As many investors know, CAN-SLIM is the mnemonic for a screen of high growth stocks that was developed by William J. O’Neil, successful investor, entrepreneur, and founder of Investor Business Daily. O’Neil began using his CAN-SLIM methodology in 1953, and the approach is generally regarded as one of the most effective screens for finding high growth stocks that will lead their sector and trade to higher highs. CAN-SLIM is a tried and true screen for early stage high growth stocks like those we see in the 3D printing space with companies like 3D Systems (DDD), Stratasys (SSYS), ExOne (XONE), and Arcam Ab (AMAVF). These companies are on the cutting edge of what many believe will be a technological and societal leap forward over the next decade.
Putting that aside for a moment, CAN-SLIM was developed with the goal of finding stocks before they make major moves, and the 3D printing stocks as a group have had a tremendous run over the last 12-18 months. This raises the question, can a company’s stock that meets the CAN-SLIM screen and has already had a significant run continue to rise? History proves the answer is yes, and the stock may continue to rise precipitously over a period of years if it remains an innovative leader in a high-growth sector during a period of economic stability.
With that in mind, I thought I’d filter 3D Systems Corp. through the 7 screens in the mnemonic to see where the company currently stands, (despite its recent gains) and this is what I found.
- C stands for Current earnings. Per share, current earnings should be up to 25% vs. the same quarter in the previous year. Additionally, it is a positive prognostic sign if earnings are accelerating in recent quarters.
3D Systems’ core operational, non-GAAP* .21 EPS in the first quarter of 2013 was an increase of 23.5% from the first quarter of 2012 which came in at .17. Moreover, progressive EPS of .27, .32, and finally .39 during the remainder of 2012 demonstrate EPS growth that accelerated throughout the year. DDD missed the acceleration in progressive EPS in the fourth quarter of 2012 as compared to the first quarter of 2013 in part due to share dilution and exposure to foreign exchange risk. Analysts on average are expecting second quarter EPS of .24, which, if 3D Systems meets or beats, would show that EPS growth is once again accelerating.
- A stands for Annual earnings which should be up 25% or more in each of the last three years.
Here, 3D Systems has knocked it out of the park:
Non-GAAP EPS for 2010 = .48 (up from a mere .05 for 2009) Non-GAAP EPS for 2011 = .81 (69% increase over 2010) Non-GAAP EPS for 2012 = $1.25 (54% increase from 2011)
3D Systems’ annual earnings growth speaks loud and clear, and explain why its lofty PE multiple is justified from the perspective of DDD bulls.
- N stands for New product or service, more specifically a product or service that fuels earnings growth for the “C” and “A” above. This forward look allows the company’s stock to break out of prior ranges and eventually to new highs. This is partly what propelled Apple, America Online, Amazon.com, eBay, and other high-fliers over the last two decades, and it is what should help drive 3D Systems’ stock higher over time.
Speaking personally, I don’t know of any “new product or service” that will be as game-changing to our personal lives, and the world as a whole ten years from now as 3D printing. I know there are some who claim 3D printing is a fad, it’s over-hyped, it won’t be adopted by the general public, and so-on, but there were also plenty of doubters when the personal computer was in its infancy, and cell phones were the size of a shoe box. I believe the doubters of 3D printing in general and 3D Systems’ role in its future will be proven wrong also.
A good indicator of the size and strength of the personal and small business 3D printer market will take place at the end of next month, when Staples begins selling the Cube 3D Printer by 3D Systems in their stores.
If online sales (already underway) and initial store sales are strong, then look for DDD and the rest of the 3D printing stocks to rally (again) as the imagination of the public and appetite for the technology grows. Incidentally, 3D Systems appears to already be selling the Cube on China’s largest B2C web site, Jingdong Mall.
Bottom line: Never underestimate the potential of the “New” factor of a company like 3D Systems.
- S stands for Supply and demand. A stock’s demand can be seen by the trading volume of the stock during price increases and decreases. Investing basics tell us that a rising stock price along with rising volume indicates demand for shares outpacing supply, and conversely, a drop in share price on high volume shows investors are heading for the exits. The Money Flow Index (MFI) is useful here as a trend of averaged stock price and volume changes together over time. I won’t go into the calculation specifics of the MFI, but if it consistently runs between 30-80, then it’s a picture that says “follow the money.”
In DDD’s case, the MFI has ranged in that sweet spot of 30-80 for almost all of the last 6 months. This is helpful in clearing up the supply/demand picture for DDD because while there have been some large volume spikes on days the stock fell precipitously during January and February, there were equally high volume spikes on share price advances in May. While the stock has traded in a broad range from $27/share to $52/share over the last 6 months, the MFI tells us that there has been, on average, more buying pressure than selling pressure, and (can I say “printing”?), the “S” very nicely in CAN-SLIM.
- L stands for Leader or laggard? Buying a strongly trading stock in a leading industry keeps the focus on strength, not weakness, and helps separate winners from losers. This measurement can be seen in the Relative Price Strength Rating (RS) of the stock. The RS (not to be confused with the RSI) is a measurement of stock performance over a defined period (usually one year) in comparison to the rest of the market.
Here again, DDD outperforms. The stock’s relative strength compared to all companies in the Investor’s Business Daily database (available by subscription) comes in at a whopping 96, meaning DDD outperformed 96% of the stocks screened. That’s strength. That’s printing a titanium “L” down for “Leader” in the CAN-SLIM screen.
- I stands for Institutional sponsorship which (unsurprisingly) looks at mutual funds, insurance companies, credit unions, banks, and other large players buying the stock. Institutional sponsorship should be increasing in the most recent two quarters, and not trailing off.
In this case, 3D Systems is a mixed bag. Institutional ownership numbers tend to vary somewhat depending on the source, but each of the sources I researched reported institutional sponsorship growth in the last quarter of 2012, with institutions as net sellers (approximately 3M shares) in the first quarter of 2013.
|Most recent quarter||Previous quarter|
|Institutional Share Purchases||9.3M||11.4M|
|Institutional Shares Sold||12.3M||5.3M|
|Net Institutional Shares Purchased||-2.9M||6.1M|
|Change in Ownership||-5.03%||9.87%|
(Data from Fidelity Investments)
I give 3D Systems a small “i” here and will wait to see what the institutional sponsorship is in the next quarter. If it continues to decline, it could be cause for measured concern.
- M stands for Market indexes, particularly the Dow Jones, S&P 500, and NASDAQ. This part of the mnemonic is based on market timing and trends. The goal is to invest in stocks that meet the above “CAN-SLI” criteria while there is an uptrend in the Dow Jones, S&P 500 and NASDAQ. The theory (based on historic trends) is that the stocks of good companies outperform in a rising market. In a declining market and souring economy, institutions as well as individuals leave high growth/high tech companies to buy defensive stocks such as utilities, consumer staples, and healthcare.
In a rising market as we’re currently experiencing, a high-growth cyclical company like 3D Systems historically outperforms. It may sound trite to say “the trend is your friend,” but it is still true nonetheless.
My conclusion is that 3D Systems Inc. currently meets all of the CAN-SLIM screening methodology with an asterisk for institutional sponsorship. While the recent gains in the share price of 3D Systems Corporation have been significant, I believe that trend will continue as 3D printing goes mainstream over the next decade and changes our lives in ways we are only beginning to imagine.
* The use of GAAP vs. non-GAAP earnings has been a subject of intense debate for many years and goes beyond the scope of this article. I have chosen to utilize non-GAAP numbers for this article because it gives investors a more accurate interpretation of the historic and potential future organic growth of 3D Systems’ core operational earnings.
Gary Anderson ………… Follow me on Twitter: @3DPrintingStock