January 5th, 2006
A reader asked “Is it possible that IBD just included some other stocks that forced these stocks to be bumped off the list temporarily?” Managing the IBD 100 list must be similar to managing your own investment portfolio with a much tighter constraint …. there must be 100 stocks on the list, not one more and not one less.
Yes, IBD drops stocks either to make room for stocks they expect to perform better than stocks on the list or because they drop a stock because they think it will no longer perform and, therefore, another stock should take its place. They say all this works rather mechanically through their CANSLIM metrics (the metrics, by the way, against which they run their daily screens, like, EPS and Relative Strength Ratings, Pretax Margin and Quarters of Rising Sponsorship. But, I’m sorry, sometimes I just don’t understand how this all works.
I know they strive to make the stock selections of for their various lists (IBD 100, New America and 85-85) appear based on “fundamentals” but I want to get into stocks that will have total returns (stock price growth + dividends) that outperforms the S&P500.
ComTech Telecommunications (CMTL) is a case in point. This stock was in the IBD 100 for 33 of the 39 weeks since April 1 being dropped only the weeks of August 12 and 19. It last appeared in the Monday, December 5 list (actually available on the website Friday evening, December 2). The following Tuesday, December 6, the stock gapped down 6.79 from the previous close, or 16.36% because second quarter earnings were up $0.43 vs. expectations of $0.47 (see TheStreet.com’s Tech Stocks in Motion).
This is how CMTL looks on a short-term chart:
The key trendlines are those forming an open pennant consolidation since April, a short term support trendline on which the stock currently rests and what I have labeled as an “Upper Boundary of Long-term Channel”. That upper channel trendline is more visible in a chart with longer time horizon:
It’s clear from this chart of what could happen when a stock bumps against an upper boundary of a long-term channel …. a 7-month consolidation. (See earlier discussions on Syneron (ELOS). But it’s not clear where CMTL goes from here.
So pardon this long-winded answer to the original question. Yes, IBD does remove stocks to make room for new stocks. But a better question is, Why wasn’t CMTL bumped from the list earlier? During those 33 weeks, with the exception of its earnings metrics, CMTL’s CANSLIM metrics were within 80-120% of all stocks while on the IBD100 list:
CMTL vs. All
|Annual EPS Est % Chg||39||6||26.06||51.9%|
|Last Qtr EPS% Chg||74||56||61.94||51.8%|
|Next Qtr EPS% Chg||50||7||24.24||45.0%|
|Last Qtr Sales% Chg||66||38||50.03||116.8%|
|Management Ownership %||10||5||9.55||53.1%|
|Qtrs of Rising Sponsorship||5||0||2.79||119.6%|
Money in CMTL while it was on the IBD 100 list would have been dead money since other stocks were moving up dramatically (especially Oil & Gas and Home Construction). What the IBD CANSLIM method doesn’t take into sufficient consideration is the supply and demand situation for a stock as represented by the stock’s chart. They may tell you that the stock has been a great stock to own and may continue to be so. But the method doesn’t tell you if it’s ready for a breakout? Is it bumping into resistance? Where are support levels? For those opinions, look here!