How to invest the CANSLIM way

William O'Neil popularized a style of selecting growth stocks he calls CANSLIM. It's an acronym standing for seven things one should look for in a growth stock. Here's a capsule overview.

Difficulty Level: hard      Time Required: ongoing

Here's How:

  1. Current quarterly earnings per share should be up significantly from the same quarter the previous year - at least 20% and higher in bull markets.
  2. Annual earnings should be increasing year to year over the last five years with a growth rate of at least 25% per year.
  3. News - stocks about to break out often have new management, new products or have just hit new highs in share price.
  4. Supply and demand is a key factor in share price. Look for stocks with less than 25 million shares outstanding.
  5. Leaders in an industry are the best bet. The stock should have a relative price strength better than 70, meaning it is outperforming 70% of the stocks on the S&P 500.
  6. Institutional sponsorship can help move a stock's price in a big way. This means that there should be some interest in the stock by at least a few mutual funds, pension funds, major investment counsellors and so on. At the same time, stocks that are "overowned" by institutions are riskier.
  7. Market direction is important. You can't fight the market so learn to recognize market tops and bottoms. This is probably the most dificult aspect of the CANSLIM method.
  8. Read William O'Neil's "How to Make Money in Stocks". The preceding is an overview and you owe it to yourself to go to the source for the full story. (See my review linked below.)

Tips:

  1. Newsletters, particularly ones focusing on new and emerging issues and growth stocks, can be a big help in finding stocks fitting the CANSLIM guidelines.
  2. O'Neil's book has a lot more in it besides the seven steps outlined above, including an extensive chapter on selling strategies, so do read it.

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