CAN SLIM is Investor Business Daily's (IBD) acronym for the seven common characteristics all great performing stocks have before they make their biggest gains. My trading foundation is rooted in CAN SLIM although I use it differently than most beginners now that I have evolved into other styles and methods.
CANSLIM Letter Breakdown
Let's start by understanding what each letter represents in the CAN SLIM acronym as described by investors.com:
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. IBD's Accumulation/Distribution Rating gauges mutual fund activity in a stock.
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
CANSLIM Strategy Breakdown
What do I look for in a stock that relates to the basic CAN SLIM principles described above?
C: I always screen for stocks that have earnings increasing quarterly. I don't set the bar at 25% but many of my buys are stocks that have earnings increasing by at least this figure. As long as earnings are increasing, the stock can remain on a watch list to be tested on additional technical and fundamental screens.
A: Annual earnings are more important when searching for loner term growth stocks that can be in your portfolio for months or years at a time. I study annual earnings more often than quarterly earnings and I always take a look at return on equity. I don't use a minimum threshold for ROE but I prefer stocks with at least a double digit figure in this category.
N: New products and services are important but I prefer to look for stocks that are new in general. I like stocks that have debuted on the market within the 5 years as an IPO. I search for stocks within 15% of new highs or stocks holding support above the 200-day moving average that made a new high within the past 52-weeks.
S: Trading volume is very important in my trading system. I prefer to buy stocks moving higher on explosive volume. Volume must be at least 50% greater than the 50-day average. I also look for sell signals when volume starts to increase as a stock violates support levels and moving averages.
L: I tend to trade leaders as far as industries and sectors are concerned but I do occasionally make a purchase in a stock that may not be in a leading industry. A relative strength rating above 80 is excellent but I prefer to see a relative strength line trending higher regardless of the actual rating in IBD. Stocks travel in packs so trade the groups moving higher in an up-trend and you should be fine. Stick with the top two or three stocks within each group and your trading results improve.
I: This is very important in my research as I am biased towards investing in stocks that show increasing sponsorship from quarter to quarter. I ride the trend and the big boys, also known as institutional investors, are the people that move the markets. When institutional money is flowing into a solid stock, I start to dig deeper.
M: This is probably the most important portion of the CAN SLIM acronym as it will tell you what direction the overall market is trending. Avoid fighting the trend by trading in the opposite direction of the market. I watch several important factors to gauge the overall strength of the markets: Price and volume on the NASDAQ, DOW and S&P 500, the NH-NL ratio and the number of stocks trading above and below their major moving averages. Finally, I keep a personal index of 20-30 stocks that I feel are the best in the market at the current time and monitor their weekly action.
This is a guest post by Chris Perruna of ChrisPerruna.com.