit growth refers to the rate of increase in profits as compared to the previous year.  A company with profits growing consistently at a rate of 25% or more shows a company whose sales is growing, while expenses related to the sales including margin is constant or decreasing. 

3.    Quarterly revenue growth for past 5 quarters > 25% - Similar to (1), a company with revenue consistently growing with respect to the same quarter the previous year signifies strong consistent short term growth.

4.    Quarterly profit growth for past 5 quarters > 25% - Similar to (2), a company with profits consistently growing with respect to the same quarter the previous year signifies strong sustainable short term growth.

5.    ROE > 18% - Return on equity refers to the profits generated from the equities of the company.  A high ROE signifies the ability of the management to generate profits from its equities, and is a sign of strength,

6.    ROA > 5% - Return on assets refers to the profits generated from the assets of the company, and is generally used for companies whose income is produced from its assets.  It also signifies the ability of the company to generate returns from its assets.

7.    Current ratio >= 1 - Current ratio is the ratio between its current assets and its current liabilities.  A good current ratio >=1 shows the ability of the company to pay up its short term liabilities, and is a sign of strong balance sheet.

A stock that meets all 7 criteria can be shortlisted under the short term list, and could be bought when the charts shows a certain pattern.  The technical analysis will determine the purchase price and point, and I generally buy only when the stock makes a cup with handle pattern.