EquitiesFundamental Analysis

Investing to Win

Based on comprehensive studies of the greatest stock market winners going back each decade, the biggest winners of all time consistently show the same seven performance common characteristics before they make huge price advances. These are the stocks that produce 100%, 500%, sometimes even 1,000% and a lot more in returns. Most of these winners were not yet household names, and yet, they were well-managed companies that began to build profits, and the necessary steam to make major price moves. CAN SLIM? represents a checklist for those common performance characteristics, with each letter standing for a key trait any great stock will possess in its emerging stages. Independent studies by The American Associate of Individual Investors (AAII) for over seven years continue to confirm that CAN SLIM? is one of the most consistent and best performing investment systems. Latest study results from 1998 through June 2005 show CAN SLIM is up 859%. Why does CAN SLIM? continue to outperform each year? Because it?s based on studies of every great stock, i.e., how the market really works. This is a fact-based system rather than on opinion, so it presents a major opportunity for investors to follow what is most relevant to investing success.

Editor’s note: An on-going discussion of CAN SLIM? and its application can be found in the CANSLIM Investing forum.

C = Current Quarterly Earnings
Of the common characteristics all great stocks share, none stand out quite as much as current quarterly earnings.  Great earnings are the lifeblood of a successful stock.  In Investor?s Business Daily??s study of the 600 biggest market winners from 1952 to 2001, three out of four posted earnings increases of more than 70% in the latest quarter before they launched huge rallies.  In every new study, this remains the key fundamental ingredient when searching for great stocks. A company?s most recent quarterly earnings report, when compared with the same quarter the year before, should be at least 18% to 25%; the more consecutive growth each quarter, the better.

Another sign of strength occurs when a stock shows accelerating growth. If you see increases of 20% to 30% to 40%, that’s a sign of an emerging leader. You’ll often see this kind of growth before a stock breaks out of a sound base (a trading area where the stock holds it?s own, without much variation in its price or volume), but then takes off to big price gains. Studying these patterns helps in learning to recognize this emerging trend.

A = Annual Earnings Per Share

Most leading stocks display strong current quarterly earnings and sales growth. But one good quarter isn’t enough to make a trend, especially for those companies engaged in serious cost-cutting measures.  That’s where the ?A? in CAN SLIM comes in.  It stands for annual earnings and sales increases. To make sure growth isn’t a one-hit wonder, look for strong increases in each of the last three years. Shoot for annual earnings growth rates of at least 25%. Between 1980 and 2000, the best stocks logged a 36% median growth rate at their early emerging stage, an IBD? study found. Three out of four of those stocks saw profit grow during the five years prior to their big run-up.

N = New Products, New Services

The greatest stock winners had an exciting new product or service, or were part of an innovative new industry group.  Also, new management and/or industry conditions can excite the market, or it could be that the company itself is relatively new to the public. Sometimes an upstart company can shake up an old industry that’s set in its ways. And the company doesn’t always have to be newly public – just one that’s growing fast and appears to do things differently from its rivals. The Microsofts, the Ciscos, the Home Depots, the Ebays were trailblazers in their heyday and showed major innovation.  This kind of new, entrepreneurial leadership is a defining factor of what constitutes an emerging market-leading stock. 

S = Supply and Demand

One of the most basic economic principles is the law of supply and demand, sharply demonstrated in the stock market. Demand in the face of small supply of available shares will power a stock’s price northward. And oversupply of shares and weak demand will cause a stock to sag. Institutional buyers, such as mutual funds and hedge funds, represent the largest demand, and because of their size, their buying and selling decisions can determine a stock’s fate. So watch for signs of heavy volume on price increases for hints to the latest demand.

L = Leader or Laggard

The best shot an investor has at making big money lies in buying a big leader just as it breaks out early in a rally.  The ?L? in the CAN SLIM? stands for "Leader," stocks that are leading their industries. Usually, just one to three companies in an industry are true leaders. They outperform their industry peers in earnings and sales growth, margins and return on equity. Their stock-price action also is superior to other stocks.  These leaders have outstanding products or services that hoist them to the top of their fields. They tend to gain market share against older, less innovative rivals.

I = Institutional Sponsorship

Institutional investors?mutual funds, pension funds, banks, insurance companies, etc.?account for up to 80% of the market?s trading.  That?s why institutional sponsorship is an important confirming factor and a main driver behind price movement.  These big players are accumulating large numbers of shares over weeks and months, which moves the stock’s price higher. So if they’re buying, you want to do the same. If they’re selling, also follow their lead.  It takes big demand to move prices up, so seek out that demand in the stocks.

M = Market Direction

Owning a stock with all six of the previous criteria is going to do an investor little good if the general market is weak.  Three out of four stocks follow the market?s direction, so always check the general strength of the market before investing. 

Following the CAN SLIM? traits will help you select stocks that have built enough power and leadership to go higher.  A stock should prove itself to you before you invest your money, and remember that spotting signs of an emerging leader still provides you with the time to act. The big institutional investors often take weeks, or even months, to complete their purchases, which allows you time to trade also.

The CAN SLIM checklist can be used by new and seasoned investors and works well to weed out weaker, underperforming stocks. There are additional rules you can learn to enhance your trade, provide you with rules to avoid big losses and more.

Rhody Trader

Senior member
The article discusses the well-known CAN SLIM™ stock trading method introduced in the book How to Make Money in Stocks, by William O'Neil.

Mr. Charts

Legendary member
A very brief summary of his investment criteria from one of the true greats in this business.
Read his books if you are an investor.