IBD Meetup Boston, MA February 25, 2009 IBD CAN SLIM® Investing in a Severe Bear Market Rally: Is It Possible to Win? IBD Meetup Boston, MA February 25, 2009 Mike Kinkead mikekinkead@gmail.com 617.901.1784

or Looking for Love (20%+ Winners) in All the Wrong Places… IBD Meetup Boston, MA February 25, 2009 Mike Kinkead mikekinkead@gmail.com 617.901.1784

This presentation is for educational purposes only and is not intended to be a recommendation to buy or sell specific securities.

Copyright & another disclaimer © 2009 Raw data used in this analysis is the sole property of William J. O’Neil + Co., Inc, Investor’s Business Daily and investors.com. © 2009 Analysis and presentation formats used in this presentation are copyrighted by Mike Kinkead. The conclusions expressed in this presentation are reached solely by Mike Kinkead and in no way represent an endorsement by IBD.

Some of IBD’s 20 Rules for Investment Success…

…are flipped upside down during rallies in a severe bear market!

Questions to answer What is the normal process to identify and buy CAN SLIM stocks? Brief review with highlights only. What are the characteristics of stocks that gained 20% or more during the latest rally? Are they traditional CAN SLIM® stocks? Would we have found these stocks on our Watch List at the beginning of the rally on 12.2.08? How do IBD’s 20 Rules for Investment Success change during rallies in a severe bear market? Finding stocks is the focus. What types of chart patterns work for buying now? What stocks in what O’Neil Industry Groups have very strong fundamentals now? What’s on our current Watch List? Is there a stock pick?

What is the normal process to identify and buy IBD’s CAN SLIM® stocks?

IBD’s CAN SLIM® process to find stocks to buy in a normal market

Fundamental factors* that create winners and where to find this data in IBD Earnings growth: IBD’s EPS rating (70 and up) Positive sales and earnings momentum (acceleration): DGO weekly chart (use your eyeball) DGO Custom Screen Wizard Increasing sales growth: IBD’s SMR Rating Expanding operating margins: IBD’s SMR Rating High return on equity: IBD’s SMR Rating Positive earnings surprises: Bolded IBD EARNUPs Strong cash flow: DGO weekly chart (120% or more x eps) Positive earnings revisions by analysts: DGO weekly chart * From The Little Book that Makes You Rich by Louis Navellier (except sales acceleration).

IBD’s SMR Rating means that earnings growth is more easily sustainable IBD’s SMR Rating components and an important nuance: Continued sales growth High (and increasing) profit margins ROE of 17% or more but must adjust for debt as % equity A high percentage of debt lowers ROE as reported on the DGO weekly charts Function of industry and competitive market segment.

Rallies in a bear market versus a severe bear market In a normal bear 3.19.08 to 5.19.08 In a severe bear  12.2.08 to 1.12.09

Prior IBD Meetup Talk March, 2008 rally: NASDAQ up 13% to peak

Stocks still go up during rallies in a severe bear market but…

Rally December, 2008 to early 2009: NASDAQ up 6% to correction (14% to peak)

What did the main market indices do during this severe bear market rally?

What are the characteristics of stocks that gained 20% or more during the latest rally?

What was the approach to analyze CAN SLIM® stocks during this rally? Start with IBD CAN SLIM stocks that have strong fundamentals: EPS Rating of at least 70 (catches turnarounds) SMR Rating of A or B In a severe bear market, a lot of growth stocks are beaten down and way below their 52-week highs: Elephants are dumping these stocks 90% of bases form during market corrections Bases are deep in severe bear markets Therefore, make no assumptions about CAN SLIM® technicals and momentum measures used by IBD. Use process of “discovery in data” to reveal the truth

What universe of stocks was analyzed during the rally?

How did all growth stocks perform during the rally?

How did CAN SLIM® stocks perform during the rally?

CAN SLIM® stocks under $10 had much better returns!

How did non-CAN SLIM® stocks perform during the rally?

1 in 5 chance of finding 20%+ winners… CAN SLIM® or otherwise…in this rally

Odds of finding winning CAN SLIM® stocks are only 1 in 14 across all prices

What about IBD’s® momentum and institutional demand measures? Start with IBD CAN SLIM stocks that have strong fundamentals: EPS Rating of at least 70 (catches turnarounds) SMR Rating of A or B During this rally in a severe bear market, test: Relative Strength O’Neil Industry Groups Relative Strength IBD’s Accumulation/Distribution measure Use process of “discovery in data” to reveal the truth

Low RS, < $10 CAN SLIM® stocks beat the market by 5X!

Using Acc/Dis of A or B will eliminate 73% of $10 up high gainers

Using Acc/Dis of A or B will eliminate 70% of < $10 high gainers

CAN SLIM® stocks < $10 with Acc/Dis Ratings of D and E are the BIG winners!

O’Neil Industry Group Ranks 44 to 96 have slight edge for CAN SLIM stocks < $10

So…how do IBD’s 20 Rules of Investment Success change So…how do IBD’s 20 Rules of Investment Success change* during rallies in a severe bear market? Focus is on rules to find winner stocks * Based on analyzing 1 rally…

New rules for finding winner stocks in a severe bear market rally

Let’s add one more important fundamental measure available in the IBD newspaper

Earnings News in IBD  EARNUPs: earnings beat expectations

Earnings News in IBD 2.17.09: Panera Bread (PNRA) in bold

How did the EARNUPs* perform during the rally? *EARNUPs are bolded line stocks in IBD’s Earnings News between 10.1.08 and 1.12.09.

What are the characteristics of the 34 20+% EARNUP winners? Very strong fundamentals as always: IBD EPS Rating of 70 or higher IBD SMR Rating of A or B Plus the added dimension of a positive earnings surprise Momentum and the elephants: 50% (17 of 34) has an IBD RS of 40 or less 50% (17 of 34) were in the bottom half of O’Neil Industry Group Ranks on 11.28.09 and on 1.12.09 38% (13 of 34) has an IBD Acc/Dis of D or E

Odds are low but the strong but downtrodden triumph…

A note about the normally powerful investors A note about the normally powerful investors.com combo Screens of the Day

What types of chart patterns work now?

What chart rules and patterns work? Focus on CAN SLIM quality stocks at or within 15% of new 52-week high??? Where? Not many available. Only 16 out of all 6,028 stocks hit new highs yesterday Identify stocks with a 30% prior uptrend and an acceptable consolidation pattern (eg: double bottom)??? Few Black Border stocks in acceptable patterns Find stocks at the bottom of a consolidation pattern  use rules to identify a change in trend from down to up. See The Market Guys by AJ Monte and Rick Swope And the tools of the collective Boston IBD Meetup group

What stocks in what O’Neil Industry Groups have very strong fundamentals now?

O’Neil Industry Groups with at least 4 3D earnings growth stocks

What is the approach to identify stocks for our current Watch List? What is growing? Start with IBD CAN SLIM stocks that have strong fundamentals: EPS Rating of at least 70 (catches turnarounds) SMR Rating of A or B Triple digit (3D) earnings growth with upside surprises (EARNUPs) since 1.2.09 Look in O’Neil Industry Groups with high 3D earners In the next rally during this severe bear market: Contest: stocks with an IBD RS of 1 to 40 versus 80+ Include stocks in all O’Neil Industry Groups Include stocks with an IBD Acc/Dis Rating of D and E

One special stock pick  ATHN * Warning: pending Earnings Release this Friday before market opens.

Final thoughts-Part 1 of 2 Using IBD’s fundamental measures of financial strength, there are still some excellent CAN SLIM stocks. However, in today’s severe bear market, there are very few IBD CAN SLIM stocks that are in proper chart patterns and at or within 15% of a new 52-week high. Even as IBD’s The Big Picture calls a new rally in this severe bear market, traditional CAN SLIM stocks are not delivering the gains that are the hallmark of IBD’s investing approach. Per IBD’s continuing advice in The Big Picture, the safest alternative is to stay in cash.

Final thoughts-Part 2 of 2 There is another, more risky investing alternative based on the analysis presented tonight. The CAN SLIM stocks with strong fundamentals have been beaten down in this market and have low prices, low IBD RS and Accumulation/Distribution Ratings and often reside in the bottom half of O’Neil’s 197 Industry Groups. Some of these stocks, especially those under $10, saw strong gains during rallies in this bear market. The screening rules to find these stocks break the IBD Rules for Investment Success. For the adventurous investor, the screens shown tonight, coupled with a change of trend pattern on daily and weekly charts, offer buying opportunities. This alternative approach has much lower odds of success and is not for the faint of heart or wallet.

Thank You! Mike Kinkead mikekinkead@gmail.com 617.901.1784 CAN SLIM®, IBD® and DGO™ (Daily Graphs Online) are trademarks of Investor’s Business Daily and William O’Neil + Co Incorporated.