CAN SLIM
Sierra Capital Investors Inc. uses the CAN SLIM method of investing to manage the bulk of client funds. This system was developed for money managers over 25 years ago by Los Angeles-based firm William O’Neil and Co. and is used by over six hundred institutions across the USA. The system is based on both fundamental and technical analysis of stocks and the market environment.It defines the requirements for successfully selecting stocks in today’s market by having studied the seven common characteristics of winning stocks through the history of the stock market before they made major price moves.
CANSLIM is itself an acronym to summarize these characteristics that have historically defined winning stocks. They are as follows:
* Current Earnings
* Annual Earnings
* New Products or Service, New Management, New Highs
* Supply and Demand
* Leader or Laggard
* Institutional Sponsorship
* Market Direction
* Current Quarterly Earnings
Current Earnings
Earnings per share or “EPS” for the most recent quarter should be up at least 20% or more when compared to the same quarter for the previous year. The EPS rating of a stock will tell you how it’s current earnings picture compares with other companies. The system looks for stocks with an EPS rating of 80 or better which tells you that the company performance is better than 80% of other companies.
Annual Earnings Growth
This parameter looks at the last three years of a company’s earnings. This should show increases of at least 20% per year. Again, the system looks for stocks that have a rating of 80 or better which again means that the company is outperforming 80% of the other companies.
New Products or Services, New Management, New Highs
A company should have a new product or service that is causing earnings to accelerate. An increasing stock price often coincides with something new. The stock should be emerging from a proper technical chart base and about to make a new high in price.
Supply and Demand
The best way to measure a stock’s supply and demand is by watching its daily trading volume. When a stock rallies up in price you want to see volume rise at the same time. This may represent institutional buying and a situation where the demand for the stock is greater than the supply or stock available for sale. In fact, a stock’s price rise should be accompanied by large volume. Conversely, when a stock pulls back in price, you want to see volume dry up indicating no significant selling pressure.
Leader or Laggard
Buy the leading stock in a leading group. Group leadership is constantly changing and should be monitored since a large percentage of a stock’s price movement is caused by the strength of the industry group it is in. A stock’s relative price strength can be measured and should be 80 or higher. This means that a stock’s price is outperforming at least 80% of the other stocks.
Institutional Sponsorship
The best time to purchase a stock is when it has been newly discovered by several institutional buyers. Intitutional volume should be increasing in recent quarters with at least one top rated mutual fund having recently acquired it.
Market Direction
This may be the most important parameter of all as 3 out of 4 stocks will follow the direction of the overall markets regardless of their own fundamental characteristics. If the markets are trending down it is a larger gamble to try to pick the 1 in 4 stocks that will outperform. This is not the time to be buying. To determine the direction of the market careful attention must be given to the price and volume action of the major market indexes.
