Weekly Lesson Wednesday📝 

CANSLIM EXPLAINED 📕

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What is CANSLIM ?

CANSLIM is a system created by Investor's Business Daily founder William J. O'Neil. It uses a combination of fundamental and technical analysis techniques to select stocks growing faster than average. CANSLIM is a bullish strategy for fast markets, with the goal being to identify and buy stocks of companies that show strong growth potential, allowing investors to capitalize, before big institutional investors drive up the price. Which will then help your investment, as you bought the shares early before the rise.

Each letter in the acronym stands for a key factor to look for when purchasing shares. Stocks that are CANSLIM candidates show the following attributes:

C: Current quarterly earnings per share (EPS) have increased sharply from the same quarter in the prior year. Generally, investors using CANSLIM want EPS growth of over 25%, but the higher the better.

A: Annual earnings increases over the last three years. Again, annual EPS growth should ideally be in excess of 25% over the last three to five years.

N: New products, management, or positive new events that push the company's stock to new highs. This type of headline news can cause short-term excitement, propelling a surge of optimism within the market and subsequent price appreciation.

L: Laggard stocks (a stock or security that is underperforming relative to its benchmark or peers) are preferred within the same industry. Use the relative strength index (RSI) as a guide. The RSI is a momentum indicator that measures the magnitude of price changes to determine whether the price of a stock or asset is overbought or oversold. The RSI ranges from zero to 100. An RSI reading below 30 suggests that the stock is oversold and could be undervalued—creating a buying opportunity (bullish). An RSI reading of above 70 signifies that a stock could be overbought or overvalued and could be a chance to sell (bearish). full lesson on RSI here.

I: Pick stocks that have institutional sponsorship by a few institutions with recent above-average performance. For example, this could be a recently public company, still supported by a small handful of well-known private equity firms. Be cautious of stocks that are over-owned by institutions as you want to get in before the big money is fully invested.

M - Determine market direction by reviewing market averages daily. A market average measures the overall price level of a given market, as defined by a specified group of stocks, such as the Dow Jones Industrial Average. CANSLIM stocks tend to be over-performers in bull markets.

One thing to note: The L in the original CANSLIM model created by O’Neil stands for both "Leader" or "Laggard". Some have argued that leading stocks should be considered instead of laggards, since they would be stocks that possess superior fundamentals and are part of a leading industry group or sector. It really depends on your preference, both can work.

⭐Advantages and disadvantages ⭐

The elements of CANSLIM resemble a wish list for fund managers looking for growth, so it's only a matter of time before buying demand rises. However, the downside is that stocks matching the CANSLIM strategy can also be among the quickest to decline if the market direction changes and large institutional investors start moving their money into safer assets.

CANSLIM can be a good fit for an experienced investor with high risk tolerance. These stocks cannot be bought and simply held, as much of the value is being priced in for future growth. Any slowing in the growth trajectory, or the market as a whole, may result in the stock being punished.

It’s an interesting theory and if pulled off can really work wonders. If you think it sounds good. Research it some more. It could be a new strategy for you to try.

Thank you
That’s All Folks

Thank you for reading. Like usual. Not financial advice.

Full disclaimer here

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