CANSLIM Series
	O'Neil's Book Reviewed C - Current Earnings A - Annual Earnings N - News S - Supply & Demand L - Leaders I - Institutional Sponsorship M - Market Direction
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"It takes something new to produce a startling advance in the price of a stock," says William O'Neil in his best selling How to Make Money in Stocks. More specifically he mentions new products, new management and new highs. In other words - news, the third criterion of stock selection in his CANSLIM methodology.

I would go a step further than O'Neil and add new contracts, new deals, new partnerships, and new strategic alliances, all of which have driven stock prices higher in the Internet sector that I follow closely.

The key word here is "startling". We're not talking steady incremental growth here. We're talking about leaps in stock price. Superb examples of this principle in action are recent price surges in a couple of stocks I follow.

On March 6th I reported on the doubling in price of two stocks on major news. The small, under-followed InfoInterActive, a tiny firm operating out of Bedford, Nova Scotia with dynamic management and a superb patented product and a market cap on January 1 of under $50 million doubled when Intel Corporation decided to license its technology and take a 10% stake in the company.

Another company, Infowave Software, which had already produced spectacular returns over the last year, a 16-bagger rising from $2 a share to $32 a share on the success of its imaging software, doubled again on the news of a major contract with the giant multi-national Nokia Corporation. It jumped from 16-bagger to 32-bagger in one week!

Sometimes news by itself, never mind revenue growth or earnings growth, can propel a stock price higher. This is particularly true in the mining exploration field. A new gold find or even a nickel find such as the one at Voisey's Bay in Newfoundland, can send an unknown stock flying.

New Highs

O'Neil only mentions new products in passing and gives even shorter shrift to new management, these being fairly self-explanatory. But he focuses a lot of attention on one of the most misunderstood phenomena in investing - the tendency of stocks hitting new highs to keep going higher.

He said that in surveys of the thousands of people attending his investment conferences over three decades, 98% said they do not buy stocks that are making new highs. The vast majority of investors, he says, whether new or experienced, "feel delightful comfort in buying stocks that are down substantially from their peaks".

This has even been ingrained in one of the classic old saws of investment lore, the maxim "Buy low. Sell high!" But as my colleague Rob Rak, About.com's Guide to Day Trading is fond of telling people, a far better piece of advice is to "Buy high. Sell higher!"

This reluctance, nay fear, of buying stocks hitting new highs is palpable. It affects me and I know better. I've been scared out of buying many stocks because I've thought, "Oh my God! It's gone so high already, it can't possibly go any higher". Or "Oops! Too late! Missed the boat on that one!" or other similar excuses. And I've made the most money when I fought my fears and bought stocks hitting new highs - JDS Uniphase, Nortel Networks, Qualcomm, Sierra Wireless, Ezenet.

O'Neil says "The hard-to-accept great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what seems low and cheap usually goes lower". He studied the daily new highs and new lows for several up as well as down markets. The results were clear. Stocks on the new high list tended to go higher. Stocks on the new low list tended to go lower.

His conclusion - "a stock making the new high list the first time during a bull market and accompanied by a big increase in trading volume might be a red-hot prospect worth checking into".

A Word of Caution

Stock promoters are well aware that news drives up stock prices and some stocks, penny stocks in particular, are sometimes subject to hyping - the issuing of flurries of news releases in the hopes of driving up the stock price. And with the advent of the Internet such hyping is even more prevalent, particularly on message forums such as Silicon Investor, Raging Bull and Stockhouse.

In fact, it is rather amusing to browse through the message boards on such stocks. Many of the speculators involved work these boards feverishly, boosting the morale of fellow investors, disparaging bad news, playing up good news, finding excuses for price declines, and cursing anyone who dares throw a little sober reflection into the conversation.

And new highs are not a panacea. In fact, O'Neil says you should look for stocks that are breaking out or near to breaking out to new highs after undergoing a price correction and consolidation. And he cautions that you should "avoid buying once the stock is extended more than 5% or 10% from the exact buy point off the base".

Moreover, one should look for new price highs in conjunction with the other elements of the CANSLIM formula. And sometimes, you have to be nimble and sell a stock quickly after it surges from its break-out point.

I don't want to go into great detail on selling points, but of the 35 or so selling signals O'Neil mentions, there is one which I wish I had paid closer attention to as I've been burned a few times by failure to sell at a high point. (Look at the charts for Corel noting its mid-December 1999 peak, Qualcomm also in December, Sideware Systems in January and Ezenet in early March). The selling principle - "If after a stock's price is extended from a proper base, its price closes for a larger increase than on any previous up days, watch out! This move usually occurs at or very close to a stock's peak".

Useful Links

There are numerous sources to find out news that may propel stocks to new highs. The financial section of your daily newspaper is undoubtedly the single best resource available. But there are also many resources on the Internet, some of which are linked below:

The Daily
My collection of links to all the major Canadian business news pages on the Net.

Financial News
Additional links to Canadian and international news sources.

Carlson Online's Blended News Headlines
Newspapers only print selected and edited news releases. Carlson Online lists all the corporate press releases from the major online wire services.

Stockhouse.com
Stockhouse is often on the leading edge in covering new and emerging companies. They are also the single best resource for keeping on top of specific stocks. Register (it's free) and create a stock list of companies you want to keep tabs on. You will receive emails of all news releases about the stocks you've listed. This is a great way to keep up to date on news about stocks you own as well as ones you're interested in.

Bloomberg U.S. Equity Preview
Bloomberg's daily list of stocks which may make significant moves the next day due to news released after the closing bell.

U.S. Business & Investment News
About.com Stocks Guide Mike Griffis's collection of links to U.S. investment news sources.

Cup With Handle
About.com Day Trading Guide Rob Rak explains the Cup With Handle stock chart pattern which O'Neil recommends using as a signal of a potential upside price breakout as it indicates new highs after a consolidation period.

Stockchart.com's New High List
Complete daily listing of stocks making new highs on the NYSE, NASDAQ and AMEX exchanges.

Next: S is for Supply & Demand!

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Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author may hold interests in investments mentioned in this article.

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