CANSLIM is a method of stock selection developed by William O’Neill and described in his book “How to Make Money in Stocks”. CANSLIM is a combination of technical and fundamental analysis. It uses price and volume action with solid fundamentals to find stocks of companies during their accelerated growth phase. We have used this method to find candidates to populate our watch lists with great success for about a decade.
C= Current Quarterly Earnings per Share: The best stock market performers have accelerated earning per share growth when compared to the previous year of 25% and higher. However, a single quarter of growth is not enough and can considered misleading. The higher the better! The earnings growth should also be accompanied by sales growth of at least 25% quarter over quarter.
A= Annual Earning Increases: Same as before. Compare the annual growth of annual earnings of the company and it should be at least 25% over the earnings of the previous year. In addition, to further refine this number the return on equity should be greater than 17% (ROE). Furthermore, it is also recommended that the annual cash flow per share / annual earnings per share be greater than 20%. Price to earning ratios (PE ratio) are not important as stocks in their growth phases will be sometimes considered overvalued.
N= New Products, New Management, New Highs: IPOD, IPAD, IPhone, Yahoo, PC direct sales (DELL), Windows, and Google.com. What do these products have in common? They made a lot of money for their respective companies. In addition, the stocks had huge run ups in price as a result. O’Neill recommends buying stocks very close to their highs after the stocks have come out of sound bases (periods of consolidation). This criteria is kind of subjective and the investor has to do his homework.
S= Supply and Demand: The volume of a stock breaking out of a period of consolidation should be at least 50% higher of the 3-month average volume. The volume of a stock that is increasing in price should also increase. When the stock price goes down, its volume should decrease.
L= Leader or laggard: Buy the best company in its group. Do not buy a company that is a laggard just because it has not moved while the group leader is reaching new highs. Look for stocks with a relative strength of 80 or more vs. the S&P 500 performance.
I= Institutional Investing: Mutual funds, hedge funds, pensions, ect. account for most of the activity in the stock market. It is recommended to buy stocks of companies where the number of institutional investors is increasing. In addition, it is recommended that these institutional investors have good track records.
M= Market Direction: Follow the stock market direction daily. Do not buy in a bear market as most stocks no matter their fundamentals get sold off by the investors as they are running for the exits.
There are other criteria on the book on the timing to buy and when to sell the stocks. The fundamental aspect can be programmed in a stock screen but the system cannot be implemented by a mechanical trading system. It is a judgmental system that takes a lot of practice and chart reading. We are providing an annotated example of Gold Corp. that we are borrowing from http://www.canslim.net. Check them out (We are not being paid for the plug). The stock went to make close to 90% return at the peak after its breakout.
Gold Corp Stock Market Chart from CANLIM.NET
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I am a dad, professional engineer, MBA student, and a financial fanatic. I can help you make money in the stock market. I use Fibonacci techniques for retracements and targets, technical analysis, some little fundamental analysis, and automated systems trading. I also trade options. In addition, I use CANSLIM to get neat growth stock ideas. No fluff and no BS.
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