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.
Visualizing China’s $18 Trillion Economy in One Chart
China’s economy reached a GDP of 114 trillion yuan ($18 trillion) in 2021, well above government targets. What sectors drove that growth?
Visualizing China’s $18 Trillion Economy in 2021
China is well-known to be the world’s second largest economy after the U.S., and it is expected to eventually overtake the number one position in the coming decades.
While China’s economy has had a much rockier start this year due to zero-tolerance COVID-19 lockdowns and supply chain issues, our visualization covers a full year of data for 2021—a year in which most economies recovered after the initial chaos of the pandemic.
In 2021, China’s Gross Domestic Product (GDP) reached ¥114 trillion ($18 trillion in USD), according to the National Bureau of Statistics. The country’s economy outperformed government targets of 6% growth, with the overall economy growing by 8.1%.
Let’s take a look at what powers China’s modern economy.
Breaking Down China’s Economy By Sector
|Sector||2021 Total GDP |
|2021 Total GDP |
|Wholesale and Retail Trades||¥10.5T||$1.7T||9.2%|
|Farming, Forestry, Animal Husbandry, and Fishery||¥8.7T||$1.4T||7.6%|
|Transport, Storage, and Post||¥4.7T||$0.7T||4.1%|
|Information Transmission, Software and IT Services||¥4.4T||$0.7T||3.9%|
|Renting & Leasing Activities and Business Services||¥3.5T||$0.6T||3.1%|
|Accommodation and Restaurants||¥1.8T||$0.3T||1.6%|
Industrial production—activity in the manufacturing, mining, and utilities sectors—is by far the leading driver of China’s economy. In 2021, the sector generated ¥37.3 trillion, or one-third of the country’s total economic activity.
Despite a slowdown in December, wholesale and retail trades also performed strongly in 2021. As the main gauge of consumption, it was affected by lockdown measures and the spread of the COVID-19 Omicron variant towards the end of the year, but still rose by double digits, reaching a total of ¥10.5 trillion*.
“Other services”, which includes everything from scientific research and development to education and social services, generated 16% of China’s total economy in 2021, or ¥18.1 trillion.
*Editor’s note: At time of publishing, China’s government seems to have since adjusted this number to ¥11.0 trillion, which is not consistent with the original data set provided, but worth noting.
Where is China’s GDP Headed?
China’s economy recovered noticeably faster than most major economies last year, and as the overall trend below shows, the country has grown consistently in the years prior.
Before the pandemic hit, China’s quarterly GDP growth had been quite stable at just above 5%.
After the initial onset of COVID-19, the country’s economy faltered, mirroring economies around the globe. But after a strong recovery into 2021, resurging cases caused a new series of crackdowns on the private sector, slowing down GDP growth considerably.
With the slowdown continuing into early 2022, China’s economic horizon still looks uncertain. The lockdown in Shanghai is expected to continue all the way to June 1st, and over recent months there have been hundreds of ships stuck outside of Shanghai’s port as a part of ongoing supply chain challenges.
China’s Zero-COVID Policy: Good or Bad for the Economy?
While every country reacted to the COVID-19 pandemic differently, China adopted a zero-COVID policy of strict lockdowns to control cases and outbreaks.
For most of 2021, the policy didn’t deter GDP growth. Despite some major cities fully or partially locked down to control regional outbreaks, the country’s economy still paced well ahead of many other major economies.
But the policy faced a challenge with the emergence of the Omicron variant. Despite lockdowns and an 88% vaccination rate nationally, seven out of China’s 31 provinces and all of the biggest cities have reported Omicron cases.
And China’s zero-COVID policy has not affected all sectors equally. Industrial production rose by more than 10% in the first 11 months of 2021, despite city lockdowns around the country. That’s because many factories in China are in suburban industrial parks outside the cities, and employees often live nearby.
But many sectors like hotels and restaurants have been more severely affected by city lockdowns. Many global economies are starting to transition to living with COVID, with China remaining as one of the last countries to follow a zero-COVID policy. Does that ensure the country’s economy will continue to slow in 2022, or will China manage to recover and maintain one of the world’s fastest growing economies?
Charted: U.S. Consumer Debt Approaches $16 Trillion
Robust growth in mortgages has pushed U.S. consumer debt to nearly $16 trillion. Click to gain further insight into the situation.
Charted: U.S. Consumer Debt Approaches $16 Trillion
According to the Federal Reserve (Fed), U.S. consumer debt is approaching a record-breaking $16 trillion. Critically, the rate of increase in consumer debt for the fourth quarter of 2021 was also the highest seen since 2007.
This graphic provides context into the consumer debt situation using data from the end of 2021.
Housing Vs. Non-Housing Debt
The following table includes the data used in the above graphic. Housing debt covers mortgages, while non-housing debt covers auto loans, student loans, and credit card balances.
|Total Consumer Debt
Source: Federal Reserve
Trends in Housing Debt
Home prices have experienced upward pressure since the beginning of the COVID-19 pandemic. This is evidenced by the Case-Shiller U.S. National Home Price Index, which has increased by 34% since the start of the pandemic.
Driving this growth are various pandemic-related impacts. For example, the cost of materials such as lumber have seen enormous spikes. We’ve covered this story in a previous graphic, which showed how many homes could be built with $50,000 worth of lumber. In most cases, these higher costs are passed on to the consumer.
Another key factor here is mortgage rates, which fell to all-time lows in 2020. When rates are low, consumers are able to borrow in larger quantities. This increases the demand for homes, which in turn inflates prices.
Ultimately, higher home prices translate to more mortgage debt being incurred by families.
No Need to Worry, Though
Economists believe that today’s housing debt isn’t a cause for concern. This is because the quality of borrowers is much stronger than it was between 2003 and 2007, in the years leading up to the financial crisis and subsequent housing crash.
In the chart below, subprime borrowers (those with a credit score of 620 and below) are represented by the red-shaded bars:
We can see that subprime borrowers represent very little (2%) of today’s total originations compared to the period between 2003 to 2007 (12%). This suggests that American homeowners are, on average, less likely to default on their mortgage.
Economists have also noted a decline in the household debt service ratio, which measures the percentage of disposable income that goes towards a mortgage. This is shown in the table below, along with the average 30-year fixed mortgage rate.
|Year||Mortgage Payments as a % of Disposable Income||Average 30-Year Fixed Mortgage Rate|
Source: Federal Reserve
While it’s true that Americans are less burdened by their mortgages, we must acknowledge the decrease in mortgage rates that took place over the same period.
With the Fed now increasing rates to calm inflation, Americans could see their mortgages begin to eat up a larger chunk of their paycheck. In fact, mortgage rates have already risen for seven consecutive weeks.
Trends in Non-Housing Consumer Debt
The key stories in non-housing consumer debt are student loans and auto loans.
The former category of debt has grown substantially over the past two decades, with growth tapering off during the pandemic. This can be attributed to COVID relief measures which have temporarily lowered the interest rate on direct federal student loans to 0%.
Additionally, these loans were placed into forbearance, meaning 37 million borrowers have not been required to make payments. As of April 2022, the value of these waived payments has reached $195 billion.
Over the course of the pandemic, very few direct federal borrowers have made voluntary payments to reduce their loan principal. When payments eventually resume, and the 0% interest rate is reverted, economists believe that delinquencies could rise significantly.
Auto loans, on the other hand, are following a similar trajectory as mortgages. Both new and used car prices have risen due to the global chip shortage, which is hampering production across the entire industry.
To put this in numbers, the average price of a new car has climbed from $35,600 in 2019, to over $47,000 today. Over a similar timeframe, the average price of a used car has grown from $19,800, to over $28,000.
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