Kenny Tran to Learn & to Share

William O’Neil, founder and publisher of Investor’s Business Daily, designed a rule-based investing system called CANSLIM. What is most helpful about CANSLIM is that it combines both technical and fundamental analysis. Each letter of CANSLIM stands for a characteristic of a winning stock:

• C: Current quarterly earnings per share

• A: Annual earnings increase

• N: New products, new management, new highs

• S: Supply and demand

• L: Leader or laggard

• I: Institutional sponsorship

• M: Market direction

Ideally, a winning stock should have all of these attributes, according to what O’Neil wrote in his best-selling book How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition.

• C: Buy stocks with large increases in current earnings, preferably 25% or more. Buy stocks in companies with accelerating earnings, especially when compared to previous quarters or years.

• A: Concentrate on stocks that have increased earnings per share every year for the last 3 years. In addition, look for stocks with recent quarterly earnings improvement. Stocks with strong earnings improvement will have a higher probability of success.

• N: Look for companies that have introduced new products or changed management. In addition, using technical analysis, look for stocks that have consolidated for a while before breaking out to reach new price highs.

• S: The stock market is all about supply and demand. Find stocks that are rising in price on rising volume, a signal that institutional investors might be buying. Trading volume should be 50 percent above normal. In addition, look for companies that buy back their own stock and upper-level managers who privately own shares in their company.

• L: Buy the strongest stocks in an industry group or sector. There is no reason to buy weak stocks (the laggards) even if the price is lower. In particular, buy the strongest stocks in a weak market (what technicians call relative strength). You want the leading stocks in the strongest industries with relative price strength of 80 or more (a statistic found exclusively in Investor’s Business Daily).

• I: Buy stocks that are also owned by institutional investors such as pension funds, banks, and mutual funds. Stocks with strong institutional support are liquid, so it’s easy to enter and exit.

• M: Study price and volume indicators to understand the strength and weakness of the market. Use stock charts to identify market tops and bottoms. Use technical analysis not to make predictions but to understand what the stock is doing right now.

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