If you are looking for an aggressive equity growth strategy, we strongly promote the CANSLIM methodology for identifying great growth stocks of the new and constantly changing world. Continuing with the concept of investing in the strongest available investments relative to the entire equity universe, we start with a screen that generates a Top 50 list, based on the criteria of Investor’s Business Daily’s CANSLIM methodology. We then build a portfolio with the Top 10 equities.
On a weekly basis, the screening process determines if a growth stock meets the CANSLIM top 50 criteria. If a stock falls off the list, the stock is sold and replaced with another stock in the top 10 out of the top 50. Ultimately, the goal of the methodology is to be invested in the strongest growth equities of the new world. If the stock continues to hold a solid uptrend with good earnings, this strategy will hold the position until 50 other growth stocks have better criteria.
CAN SLIM is a growth stock investment strategy formulated from the study of the 500 best performing stock market winners by William J. O’Neil. This strategy involves implementation of both technical analysis and fundamental analysis.
The goal of the strategy is to discover leading stocks before they make major price advances. It is stated 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.
The seven parts of the CANSLIM mnemonic are as follows:
C stands for Current earnings. Per share, current earnings should be up to 25%. Additionally, if earnings are accelerating in recent quarters, this is 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.
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 uptrends of these three indices, as three out of four stocks tend to follow the general market pattern.
For more information, please contact Scott Brooks.
The CANSLIM IBD model is a growth model and should be limited to growth oriented investors or an appropriate allocation for growth & income investors. This growth model can experience individual growth stock equity-type volatility which should be considered before investing. Past performance is no guarantee of future performance.
*CANSLIM information derived from Wikipedia