Here’s a disciplined method given by a legendary investor William O’Neil founder and publisher of Investor’s Business Daily in his best-selling book How to Make Money in stocks: a winning system in good times or bad times. This helps to choose a winning stock. He was the youngest person to get a seat at the NYSE. He doesn’t believe in the existing facts. He made a profound research to find his own strategy which revolutionizes the method of stock selection. He made a profound analysis and came up with 7 common traits that a quality stock has.

A Stock-Picker's Guide to William O'Neil's CAN SLIM System - Portfolio123  Blog
William O’Neil

Each individual letter in the acronym represents a magnificent attribute which is a combo of both technical and fundamental analysis. Its main idea is to find the stocks which promised a high potential in the near future before rise in price. This is associated with the majority of multi-baggers. Technical analysis is used to note the entry and exit points of the stocks while the fundamental analysis finds the top quality stocks. Both hands on hand makes CANSLIM. According to the technical part, there is new support and resistance when a stock price breaks in a 52 week high/low period based on the closing price of the securities. He stressed to always cut your losses if they fall by 7 to 8% before its too high

Disclaimer: Neil suggests that if you are using his strategy use it as a whole not in bits and pieces of your own choice!

Here are are rules to follow before choosing a quality stock:

C: Current quarterly earnings per share.

Neil suggests that one should buy stock with high current earnings which is about 25-30%, not less than that. According to him if the EPS is high it will yields high income. By Checking out the same previous quarters of the company’s chart, we can determine if there is an inclined slope. This will attract the institutional investors and eventually the price will take off.

” When everybody is running around saying how great a stock is, everybody who can buy probably already has, and the only direction for the stock to go at that point is down. When it’s obvious and exciting to everyone, it’s too late!”

William O’Neil

A: Annual earnings increase

When there is a good improvement in earnings it represents a high probability of success. Look for annual earnings which are sustainable. Always concentrate the earnings per share every year for the past 3-5yrs because companies can manipulate their current earnings of the present year by some needles to boost their income. And one company should  have ROE as at least 17% this  discloses the worth of an investment. One should always concentrate not only the company’s returns but also how well it utilizes the returns by reinvesting.

N: New Products, new management, new highs

An innovation and invention in any sector brings new opportunities, change in management so obviously this is a good clutch. An entity should undergo change from time to time, if it’s stagnant then it’s sooner out of the trend. A company should always recruit new people because young people come up with new ideas.

Neil highlights a point here by saying look for the companies which shows a hike in price by a recent consolidate.

S: Supply and Demand

The institutional investors accumulates and creates a strong demand for the stocks. They stand as a support to the company by buying back privately. A simple method to analyze this is that there should be a rise in volume with rise in price. The trading volume should generally be more than 50%. If there is an oversupply then there will be no demand. If the supply is controlled then the demand is concentrated.

L: leader or Laggard

A Leader always has an advantage. A company holding a leading position will have good revenue,  growth, margin and earnings.

“It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower”

William O’Neil

A laggard is the one which is sluggish in nature. As the inflation and slug natured stocks go hand in hand which is of no yield. Neil suggests that a relative strength of 80 or more will help you to find a leading stock.

I: Institutional sponsorship

Institutional sponsors are mutual funds, banks, pension funds and other large institutions. It’s good to consider them buying as they hold a major portion(as an individual cannot create a major change in demand) and do a lot of research before a buy.

M: Market direction

Indexes are important. They determine if the market is bullish or bearish.  The market averages are to be studied to know whether the market is in uptrend or downtrend. 3 out of 4 companies follow the trend. So there is a positive hope. Be cautious of downtrend, be ready with defense. Neil says always purchase only when there is an uptrend.

“When everybody is running around saying how great a stock is, everybody who can buy probably already has, and the only direction for the stock to go at that point is down. When it’s obvious and exciting to everyone, it’s too late!”

William O’Neil

In what way CANSLIM is different from conventional methods?

Hold the leading stocks and sell them over a periodBuy and hold blue chip stocks
P/E ratio is never used to buy.P/E ratio is used as a factor to buy.
Market direction is the best, 3/4 follow the market trendDowntrends are good time to bargain
Always buy during the uptrendBuy when there is a dip

To Sum up:

  • CANSLIM holds high risk, as the market might turn into downtrend any time
  • Its not for long term holders
  • It ensures high returns
  • Its on for bullish traders who expect to buy high and sell higher, Not for bearish players who wants to buy low and sell higher which is totally opposite from Neil’s strategy.
  • This was introduced in 1950’s and 1960’s, If you raise a question – If it will work now, then according to recent comments of the people- It worked for some but at the same time, it failed for few. But before trying keep in mind that if you are using this, Neil wants advise you to use this strategy as a whole! Not in parts.