CANSLIM: How to make Money In Stocks; A Winning Selection System and Strategy Book

CANSLIM
A Stock Selection Strategy and Method

"A Winning System in Good Times or Bad"

From William O´Neil´s Book:
How To Make Money In Stocks

CANSLIM selection strategy is based on over 35 years of research . CANSLIM methods are the result of William O´Neil and Company´s research, where market winners of the past have been closely examined to learn all of the attributes that made them winners. In his book, How To Make Money In Stocks, O´Neil shares his method to spot the same price and volume patterns that past market winners demonstrated just before their advances in price. The book includes 18 common mistakes most investors make. This is a system I use personally and when I follow it, it works!

O'Neil: "... CANSLIM has absolutely nothing to do with momentum investing. In fact, I'm not even sure what momentum investing is.

CANSLIM is a selection method.

CANSLIM is a set of rules to apply to stock that can effectively weed out 10's of thousands of stocks down to just a handful.
Lets summarize a CANSLIM stock:

Stock of a small but successful public company, that is a leader in its field, that is innovative in one or more ways, with a history of increasing earnings, trading some thousands of shares- per day- on a major stock exchange, has an innovative product, has been noticed by institutional investors, is currently being bought in quantity, and is owned in part by it's management.

The CANSLIM method advocates timing the buying of these quality companies as they emerge from "consolidation periods" before the price runs up dramatically. And the method is based upon past histories of companies that have done just that.

O'Neil's seven characteristics of a winning stock:

C: Current (Quarterly) Earnings Increases

Quarterly earnings should increase each period by a double digit figure. The larger the increase, the better. Quarterly increases can be reviewed on-line at YAHOO! Finance "Research" or Market Guide. The Value Line shows much more detail, is easy to read and can be found at your library, in the business reference section. Lets look at Shuffle Master as an example:
Yahoo! Finance/ SHFL/ Profile; Earnings
Marketguide/ SHFL/ Comparisons; Growth Rates
Its a good idea to review the sales increase to make sure the earnings didn't come from a one-time event like sale of land, equipment, or a division of the company etc.

A: Annual Earnings Increases

Same as above. Yearly earnings should increase by double digits as well- for several years. The more years the better. Never pick a CANSLIM that has no earnings. Never! You might choose to invest in a high risk, very speculative stock without a history of earnings (and earnings increases) but it isn't a CANSLIM. Example is same as above.

N: New Products, New Management

Your CANSLIM selection should be doing things differently- new products, innovative distribution/ marketing etc. A company making the same ol' donut isn't going to take Wall Street by storm. O'Neil says there has to be a successful twist or two- or its the same old thing over again. Old management using old methods won't make the company a leader either. Look for something new.
Yahoo! Finance/ SHFL/ Profile; Business Summary
Marketguide / SHFL/ Exec. Biographies

S: Supply and Demand: Small number of shares outstanding, high volume demand

Shares Outstanding: Companies should have a relatively small number of shares outstanding. This means no General Motors, GE, IBM or Large Cap Companies. The number of shares outstanding should be large enough to to actually trade on a large exchange, but small enough so as not to "dilute" the stock price and earnings among billions of shares. Look for 10 to 30 million shares outstanding. No hard rules here- billions are bad, several 10s of millions are good.

Volume: There has to be some volume traded every day to be a CANSLIM. Puerto Rican Cement has great numbers but only trades several thousand shares a day- not a CANSLIM. There has to be a demand for the stock to increase in market value. Look for several 10s or 100s of thousands to trade on average, each day. If you see a large increase in volume on your CANSLIM candidate, on a day where the price is up, your ears should perk up. High volume on a down day is bad (very bad). Down day on high volume means there a lots of sellers, supply is high, and demand is low- a bad thing to buy into.
Yahoo! Finance/ SHFL/ Profile/ Statistics-At-A-Glance; Shares Outstanding
Yahoo! Finance/ SHFL- Chart/ Volume- Avg.Volume

L: Leader or Laggard in the market: Don't buy laggards

Don't buy laggards.
Yahoo! Finance/ SHFL/ Research; Industry- Entertainment ( weak info)
Marketguide/ Sector- Services: Industry- Casinos and Gaming (better info)

I: Institutional Sponsorship
Institutional investors are accumulating the stock. There will be buyers and sellers but the net change is what is important. Are institutions buying the stock?
Yahoo! Finance/ SHFL/ Profile; Ownership- Net Institutional Buying
Marketguide/ Institutional Ownership/ Summary- Holder-Buyers- Sellers

M: Market Direction: General direction of the market and the indexes.

O'Neil says you can't know what the market is going to do- you can only know where it t is, and where it is been. He elaborates that if the market is headed down, so will three out of four of your stocks. CANSLIM is described by many to be a MOMENTUM style of investing. O'Neil said "No. CANSLIM has absolutely nothing to do with momentum investing. In fact, I'm not even sure what momentum investing is. He also says that the only way to know whether market momentum is up or down is to learn to read the indexes, and understand "every day" what the general market averages are doing. I consider the "M" in CANSLIM to be the most advanced concept in the system. O'Neil gives us the following homework:

Study Historical Market Tops.

Look for volume verses price progress.

Lower quality, low priced stock moving up (bad)

Study the moving averages and daily volumes.

My personal investment experience has taught me this- if a company has not yet shown a profit- its price and performance are volatile. So is the success of the company (this has been an expensive lesson). But a company showing profit may not be a profitable stock investment either.

However, if a company has earnings, and a history of increased earnings- due to innovative product, service, management or method- it will attract the attention of institutional investors (mutual funds, pension funds etc.) and they will start to accumulate (buy). As the company's stock makes new price highs, it attracts further attention from the market. As quarterly earnings continue to increase, so should the value of the company, and the market demand, and the value of the stock! These characteristics are what made the Dells, Intels and Ciscos winners. CANSLIM method can effectively trim down thousands of stocks to the few with the greatest potential for increase.

Buy it now:

How To Make Money In Stocks takes the mystery out of selecting the best stock for market appreciation. It's methods have been used by the winners of various Investment Challenge contests. As Mr. O´Neil puts it: "one of the most valuable chapters in this book.... should be worth several hundred times what you paid for [it].

Not only will you learn how to make money in stocks, you will learn how to limit your losses as well. O'Neil says that its more important to limit your losses than to be "right" 100% of the time. O'Neil quotes Bernard Baruch: "Even being right 3 or 4 times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong." Chapter 9 tells you how.

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This is not an offer to invest. Information presented here is for educational and illustrative purposes only and not intended to be used as investment advise or guidance. All investments involve risk, and investing can result in the total loss of principle. Past performance is no guarantee of future results. Always seek advise from a registered investment professional and always read the official company prospectus before investing. No guarantee is expressed or implied concerning the accuracy of information presented here.