CANSLIM

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CAN SLIM is an acronym for an investment strategy based upon common characteristics shared among the greatest performing stocks. This strategy is made widely known in the book How to Make Money in Stocks: A Winning System In Good Times or Bad, 3rd Edition (May 23, 2002) ISBN 0071373616. by William J. O'Neil, and by the earlier Editions of the book.

Contents

[edit] The investing mechanism and process

CAN SLIM is a growth stock investment strategy based on a study of 500 of the greatest stock market winners dating back to 1953 which uses both technical analysis and fundamental analysis.

The goal of this strategy is to discover leading stocks before they make major price advances. These pre-advance periods are "buy points" that are emerging from price consolidation areas (or "bases") of at least 7 weeks on weekly price charts. The break-out (buy-point) is made on a new price high and must be supported with at least a 50% volume gain from the day before. The most common base or pattern is the cup-with-handle. Other bases/patterns often observed are flat bases, ascending bases, and double bottom bases.

[edit] Components of CAN SLIM

Each letter in CAN SLIM stands for common characteristics found in the greatest stock market leaders over the past 50 years:

  • C = Current earnings per share. They should be up 30% or more. Current Earnings Growth
  • A = Annual earnings. They should be up 25% or more in each of the last three years. Annual Earnings Growth
  • N = New. The company should either be under new management, have a new product, or have a new service. It should also have a new high for its stock price. New
  • S = Supply and demand. Look for a company that has large trading volume. High demand = increasing prices. Micro- and small-caps are more volatile, they can go down as fast as they go up. Supply and Demand
  • L = Leader or laggard? Within an industry, always choose the company that is leading the way, not one that is following in another's footsteps. Leader or Laggard
  • I = Institutional sponsorship. Make sure large mutual fund companies (and other institutions) are investing in your stock - you can ride on their capital. Also, focus on the better performing institutions buying your stock. Institutional Sponsorship
  • M = Market trends and market indices. Recognize the cup and handle pattern, as well as other market correction footprints. Know when a stock has peaked out. Also, buy stocks only when the Dow, S&P 500, and Nasdaq are going up. Market Direction

[edit] Cutting losses

The strategy is one that strongly encourages cutting all losses at no more than 7% or 8% below the buy point, with no exceptions, to minimize losses and to preserve gains. It is stated in the book, that buying stocks from solid companies should generally lessen chances of having to cut losses, since a strong company (good current quarterly earnings-per-share, annual growth rate, and other strong fundamentals) will usually shoot up--in bull markets--rather than descend.

William J. O'Neil has stated in interviews and books that the CAN SLIM strategy is not "momentum investing", which is a term sometimes given to CAN SLIM by some analysts and reporters who don't understand how the strategy really works. They tend to say it's "buying stocks that have gone up the most in price" and that have the strongest relative price strength. He says, "No one in their right mind should invest this way." What the system does is identify companies with strong fundamentals--big sales and earnings increases which is a result of unique new products or services--and encourages buying their stock when they emerge from price consolidation periods (or "bases") and before they advance dramatically in price.

[edit] Strength of CAN SLIM

An independent study conducted by the American Association of Individual Investors said that the IBD's CAN SLIM strategy led all strategies in 2005 with a 24.1% gain (2nd Edition of "How to Make Money In Stocks) AAII pdf article. The original CAN SLIM strategy, in the AAII article, made higher gains compared to the 3rd Edition screen of "How to Make Money In Stocks," by William J. O'neil. AAII has stated they believe that one reason this may be is that the 3rd Edition focus' on all cap stock sizes, rather than just small caps which the original CANSLIM version primarily focused on. The 3rd Edition seemed to outperform the 2nd Edition in the late 1990's, while the 2nd Edition screen seemed to pick up and outperform the 3rd Ed. in more recent years. AAII PDF article comparing 2nd and 3rd Edition screens of How to Make Money In Stocks

[edit] Criticism

A good understanding of CANSLIM is a must.

Investment data must be reviewed on a regular and frequent basis to ensure accurate entry and exit point timing.

[edit] External links

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