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All about CAN SLIM

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CAN SLIM

CAN SLIM is a seven lettered word also known as the seven-pronged mnemonic which is publicized by the American famous national daily titled Investor’s Business Daily. These seven lettered word is regarded to be the checklist while choosing stocks for investment. It is a checklist of characteristics of the performing stocks, which is expected to give the maximum gains. William O’Neil is the man behind the development who served as the editor of Investor’s Business Daily. It is also reported that William O’Neil made several hundreds of millions of dollars by consistently using this approach.

The strategy of selecting stocks by this approach includes the implementation of both technical analysis and fundamental analysis. The fundamental goal of the strategy is to discover leading stocks before they make major price advances. The pre-advance periods are called “buy points” and emerge from price consolidation areas which are also called as “bases”. These areas emerge in the form of a “cup & handle” price pattern which takes into consideration a minimum of 7 weeks on weekly price charts.

Following are the seven parts of the mnemonic:

  • C stands for Current earnings – According to the strategy the Per-Share current earnings should be up to 25%. Also if the earnings are accelerating in recent quarters, it gives 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 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 stock in a leading industry”. This somewhat qualitative measurement can be more objectively measured by the Relative Price Strength Rating (RPSR) of the stock, an index designed to measure the price of stock over the past 12 months in comparison to the rest of the market based on the S&P 500 or the TSE 300 over a set period of time.
  • 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 up trends of these three indices, as three out of four stocks tend to follow the general market pattern.

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.

Read How to invest in the India Stock Market on GWI.

CANSLIM strategy is not momentum investing, but that the system identifies 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.

 

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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