Canslim Method: A Comprehensive Guide to Smart Investing

The Canslim method is a popular investment strategy that's been around for decades. It's based on a set of nine key characteristics that help identify successful stocks.

The first characteristic is Current quarterly earnings per share (EPS) growth, which is a crucial indicator of a company's financial health. Companies with consistently high EPS growth tend to outperform the market.

Investors who use the Canslim method are looking for stocks that have been growing their earnings at a rate of 20% or more per year. This indicates a strong and sustainable business model.

A stock's sales growth is also a key factor in the Canslim method. Investors want to see companies with sales growth of 20% or more per year, which suggests a strong demand for their products or services.

The company's annual earnings per share (EPS) should be positive, indicating profitability. This is a fundamental requirement for any investment.

See what others are reading: Vanguard Index Funds Returns

Investors also look for companies with a strong and stable industry trend. This could be a growing industry, a declining industry with a strong company, or a mature industry with a strong company.

The stock's price-to-earnings (P/E) ratio should be reasonable, typically below 25. This indicates that the stock is fairly valued compared to its earnings.

A different take: Large Company Growth Index Fund

The CANSLIM method is a stock selection system created by William O'Neil that helps investors find stocks with strong growth potential.

It combines fundamental and technical analysis to spot companies with big price potential. This approach is outlined in O'Neil's book, How to Make Money in Stocks.

The CANSLIM method is a seven-step process that allows investors to identify high-growth stocks and make investments to generate considerable profits. Each letter in the word CANSLIM signifies an attribute that defines how stock analysis and selection should be done.

Here's a breakdown of the CANSLIM acronym:

The CANSLIM method is a powerful growth stock investing strategy that involves both technical and fundamental analysis. It's based on a study of stock market winners dating back to 1953.

To implement the strategy, you need to identify leading stocks before they make major price advances. These pre-advance periods are known as "buy points" and typically occur after a stock has emerged from a price consolidation area, also known as a "base", on a weekly price chart.

A "cup-with-handle" chart pattern is a common indication of a "buy point". This pattern forms when a stock's price consolidates in a cup shape before breaking out of a handle. The strategy requires at least 7 weeks of consolidation before considering a stock as a potential buy.

The CANSLIM strategy is not about momentum investing, but rather about identifying companies with strong fundamentals, such as big sales and earnings increases due to unique new products or services. O'Neil emphasizes the importance of using the whole strategy, not just the parts you like.

To decide if a stock is worth investing in, you need to go through the checklist of seven criteria. These criteria are the foundation of the CANSLIM strategy and will help you make informed investment decisions.

Expand your knowledge: Canslim Book

The Canslim method is a popular investment strategy that focuses on identifying undervalued companies with strong fundamentals.

C stands for Current Ratio, which measures a company's ability to pay its short-term debts. A current ratio of 2:1 or higher is generally considered healthy.

A stands for Asset Turnover, which indicates how efficiently a company is using its assets to generate revenue. A higher asset turnover ratio is preferred.

N stands for Net Profit Margin, which shows a company's ability to generate profits from its sales. A net profit margin of 15% or higher is considered good.

S stands for Sales Growth, which measures a company's ability to increase its sales over time. A sales growth rate of 10% or higher is considered strong.

L stands for Liquidity, which refers to a company's ability to quickly convert its assets into cash. A liquidity ratio of 1:1 or higher is generally considered good.

You might enjoy: M1 Finance Margin Rates

I stands for Interest Coverage, which measures a company's ability to pay its interest expenses. An interest coverage ratio of 5:1 or higher is generally considered healthy.

M stands for Management Quality, which refers to the effectiveness and integrity of a company's management team. A strong management team is essential for long-term success.

Readers also liked: Institutional Asset Management

Market direction is the most important factor in determining stock performance, as even the best stocks will sink in a bear market. Three out of four stocks follow the trend of the general market.

To identify market direction, follow market indices such as the S&P 500, NASDAQ Composite, Dow Jones Industrial Average, and NYSE Composite. These indices will give you a well-rounded perspective of the market and its direction.

A key signal of a market shift is the Follow-Through Day (FTD), which occurs four to seven days after the market hits a low. An FTD is marked by a significant gain in one of the major indexes on high volume, signaling that big investors are coming back into the market.

Here are some key indices to follow:

Understanding the weighting practices of these indices is also important. For example, the S&P 500 has a 25.7% weighting in information technology stocks, while the NASDAQ has a 48.39% weighting in tech stocks.

Discover more: The Debt Snowball Method Involves . . .

CQ stands for "Cut Losses, Take Gains", a crucial aspect of market analysis that can make or break your investment strategy. O'Neil recommends selling off your worst-performing stocks to minimize losses.

You should aim to avoid letting your ego dictate your actions, as this can lead to significant problems down the line. Recognize a mistake early, and don't be afraid to cut losses.

O'Neil suggests keeping your best-performing stocks a little longer, allowing them to continue growing and generating returns. This approach can help you maximize your gains.

In order to implement the CQ strategy effectively, you should regularly monitor your portfolio and be prepared to make adjustments as needed.

In the CAN SLIM investment strategy, supply and demand play a crucial role in identifying potential winners. O'Neil found that 95% of winning stocks had fewer than 25 million shares outstanding, with a median of 4.6 million shares.

Companies with a smaller number of shares outstanding tend to increase in value more quickly, making them attractive to investors. This is because the supply of shares is restricted, which can lead to a surge in demand and a resulting increase in price.

The float, or the number of shares in the hands of the public, is also an important consideration. O'Neil suggests looking at the actual float, which is determined by subtracting the number of shares held by management from the number of shares outstanding.

Stocks with a float of 20 million shares or less were previously considered ideal, but as companies have grown, this requirement has become increasingly restrictive. The CAN SLIM No Float approach does not specify a specific float requirement.

A recent stock buyback can also signal a positive impact on supply and demand. Stock buybacks reduce the supply of shares available to traders and often indicate that management is confident in the company's direction and anticipates an increase in demand.

Investors should look for stocks with average daily trading volume higher than the average of the last three months. This indicates increasing demand and can be a sign of a potential winner.

There is academic evidence to support the idea of an illiquidity premium, which suggests that stocks with lower liquidity can perform well due to restricted supply.

Additional reading: What Is Webull Cash Management

A key aspect of successful investing is understanding the broader market trends and direction. According to William O'Neil, the market direction is the most important factor, as it affects every stock, regardless of its strength.

The CANSLIM system emphasizes the importance of identifying the overall market direction. O'Neil believed that recognizing when the market has topped or bottomed is 50% of the whole complicated investment game.

To determine market direction, O'Neil focuses on technical measures, such as heavy volume without significant price progress and the divergence of key averages. He recommended following market indices, including the S&P 500, NASDAQ Composite, Dow Jones Industrial Average, and the NYSE Composite.

Market direction has a significant impact on individual stocks, with at least 50% of the whole game being the general market. O'Neil's research shows that three out of four stocks follow the trend of the general market.

Here are some key indices to follow for market direction:

Understanding how various stock market sectors are moving relative to the market direction as a whole is also essential. For example, O'Neil believed that tops occurred when uptrends barely moved on high-volume, which he called "Heavy volume without further price progress up".

Institutional sponsorship is a crucial factor in stock market analysis. It refers to the presence of big investors, such as mutual funds, pension funds, and hedge funds, in a stock.

These large investors bring stability, credibility, and a steady flow of cash that can drive stock prices up. A stock with institutional sponsorship is more likely to experience steady price growth.

Not all institutional support is equal, and top-performing funds with a history of strong returns are the best indicators of a stock's potential. You can find stocks that these reputable institutions are buying by checking fund ratings or holdings data.

Keeping an eye on changes in institutional ownership can give you early clues about a stock's potential. If more funds are buying a stock, it's generally a good sign, but if institutional ownership is dropping, it could be a red flag.

Institutional ownership generally improves a stock's liquidity and stabilizes its price, creating a floor of demand that reduces swings in price and volatility. However, too much institutional sponsorship can be a red flag, as it can cap further upside.

Additional reading: Do Angel Investors Get Equity

Here are some key things to look for in institutional sponsorship:

By focusing on stocks with increasing institutional interest, you're aligning your trades with the major forces that drive market momentum.

Screening for CANSLIM stocks can be a daunting task, but with the right tools, it's a breeze. Deepvue is a CANSLIM screener that makes it super easy to scan for high growth stocks that meet William O'Neil's criteria.

You can use relative strength ratings and industry group rankings to spot the top performers in each sector in just a few clicks. Deepvue's easy-to-use interface and stock ratings make the process smooth and efficient.

If you prefer not to use a stock screener, you can also use the fund holdings list of CANSLIM funds. Both the IBD 50 ETF and the CANSLIM Tactical Growth Fund contain a portfolio of stocks that have met all of the CANSLIM requirements.

Curious to learn more? Check out: Most of the Capital Budgeting Methods Use

Ryan, a wise investor, used the CANSLIM technique and identified high-growth stocks by checking several companies for all the seven CANSLIM investment criteria. He chose stocks of a company with a high EPS, institutional investor support, industry leadership, good annual earnings, and recent new products and management appointments.

Here are two screeners that appear to have everything you need to screen for CANSLIM stocks:

Investor's Business Daily also provides a can-slim select service, giving you a list of CANSLIM stocks to choose from.

The CANSLIM method has several advantages that make it a popular choice among traders and investors. It provides a structured, research-based approach to stock picking that combines both fundamental and technical analysis.

This approach helps make decisions based on specific criteria, cutting down on emotional decisions. The methodology encourages disciplined buying and selling, which helps avoid common mistakes like holding onto losing stocks or wasting time buying low-quality stocks.

You might like: How to Buy Penny Shares

CANSLIM's step-by-step process is backed by decades of research by William O'Neil, who studied top-performing stocks from the early 1900s onward. He analyzed winning stocks across economic cycles and used this research to form the CANSLIM formula.

The strategy focuses on high-growth stocks, which gives investors the chance to capture outsized returns during bull markets by identifying "big winners" that make a major impact on a portfolio.

Here are the main benefits of the CANSLIM method:

However, the CANSLIM method also has some limitations. It doesn't focus on shorting opportunities, which may not appeal to more aggressive traders who want to take advantage of shorting stocks in falling markets.

The strategy is also biased toward growth stocks, which means it doesn't look at value stocks or dividend-paying stocks that don't meet CANSLIM's growth criteria.

Explore further: T Rowe Index Funds

The CAN SLIM method is a structured approach to finding high-growth stocks, developed by William O'Neil. It's based on a study of stock market winners dating back to 1953.

The method involves both technical analysis and fundamental analysis to identify companies with strong fundamentals, such as big sales and earnings increases due to new products or services. These companies are more likely to shoot up in price in bull markets.

The CAN SLIM strategy has seven attributes that help identify high-growth stocks: Current quarterly earnings, Annual earnings, New product, management, innovation, or service, Supply and demand, Leading stocks, Institutional investors support, and Market trend or direction.

To decide if a stock is worth investing in, you need to go down the checklist and ensure that the security meets each of the seven criteria. The method works best in bull markets and focuses on growth stocks.

Here are the key CAN SLIM rules to remember:

The CAN SLIM method encourages cutting all losses at 7% or 8% below the buy point, with no exceptions, to minimize losses and preserve gains.

Trading and Risk Management is a crucial aspect of the CANSLIM method. The goal is to minimize losses when you're wrong, rather than trying to be right all the time.

O'Neil emphasizes that it's not about being perfect, but about losing the least amount of money when you make a mistake. This mindset shift can help you stay calm and focused in the market.

Losing the least amount of money when you're wrong means being disciplined in your trading decisions. It's a key part of the CANSLIM trading rules, which can help you achieve long-term success in the stock market.

By understanding and applying these principles, you can develop a more effective trading strategy and reduce your risk exposure. This can lead to greater peace of mind and more consistent returns over time.

See what others are reading: Is It a Good Time to Buy Bond Etfs

Annual earnings growth is a crucial factor in the CANSLIM method. A company should have seen increased annual earnings over the previous three years, with a growth rate of 25% or higher.

This growth rate may vary depending on the situation, but it's a general guideline to look for. You're not just looking for any old growth, but sustained growth over several years.

To ensure the company is using its earnings wisely, look at the Return on Equity (ROE). A good ROE is one that exceeds 17%. This indicates the company is generating profits and reinvesting them effectively.

A high ROE suggests the company is using its earnings to benefit shareholders. It's not just about making profits, but also about using those profits to drive growth and increase value.

Consider reading: Prepare a Cash Flow Statement Using the Indirect Method