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Great Stocks Have This In Common: Innovation

Nothing propels a good stock on its way to becoming a great stock more than innovation. It might be a new product, new management, new technology, a medical breakthrough. Or it may be a breakout off a properly formed base pattern.




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We call this the N in CAN SLIM, and it’s the subject of the third part in an Investor’s Corner series on CAN SLIM.

IBD initiates its CAN SLIM investing paradigm by first examining current quarterly growth in earnings per share and sales. That’s the C in CAN SLIM. And then it looks at how a company did on a yearly basis, looking at annual earnings per share increases. That’s the A.

But if you want to invest in a company that is accelerating earnings faster than previous rates of increase, or management that brings in new ideas, or new industry conditions that result in higher price changes, you want a company that knows how to innovate.

Great Stocks Have New Products, New R&D, New Management

“We try to invest in winners that can compound value over multiple years,” said Alan Tu, manager of the T. Rowe Price Global Technology Fund (PRGTX). “And because of the fact that we see so much change and opportunity, we really hope to use that to our advantage.”

To identify the winning stocks, it helps to choose stocks breaking out from their base patterns.

“Search for companies that have developed important new products or services, or that have benefited from new management or materially improved industry conditions,” wrote IBD founder William J. O’Neil in his bestselling “How to Make Money in Stocks.” “Then buy their stocks when they are emerging from sound, correctly analyzed price consolidation patterns and are close to, or actually making, new price highs on increased volume.”

How To Find Innovators

Using MarketSmith, we screened for companies on the MarketSmith Growth 250, looking for stocks that had recently broken out of their patterns. The list identified 45 stocks, of which 13 were in the medical sector (suppliers, researchers, equipment suppliers, managed care, medical systems, etc.), by far the highest number of stocks in one sector.

Then we narrowed that list to eight medical stocks that had a Composite Rating of 90 or better. From there, we chose three stocks that had broken out of their patterns the past several days. Those were Avantor (AVTR), Omnicell (OMCL) and Intuitive Surgical (ISRG).

Avantor, which is on the IBD 50, provides products and services to customers in the biopharma and health care industries. It recently formed a cup base, according to MarketSmith analysis, with a buy point of 34.09. Shares broke out on June 16. The base formed almost entirely above its 50-day moving average, which is a positive sign. The buy area tops out at 35.79.

Avantor’s Strength Is Its Innovation

The relative strength line of Avantor has been trending higher since the beginning of June. This compares a stock’s performance with that of the S&P 500. The Pennsylvania-based company maintains a near-perfect IBD Composite Rating of 98. The company’s year-over-year EPS growth has accelerated over the past two quarters, from 53% to 106% in the most recent quarter. This well exceeds IBD’s CAN SLIM requirements for top growth stocks.

The health care stock ranks No. 1 in its industry group, according to IBD Stock Checkup.

Intuitive Surgical entered into its buy range off a flat base entry point of 893.89. The maker of robotic surgery systems is in IBD’s medical systems and equipment industry group. The group ranked No. 33 out of 197, putting it in the top 17% of all industry groups.

Omnicell belongs to the same strong industry group as Intuitive Surgical. Shares rank fourth with a Composite Rating of 95. Omnicell manages and delivers pharmaceutical products. Omnicell delved further into its buy range after it topped a cup base entry at 147.09.

For these and other bases, the buy point is 10 cents above the most important resistance level on the pattern. On a cup base, it’s the stock’s prior high, when the correction begins. For a cup with handle, it’s the highest price in the handle area. On a flat base, it’s the highest level in the entire base.

Follow Michael Molinski on Twitter @IMmolinski

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