10.11 CAN SLIM - Stock picking strategy

Stock Picking Strategy

CAN SLIM is a philosophy of screening, purchasing and selling common stock developed by William O'Neil. It is a very successful investment strategy. What makes CAN SLIM different is its attention to tangibles such as earnings, as well as intangibles like a company’s overall strength and ideas. The best thing about this strategy is that there is evidence that it works: there are countless examples of companies that, over the last half of the 20th century, met CAN SLIM criteria before increasing enormously in price. Let’s explore each of the seven components of the CAN SLIM system. Here’s a crux of the seven CAN SLIM criteria:

C=Current quarterly earnings per share (EPS).

Earnings must be up at least 18-20 per cent.

A=Annual earnings per share. These figures should show meaningful growth for the last five years.

N=New things. Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to hit new price highs. Forget cheap stocks. They are that way for a reason.

S=Shares outstanding. This should be a small and reasonable number. CAN SLIM investors are not looking for older companies with a large capitalization.

L=Leaders. Buy market leaders, avoid laggards.

I=Institutional sponsorship. Buy stocks with at least a few institutional sponsors who have better than- average recent performance records.

M=Market. The market will determine whether you win or lose and so learn how to discern the market's overall current direction, and interpret the general market indexes (price and volume changes) and action of the individual market leaders.

CAN SLIM is great because it provides solid guidelines, keeping subjectivity to a minimum. Best of all, it incorporates tactics from virtually all major investment strategies. Think of it as a combination of value, growth, fundamentals, and even a little technical analysis.