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CANSLIM (investors.com)
CANSLIM (investors.com)
How do you know what to buy, when to buy, and when to sell? Using CANSLIM can make a huge difference in your portfolio as you begin to narrow down your choices and are able to identify signs of strength and weakness. Below are the seven different areas that many investors use to make their investment decisions. Yes, short term investors may often narrow down the field of companies they want to risk their money even on a short term basis.
Current Quarterly Earnings
Annual Earnings Growth
New Product, Service Management, or Price High
Supply and Demand
Leader or Laggard
Institutional Ownership
Market Direction
Current Quarterly Earnings
Current Quarterly Earnings
Earnings Growth is an important factor to look at when buying stocks. Look for stocks with increases in current quarterly earnings of at least 25%.
Sales Growth: Look for 20% - 25% or higher growth in the most recent quarter. If the company's sales growth is below that benchmark, make sure it has at least increased in recent quarters.
Return on Equity: Look for 17% or higher ROE. Return on equity reveals how well a company manages its capital and helps you identify the best-run businesses.
Learn more about the Current Quarterly Earnings >
Earnings Per Share (EPS) vs Diluted Earning Per Share
Earnings Per Share - This metric tells investors how much money a company makes for each of its shares. EPS is one of the most common ways to gauge a company’s profitability.
To calculate a company’s EPS, first subtract any preferred dividends from a company’s net income. Then divide that amount by the number of outstanding shares the company has.
Dilutive securities are securities that are not common stock but can be converted to common stock if the holder exercises that option (creating more shares). If converted, dilutive securities effectively increase the weighted number of shares outstanding, which decreases EPS.
Best Case Scenario (EPS ≈ Diluted EPS; as close as possible to being even)
Worst Case Scenario (Big difference between EPS and Diluted EPS)
Annual Earnings Growth
Annual Earnings Growth
In addition to quarterly earnings you want to make sure companies are showing strong long term growth. Look for stocks that have grown their earnings at least 25% or more for the past 3 years.
25% - 50% or higher annual earnings growth over the last three years
New product, service management, or price high
New product, service management, or price high
Studies of the great stock market winners of the past all had something NEW. Always look for companies with new, game-changing products and services.
New product or service that is leading or changing the industry and generating exceptional sales and earnings growth.
New CEO or new industry trend that benefits the company.
New price high of stock.
Supply and Demand
Supply and Demand
S is for Supply and Demand. As more investors demand a limited supply of shares, a stock's price goes up. Look for heavy-volume accumulation by institutional investors, particularly at buy points.
Heavy-volume accumulation (buying) by institutional investors, particularly at key moments like when the stock is forming and breaking out of a chart pattern
Leader or Laggard
Leader or Laggard
We are always looking to buy leading stocks in leading industry groups. Look for the best of the best - the leaders in strong industries that are showing superior earnings growth and sales.
Top-rated stocks within top 40-50 industry groups
80 or higher Relative Price Strength (RS) Rating
Rising relative strength line, preferably near new 52-week high
Learn more about buying Leaders >
Other considerations to determine Leaders vs Laggard: P/E Ratio and Market Cap
P/E ratios tell us the Price per Earnings of a company.
Often used to compare similar companies from the same industry/sector
Many people will talk about having a high or low P/E ratio, but high P/E companies can keep growing at an exponential rate and low P/E ratios can be cheap for bad reasons
Compare companies to the industry leader. Are they similar? Do they have an advantage?
If they are not of equal caliber, consider whether that company is overvalued
Market Cap (see Market Cap Explanation)
Market Cap = Share Price x Outstanding Shares
Mega: $200B+
Large: $10B to $200B
Mid: $2B to $10B
Small: $250M to $2B
Micro: $50M to $250M
Nano: <$50M
The larger the market cap, the less likely that price can be manipulated by the hedge funds/market
Most view Small-cap and Mid-caps to be where most growth businesses lie since they are still building and will often see their value rise significantly with more shares being issued and their stock price rising with performance.
Look for liquidity by finding stocks with a high volume
Institutional Sponsorship
Institutional Sponsorship
Professional investors, like mutual funds and pension funds, account for about 75% of all market activity. Using Investors.com, you'll learn how to follow the big money.
Increase in number of funds owning the stock in recent quarters
Ownership by funds that have outperformed the market over the last 3 years
Average daily trading volume of 400,000 or more
Other sites like Finviz.com offer you insight to the institution ownership for FREE, but you will need to find other free sites to track the instructional buying and selling. Below are some of the things to consider with stocks held largely by institutions.
Since they hold a large portion, like most other stocks they can often control or dictate price action if everyone followed
While large selling by institutions can indicate a complete sell off, it does not always mean they are jumping ship
Trading around a core and taking profits
A hedge fund or retail investor may want to hold on to shares of a really good company due to its returns, dividends, and ability to make money off of Covered Calls. This core could be 20 shares, 500 shares, or in institutional hedge funds millions.
Like many investors, you may acquire more shares at times the security is performing at a high level
Hedge funds and retail market often have a percentage of profit they want to lock and will sell off the additional shares above their core to lock in profits (eg. some believe 30% is the typical rise a stock may see before a pullback is inevitable).
Similar to Inside Ownership, this may periodical selling to earn an income or profit
CEO's of companies are often paid in shares of the company; this enables a company to avoid having to use its cash to pay the CEO
This incentivizes the CEO to help the performance since their efforts directly relates to their ownership increasing in value of the share price
Since CEO's are paid in shares, they will often sell shares each month, typically at a fixed amount, to collect their pseudo salary for them working
Market direction
Market direction
Simply put: If you buy a stock when the market is in a strong uptrend, you have a 75% chance of being right. But if you buy when the market is in a downtrend, you have a 75% chance of being wrong. You want to have market direction on your side regardless of meeting several of the components above.
Make new purchases only in a market uptrend
Take defensive action as the market begins to weaken (Cash is a position/defensive position)
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