CAN SLIM

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CAN SLIM refers to the seven-pronged mnemonic publicized by the American newspaper Investor's Business Daily, which claims to be a checklist of the characteristics performing stocks tend to share before their biggest gains. It was developed by Investor's Business Daily editor William O'Neil who has reportedly made several hundreds of millions of dollars by consistently using its approach.[1]

Critics of the technique include Warren Buffett and William Lynch, as well as Buffett's investing guru, Benjamin Graham, all of whom prefer the value investing approach to establishing an effective stock portfolio.[2]

Contents

[edit] Mnemonic

The seven parts of the mnemonic are as follows:[1]

  • C stands for Current Earnings. Per share, current earnings should be up to 25%. Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.
  • A stands for Annual earnings, which should be up 25% or more in each of the last three years. Annual returns on equity should be 17% or more
  • N stands for New product or service, which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic. This product is what allows the stock to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high for pricing. A notable example of this is be Apple Computer's iPod.
  • S stands for Supply and demand. An index of a stock's demand can be seen by the trading volume of the stock, particularly during price increases.
  • L stands for Leader or laggard? O'Neil suggests buying "the leading leading stock in a leading industry". This somewhat qualitative measurement can be more objectively measured by the Relative Price Strength Rating (RPSR) of the stock.
  • I stands for Institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters. A quantitative measure here is the Accumulation/Distribution Rating, which is a gauge of mutual fund activity in a particular stock.
  • M stands for Market indexes, particularly the Dow Jones, S&P 500, and NASDAQ. During the time of investment, O'Neil prefers investing during times of definite uptrends of these three indices, as three out of four stocks tend to follow the general market pattern.

[edit] CANSLIM Performance

According to the American Association of Individual Investors (AAII), between January of 1998 and June of 2005, market portfolios traded according to CANSLIM principles gained an average of 849.1%, almost forty times greater than the S&P 500 increase of 22.8%, with gains made every year regardless of bull or bear market performance.[3]

[edit] References

  1. ^ a b William O'Neil. What is CAN SLIM?. Investor's Business Daily.
  2. ^ Matt Logan (August 9, 2004). Value Investing 101. The Motley Fool.
  3. ^ CAN SLIM Investor's Network. CANSLIM Performance.

[edit] See also