Investor's Business Daily
Investor's Eduction: Struck Down Stocks, Like Yahoo, Often Earn Second Round
Friday September 7, 7:00 pm ET
Alan R. Elliott


The idea of reincarnation is a bit too ethereal for use as an investment tool. But leading stocks often do give up the ghost, then return, sometimes years later, to yield solid gains. CAN SLIM rules help determine whether and when to jump back in.

Case in point: Internet portal Yahoo (NasdaqGS:YHOO - News). In the late 1990s, Yahoo's blend of content and search capabilities made it a leading locus for Internet traffic. Ad revenue drove the Sunnyvale, Calif.-based company's sales and earnings well ahead of its dot-com peers.

Yahoo shares sailed 1,200% in the four years following its 1996 IPO. But the stock slipped into a dot-coma early in 2000, just before the Nasdaq's crash in March.

Yahoo sales dropped 35% in 2001, after an 88% increase the year before. Earnings in 2001 fell 83%. The stock plunged 97%. Investors turned attention elsewhere.

On Comeback Trail

But Yahoo immediately bounced back, growing sales by 33% and more than doubling earnings in 2002. Forecasts called for even stronger growth in the coming quarters.

The stock began climbing alongside the market rebound in October 2002 (point 1). By November Yahoo was 35 weeks into a possible cup-shaped base (point 2).

Yahoo's Relative Strength Rating was 87. Its EPS and Composite Ratings were even stronger. But Yahoo was not yet ripe for the picking. Why?

For starters, the base had not yet crafted a buy point. That was tough to swallow, given that the Nasdaq had climbed nearly 30% between Oct. 10 and Nov. 20.

The stock taunted investors, setting up in a possible handle on Nov. 4 (point 3). It was a bit steeper than an ideal handle, but prices drifted lower on declining volume for the week.

The breakout above that handle's buy point 15de weak volume (point 4). That told CAN SLIM investors to hold fire. Smart move. The breakout soon fizzled.

The stock started another handle Dec. 2 (point 5). The would-be breakout came Jan. 6-7, 2003 (point ,- 6). But the market had by then reversed course, killing the October rally in the first week of December. Yahoo's Jan. 6 breakout folded.

The stock started another potential handle Jan. 13 (point 7). This handle stretched through the end of February and notched a decent volume breakout Feb. 28 (point 8). Yahoo was by then no longer a recuperating dot-com casualty. Its RS Rating had strengthened to 94, equal to its EPS Rating. Its Composite Rating was 99.

No Help From Market

But the market remained in limbo. The hands-off rule still applied. A rally attempt launched Feb. 14 (point 9) had not yet been confirmed by a follow-through. Yahoo shares quickly reversed course and dropped 10%. That triggered the 7%-8% sell rule. Four days later, the S&P 500 undercut and offed the rally attempt.

Yahoo's slide bottomed at its 10-week moving average March 12. That same day, a volume-supported uptick on the Nasdaq, Dow and S&P 500 launched a new rally attempt (point 10). Yahoo shaped the base's fourth and final handle (point 11).

Yahoo broke free from that handle on huge volume March 17 (point 12). That was also the day of a follow-through day for the broader market (point 13).

The Nasdaq stabbed 3.9% higher on huge volume, confirming the rally attempt and giving CAN SLIM blessings to investors patiently waiting to jump into Yahoo.

The reincarnated dot-com issue rose 273% over the next 20 months. The Nasdaq rose 60% over the same period.