C A N S L I M

CANSLIM is a popular method of screening stocks for purchase developed by William O'Neil in his book "How To Make Money In Stocks".

Here are the highlights of the CANSLIM strategy:

C = Current quarterly earnings per share.

• Buy companies with the largest increases in quarterly earnings compared to the same quarter last year.
• Bigger is better!(quarterly earnings jumps of 70% or more.)
• The minimum acceptable increase is 18%.
• Avoid stocks with tiny year-ago earnings (huge increases don’t mean much if you're comparing to a miniscule year ago number.)

A = Annual earnings per share.

• They should show meaningfull growth for the last 5 years.(Consistent annual growth rates of 25% or more.)
• Make sure forecast earnings for next year are in line with the historical growth rate.

N = New.

• Buy companies with new products, new management, or significant new changes in their industry conditions.
• Buy stocks as they initially make new highs in price.
• No cheap stocks -- they are usually cheap for a good reason.
• Forget the natural tendency to buy stocks after they have gone down in price—Buy when they are at new highs.

S = Shares outstanding.

• They should be small or of reasonable number, not large capitalization, older companies.
• Stock prices move as a result of supply and demand for the company’s shares. If there’s not many shares in circulation, a small amount of buying could push prices up quickly.
• Buy companies with 5 to 25 million shares outstanding.

L = Leaders.

• Buy market leaders (in terms of stock prices), avoid laggards.
• Buy stocks that have outperformed at least 80 percent of the rest of the market during the past year.
• Buy the company with the best performing stock in its industry.

I = Institutional sponsorship.

• Buy stocks with at least a few institutional sponsors with better than average recent performance records.
• Institutions are mutual funds, corporate pension plans, insurance companies, etc.
• Look for 5% to 25% institutional ownership.

M = The general market.

• Watch the daily general market indexes (price and volume chages) and action of the individul market leaders to determine the overall market's current direction.
• Very few stocks go up when the market is going down. Buy only when the market as a whole is going up.

Warning: Sell Fast if Stock Drops

For CANSLIM stocks that are going down instead of up, sell them immediately after they drop 8% below your purchase price.

Readers are invited to comment their views on this method.