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.