Sunday, April 4, 2010

The CANSLIM investment strategy

CANSLIM is a stock trading/investing strategy created by William O'Neal, who also created Investors Business Daily. CANSLIM is an acronym, which really stands for
 
Current quarterly earnings per share
Annual earnings growth
New products, New Management, New Highs
Shares outstanding
Leading industry
Institutional sponsorship
Market direction
 
CANSLIM is a combination of fundamental and technical concepts, and is covered in detail in O'Neil's books "How to Make Money in Stocks" and "The Successful Investor". Here's a short summary:
 
C: Current Quarterly Earnings per Share
 
EPS should be 20% or more over the same quarter of previous year. In other words, the company is growing, and growing at a good rate.
 
A: Annual Earnings Growth
 
EPS for last five years should be growing at least 15% per year, averaged out, and preferably, positive growth each of the five years. However, one bad year out of five is fine. Relatively steady growth is good.
 
N: New Products, New Management, New Highs
 
Anything new, such as new product, new management, and even new stock high, can drive the stock prices higher. Each of those events will decrease the resistance (i.e. sellers), leading to breakouts.
 
S: Shares Outstanding
 
Most stock market winners have less than 25 million shares outstanding, according to O'Neil's research. With few shares outstanding, even a little bit of purchase can cause scarcity and drive up prices.
 
L: Leader
 
An industry leader is is far more likely to stay ahead of its competitors as well, and thus remain profitable. It is assumed that they have done SOMETHING right, in taking advantage of changing markets.
 
I: Institutional Sponsorship
 
Most large purchases comes from institional buyers (i.e. mutual funds, banks, insurance companies, pension funds, etc.), who can be assumed to have done their analysis, as they can afford it. However, if the stocks are more than 70-80% owned by institutions, this can be a problem, as often bad news leads to excessive selling by those owners, and thus, sharp drops in prices. Thus, if a stock is only owned by 3-10 instutional owners, the stock is good for you to buy.
 
Please note that this is contradictory to Peter Lynch's advice, that you want to get in BEFORE the institutional guys get in. However, it's not too far off the mark. The idea is, if the instutional investors got SOME in, to confirm your choices. It's assumed that the institutional investors know what they're doing, so following in their footsteps is not a bad idea.
 
M: Market Direction
 
In O'Neil's research, 75% of the stocks move WITH the market, rather than against it. Thus, you can pick all of the other criteria correctly, and STILL lose money, because you bought at the wrong time, going against the market. Thus, be sure about the trends.
 
CANSLIM claims to have good track record. And it is relatively simple to implement, and generally follows "common wisdom". Give it a try.

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