The focus is on growth investing, rather than traditional investing by value. This acronym creates a filter to help pick the stocks that have the highest probability of growth in the near future. Here’s a breakdown of how it works:
C: Current Quarterly Earnings
This method makes it very clear that earnings are a clear definition of performance within a company. Quarterly earnings should be 25% higher than the previous year, within the same quarter, and should have increased from previous quarters. Also, the projections should be up by about 25% for the next quarter.
A: Annual Earnings Increase
Companies must see a 25% increase annually in order to be considered a growth stock for CANSLIM investing. They should also have 3 consecutive years of increases, at a minimum.
N: New Companies, New Products, New Management, New Highs
A growth stock will have a new element to it that is driving the success. New companies are considered those less than 8 years old. New products might be the focus, or even new management that has revamped the company. Something new should be driving the stock progress.
S: Supply and Demand
Any CANSLIM stock needs to have small supply and high demand. This will cause growth.
L: Leader or Laggard
The top 3 stocks in a group are the ones that you want. The real leaders are the ones that will see the most growth, and those are the stocks that you want to invest in.
I: Institutional Sponsorship
If a stock doesn’t have large institutions buying 1,000 to 100,000 shares at a time, it is not a growth stock. Choose stocks with at least two top institutions buying.
M: Market Direction
You NEED to understand the general market direction above all else. Regardless of whether every rule is in order, being wrong about the market direction will void everything that you’ve done thus far. Check the major indexes to determine market direction before you invest.