Investing can be extremely psychologically demanding.
Not only are you up against the world’s best investors, but you’re also up against yourself. It’s easy to get caught making irrational decisions based on your own personal blindspots or cognitive biases, and these mistakes can lead to buying when you should sell, and vice versa.
For the above reasons, the most successful investors are often those that have rational and proven systems in place.
Having a method to your madness allows you to have confidence in your decisions, while also taking advantage of the strategies and heuristics that have performed well for the world’s most elite investors.
How to Pick Growth Stocks
Today’s infographic comes to us from Investor’s Business Daily, and it details the basics around the discipline of growth investing, including the differences the school has with value investing.
More importantly, it also provides a framework for choosing growth stocks used by elite investors such as William J. O’Neil.
Growth investing is all about identifying the companies that are exhibiting behavior that suggests that they will be tomorrow’s leaders.
The benefits to this strategy, if successful, are easy to see. Think about buying Microsoft before it dominated the software industry, or Starbucks before it conquered the United States with its new approach to coffee culture.
The question is: how can these stocks be found reliably?
The CAN SLIM Approach
Fantastic growth stocks don’t just grow on trees – instead, you have to have a system to sift through them.
One easy place to start your search for the next growth leader is with an approach pioneered with investing legend William J. O’Neil. Developed in the 1950s, the CAN SLIM strategy identifies seven characteristics that top-performing stocks often share before making their biggest price gains.
Each characteristic is represented by a letter in the CAN SLIM acronym:
C – Current quarterly earnings
A – Annual earnings growth
N – New product, service, management, or price high
S – Supply and demand
L – Leader or laggard
I – Institutional sponsorship
M – Market direction
Importantly, each of these traits can be a catalyst to influence other traits. When they compound, it can lead to big price movements that beat the rest of the market.
Breaking Down the Factors
Let’s look at each characteristic of the CAN SLIM approach in more detail:
Current quarterly earnings
Look for companies with a minimum earnings-per share (EPS) growth of 25% in the most recent quarter, though 50% or higher is even better. These companies should also have 20% sales growth in the quarter, and a 17% ROE to ensure that growth is sustainable.
Annual earnings growth
Look for companies with annual EPS growth of at least 25% to 50% in each of the previous 3-5 years. This helps confirm that the company is showing long-term growth.
New product, service, management, or price high
What is the company doing that is new or game-changing? To be a market winner, a company must constantly reinvent itself to position itself for higher-than-average profits.
Examples: Consider Google’s monetization of search ads, or McDonald’s novel approach to food. These innovations set the companies up for massive profits and success.
Supply and demand
A stock price increases when more investors demand an increasingly limited supply of shares. Spikes in price, along with volume accumulation, mean that demand is increasing. If this is coming from institutional investors, who tend to buy and hold, it’s even better.
Leader or laggard
The leading companies in leading industries – the best of the best – will be the companies that have the most growth potential.
75% of all market activity comes from professional investors, such as mutual funds or pension funds. Not only does the smart money help validate a potential growth stock by being involved, but they can trigger big price increases.
CAN SLIM investors believe you should invest with the market, as opposed to against it. That’s because an individual stock moves with the market 75% of the time.
Putting it Together
Understanding how the different CAN SLIM factors work together – and how they can help bring massive bouts of growth for the underlying stock – is key for the successful growth investor.
Using a rational system like this also helps you in overcoming cognitive biases or making other mistakes that may affect your investments, as well.
How Big Tech Makes Their Billions
The big five tech companies generate almost $900 billion in revenues combined, more than the GDP of four of the G20 nations. Here’s how they earn it all.
How Big Tech Makes Their Billions
The world’s largest companies are all in technology, and four out of five of those “Big Tech” companies have grown to trillion-dollar market capitalizations.
Despite their similarities, each of the five technology companies (Amazon, Apple, Facebook, Microsoft, and Alphabet) have very different cashflow breakdowns and growth trajectories. Some have a diversified mix of applications and cloud services, products, and data accumulation, while others have a more singular focus.
But through growth in almost all segments, Big Tech has eclipsed Big Oil and other major industry groups to comprise the most valuable publicly-traded companies in the world. By continuing to grow, these companies have strengthened the financial position of their billionaire founders and led the tech-heavy NASDAQ to new record highs.
Unfortunately, with growth comes difficulty. Data-use, diversity, and treatment of workers have all become hot-button issues on a global scale, putting Big Tech on the defensive with advertisers and governments alike.
Still, even this hasn’t stopped the tech giants from (almost) all posting massive revenue growth.
Revenues for Big Tech Keep Increasing
Across the board, greater technological adoption is the biggest driver of increased revenues.
Amazon earned the most in total revenue compared with last year’s figures, with leaps in almost all of the company’s operations. Revenue from online sales and third-party seller services increased by almost $30 billion, while Amazon Web Services and Amazon Prime saw increased revenues of $15 billion combined.
The only chunk of the Amazon pie that didn’t increase were physical store sales, which have stagnated after previously being the fastest growing segment.
Big Tech Revenues (2019 vs. 2018)
|Company||Revenue (2018)||Revenue (2019)||Growth (YoY)|
|Apple||$265.6 billion||$260.2 billion||-2.03%|
|Amazon||$232.9 billion||$280.5 billion||20.44%|
|Alphabet||$136.8 billion||$161.9 billion||18.35%|
|Microsoft||$110.4 billion||$125.8 billion||13.95%|
|$55.8 billion||$70.8 billion||26.88%|
|Combined||$801.5 billion||$899.2 billion||12.19%|
Services and ads drove increased revenues for the rest of Big Tech as well. Alphabet’s ad revenue from Google properties and networks increased by $20 billion. Meanwhile, Google Cloud has seen continued adoption and grown into its own $8.9 billion segment.
For Microsoft, growth in cloud computing and services led to stronger revenue in almost all segments. Most interestingly, growth for Azure services outpaced that of Office and Windows to become the company’s largest share of revenue.
And greater adoption of services and ad integration were a big boost for ad-driven Facebook. Largely due to continued increases in average revenue per user, Facebook generated an additional $20 billion in revenue.
Comparing the Tech Giants
The one company that didn’t post massive revenue increases was Apple, though it did see gains in some revenue segments.
iPhone revenue, still the cornerstone of the business, dropped by almost $25 billion. That offset an almost $10 billion increase in revenue from services and about $3 billion from iPad sales.
However, with net income of $55.2 billion, Apple leads Big Tech in both net income and market capitalization.
Big Tech: The Full Picture
|Company||Revenue (2019)||Net Income (2019)||Market Cap (July 2020)|
|Apple||$260.2 billion||$55.2 billion||$1.58 trillion|
|Amazon||$280.5 billion||$11.6 billion||$1.44 trillion|
|Alphabet||$161.9 billion||$34.3 billion||$1.02 trillion|
|Microsoft||$125.8 billion||$39.2 billion||$1.56 trillion|
|$70.8 billion||$18.5 billion||$665.04 billion|
|Combined||$899.2 billion||$158.8 billion||$6.24 trillion|
Bigger Than Countries
They might have different revenue streams and margins, but together the tech giants have grown from Silicon Valley upstarts to global forces.
The tech giants combined for almost $900 billion in revenues in 2019, greater than the GDP of four of the G20 nations. By comparison, Big Tech’s earnings would make it the #18 largest country by GDP, ahead of Saudi Arabia and just behind the Netherlands.
Big Tech earns billions by capitalizing on their platforms and growing user databases. Through increased growth and adoption of software, cloud computing, and ad proliferation, those billions should continue to increase.
As technology use has increased in 2020, and is only forecast to continue growing, how much more will Big Tech be able to earn in the future?
Visualizing the Size of Amazon, the World’s Most Valuable Retailer
Amazon’s valuation has grown by 2,830% over the last decade, and the tech giant is now worth more than the other 9 largest U.S. retailers, combined.
Visualizing the Size of the World’s Most Valuable Retailer
As brick-and-mortar chains teeter in the face of the pandemic, Amazon continues to gain ground.
The retail juggernaut is valued at no less than $1.4 trillion—roughly four times what it was in late 2016 when its market cap hovered around $350 billion. Last year, the Jeff Bezos-led company shipped 2 billion packages around the world.
Today’s infographic shows how Amazon’s market cap alone is bigger than the nine biggest U.S. retailers put together, highlighting the palpable presence of the once modest online bookstore.
The New Normal
COVID-19’s sudden shift has rendered many retail outfits obsolete.
Neiman Marcus, JCPenney, and J.Crew have all filed for bankruptcy as consumer spending has migrated online. This, coupled with heavy debt loads across many retail chains, is only compounding the demise of brick-and-mortar. In fact, one estimate projects that at least 25,000 U.S. stores will fold over the next year.
Still, as safety and supply chain challenges mount—with COVID-19 related costs in the billions—Amazon remains at the top. It surpasses its next closest competitor, Walmart, by $1 trillion in market valuation.
How does Amazon compare to the largest retailers in the U.S.?
|10 Largest Public US Retailers*||Market Value July 1, 2020||Market Value July 1, 2010||Normalized % Change 2010-2020||Retail Revenue|
|The Kroger Co.||$26B||$13B||107%||$118Be|
|Walgreens Boots Alliance||$36B||$26B||38%||$111B|
|The Home Depot||$267B||$47B||466%||$108B|
|Combined value of retailers (without Amazon)||$1,071B|
Source: Deloitte, YCharts
*Largest public US retailers based on their retail revenue as of fiscal years ending through June 30, 2019, e=estimated
With nearly a 39% share of U.S. e-commerce retail sales, Amazon’s market cap has grown 2,830% over the last decade. Its business model, which aggressively pursues market dominance instead of focusing on short-term profits, is one factor behinds the rise.
By the same token, one recent estimate by The Economist pegged Amazon’s retail operating margins at -1% last year. Another analyst has suggested that the company purposefully sells retail goods at a loss.
How Amazon makes up for this operating shortfall is through its cash-generating cloud service, Amazon Web Services (AWS), and through a collection of diversified enterprise-focused services. AWS, with estimated operating margins of 26%, brought in $9.2 billion in profits in 2019—more than half of Amazon’s total.
Amazon’s Basket of Eggs
Unlike many of its retail competitors, Amazon has rapidly diversified its acquisitions since it originated in 1994.
Take the $1.2 billion acquisition of Zoox. Amazon plans to operate self-driving taxi fleets, all of which are designed without steering wheels. It is the company’s third largest since the $13.7 billion acquisition of organic grocer Whole Foods, followed by Zappos.
Accounting for the lion’s share of Amazon-owned physical stores, Whole Foods has 508 stores across the U.S., UK, and Canada. While Amazon doesn’t outline revenues across its physical retail segments—which include Amazon Books stores, Amazon Go stores, and others—physical store sales tipped over $17 billion in 2019.
Meanwhile, Amazon also owns gaming streaming platform Twitch, which it acquired for $970 million in 2017. Currently, Twitch makes up 73% of the streaming market and brought in an estimated $300 million in ad revenues in 2019.
Despite the flood of online orders due to quarantines and social distancing requirements, Amazon’s bottom line has suffered. In the second quarter of 2020 alone, it is expected to rack up $4 billion in pandemic-related costs.
Yet, at the same time, its customer-obsessed business model appears to thrive under current market conditions. As of July 1, its stock price has spiked over 51% year-to-date. On an annualized basis, that’s roughly 100% in returns.
As margins get squeezed and expenses grow, is Amazon’s growth sustainable in the long-term? Or, are the company’s strategic acquisitions and revenue streams providing the catalysts (and cash) for only more short-term success?
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