How to Make Money in Stocks - CANSLIM

CAN SLIM
From William O'Neil's "How to Make Money in Stocks" Joe York, SFD Tuesday, February 01, 2005
CAN SLIM? Is this a diet program?
CAN SLIM was developed by William O'Neil and is outlined extensively in his book, "How to Make Money in Stocks". It is: "A system that consists of buying and selling rules from an extensive analysis of all the greatest winning stocks each year for the last half century."
C-A-N S-L-I-M
C= Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters. A= Annual earnings should be up 25% or more in each of the last three years. Annual return on equity should be 17% or more. N= A company should have a new product or service that's fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price. S= Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases. L= Leader or laggard? Buy the leading stock in a leading industry. A stock's Relative Price Strength Rating should be 80 or higher. I= Institutional sponsorship should be increasing. Invest in stocks showing increasing ownership by mutual funds in recent quarters. M= The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since three out of four stocks follow the market's overall trend.
N – Continued
S= Supply and demand
Big companies vs. smaller ones: Big-caps are more liquid, have less downside volatility, have better quality products, and are generally less risky. They also possess less imagination and have a gap between management and production. Employees generally don't have a personal interest in the company. Smaller companies, while riskier, possess more imagination and have a greater personal stake in their business.
Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters.
C - Continued
A= Annual earnings
Look for annual earnings that have increase for the past 3 years. "From '80 to '00, the mean annual growth rate for all outstanding stocks in the emerging stage was 36%." – pg 16 You may accept one down year, AS LONG AS THE STOCK RECOVERS. Also pay attention to ROE, this separates wellmanaged firms from poorly managed ones. Consensus estimates for future earnings should also be up.
N= A company should have a new product or service that's fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price.
Stocks on the "new-high" list tend to go even higher in price. Why? Because these companies generally have something 'new' to offer it's market. Look for stocks that are just coming out of their bases [pivot or buy point] in the wake of important developments or new products or services.
Syntex in 1963 marketed the oral contraceptive pill. In six months, the stock soared from $100 to $550. McDonald's, with low-priced fast-food franchising, snowballed from 1967 to 1971 into a 1100% profit for stockholders. Thiokol in 1957-1959 came out with new rocket fuels for missiles, propelling its shares from $48 to the equivalent of $355. Houston Oil & Gas, with a major new oil field, ran up 968% in 61 weeks in 1972-1973 and picked up another 367% in 1976.
Hale Waihona Puke Sales growth is also important: What will propel further earnings growth? General rule: If a company has two quarter of earnings deceleration (shrinking earnings), it usually spells trouble ALWAYS check other stocks in the industry to see how the overall market is compare to your stock, but:
C – Current EPS
"[Of the] 600 best performing stocks from '52 to '00, three out of 4 showed earnings increases of 70% on average in the last publicly traded quarter BEFORE they began their major advances." – pg 8 Stocks should show a major % increase in earnings for the most recent quarter when compare to the prior year's same quarter. WATCH OUT FOR MISLEADING EARNINGS! Look out for the company issuing addition share or 'diluting' the stock and large, one-time gains.