Can Slim

CAN SLIM From William O’Neil’s “How to Make Money in Stocks” Joe York, SFD Tuesday, February 01, 2005

CAN SLIM? Is this a diet program? • CAN SLIM was developed by William O’Neil and is outlined extensively in his book, “How to Make Money in Stocks”. • It is: “A system that consists of buying and selling rules from an extensive analysis of all the greatest winning stocks each year for the last half century.”

C-A-N S-L-I-M • • • • • • •

C= Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters. A= Annual earnings should be up 25% or more in each of the last three years. Annual return on equity should be 17% or more. N= A company should have a new product or service that's fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price. S= Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases. L= Leader or laggard? Buy the leading stock in a leading industry. A stock's Relative Price Strength Rating should be 80 or higher. I= Institutional sponsorship should be increasing. Invest in stocks showing increasing ownership by mutual funds in recent quarters. M= The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since three out of four stocks follow the market's overall trend.

C – Current EPS • “[Of the] 600 best performing stocks from ’52 to ’00, three out of 4 showed earnings increases of 70% on average in the last publicly traded quarter BEFORE they began their major advances.” – pg 8 • Stocks should show a major % increase in earnings for the most recent quarter when compare to the prior year’s same quarter. • WATCH OUT FOR MISLEADING EARNINGS! Look out for the company issuing addition share or ‘diluting’ the stock and large, one-time gains.

C - Continued

• Sales growth is also important: What will propel further earnings growth? • General rule: If a company has two quarter of earnings deceleration (shrinking earnings), it usually spells trouble • ALWAYS check other stocks in the industry to see how the overall market is compare to your stock, but: •Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters.

A= Annual earnings • Look for annual earnings that have increase for the past 3 years. • “From ’80 to ’00, the mean annual growth rate for all outstanding stocks in the emerging stage was 36%.” – pg 16 • You may accept one down year, AS LONG AS THE STOCK RECOVERS. • Also pay attention to ROE, this separates wellmanaged firms from poorly managed ones. • Consensus estimates for future earnings should also be up.

A - Continued

• Using a 3 year average will weed out 80% of the potential losers. • PE’s: “Are an end to an effect, not a cause.” – pg 20 • Don’t use PE’s to value a company, if they have a low PE, THERE’S PROBABLY A REASON! Use PE’s in conjunction with earnings growth and PE trend charts. Annual earnings should be up 25% or more in each of the last three years. Annual return on equity should be 17% or more.

N – New Products • Syntex in 1963 marketed the oral contraceptive pill. In six months, the stock soared from $100 to $550. • McDonald's, with low-priced fast-food franchising, snowballed from 1967 to 1971 into a 1100% profit for stockholders. • Thiokol in 1957-1959 came out with new rocket fuels for missiles, propelling its shares from $48 to the equivalent of $355. • Houston Oil & Gas, with a major new oil field, ran up 968% in 61 weeks in 1972-1973 and picked up another 367% in 1976.

N – Continued

• Stocks on the “new-high” list tend to go even higher in price. Why? Because these companies generally have something ‘new’ to offer it’s market. • Look for stocks that are just coming out of their bases [pivot or buy point] in the wake of important developments or new products or services. N= A company should have a new product or service that's fueling earnings growth. The stock should be emerging from a proper chart pattern and about to make a new high in price.

S= Supply and demand • Big companies vs. smaller ones: Big-caps are more liquid, have less downside volatility, have better quality products, and are generally less risky. They also possess less imagination and have a gap between management and production. Employees generally don’t have a personal interest in the company. • Smaller companies, while riskier, possess more imagination and have a greater personal stake in their business.

S - Continued • Stock splits: Excessive splitting is bad. “Oversize splits create larger supply and may move the company to a lethargic, big-cap status sooner.” – pg 34 • Look for companies buying back their own shares [decreasing supply of their stock]. It can imply improved sales and increased earnings in the future. • Lower Debt to Equity is generally better (look at the industry), especially in times of increasing interest rates. S= Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases.

L= Leader or laggard? • “The number one market leader is not the largest company or the one most recognized, it’s the one with best quarterly and annual earnings, ROE, profit margins, sales growth, and price action. It will also be gaining market share from its competitors.” – pg 38 • Use relative strength, which measures price performance of a given stock against the rest of the market for the past 52 weeks. Scaled 1 to 99, a score of 70 can be considered lagging. Look for companies with RS above 80. The RS can be found at www.investors.com

L – Continued • Look for companies that are leaders in their industry during a market correction. “the first stocks that bounce back to new price highs [after a correction], are almost always your authentic leaders.” – pg 40

L= Leader or laggard? Buy the leading stock in a leading industry. A stock's Relative Price Strength Rating should be 80 or higher.

I= Institutional Sponsorship • Look for the # of institutions (what are these?) who own a stake in the company as well as the % of institutional ownership. • Also look at trends; is the Inst. Ownership increasing or decreasing? Use IBD’s Sponsorship Rating. • Be alert to stocks that are ‘overbought’. If too many institutions get in, it will be VERY hard for the price to move up. I= Institutional sponsorship should be increasing. Invest in stocks showing increasing ownership by mutual funds in recent quarters.

M= The market indexes • “You can be right about every one of the factors in the first 6 chapters, but if you’re wrong about the general direction of the market, 3 out of 4 of your stocks will plummet…” – pg 48 • “Follow, interpret, and understand what the market averages are doing EVERY DAY!”

M - Continued • • • • • •

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Bull Market: Top out and trend down BEFORE a recession sets in. Stocks open weak, but end strong. Sign of the end when there is higher and higher volume, with less and less price increase in market. Initial downturn can be on lower volume, then a feeble rally attempt, then full fledged selling. You can ID a feeble rally by: 1) Index advances in price on a 3rd, 4th, or 5th rally day, but on lower volume than day before. 2) Averages make little net upward price progress compared to day before. 3) The market averages recover less than half of the initial price drop from its former intraday high. Another sign of an ending bull market may be a climax top (stock rush up to new highs for 1-2 weeks, after slow increases for many months). Also poor quality stocks will start to dominate the market leader boards.

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Bear Market: End while business is still in downtrend. Stocks usually open strong and close weak. Market may be at bottom when a rally attempts begins when major averages close higher after a decline the previous session. Starting on the 4th day of a rally, look for a follow through where you see a 2% gain on heavier volume than the day before. “No bull market has EVER started without a prong price and volume follow through”– pg 65

M - Continued • Additional things to consider: • Look for divergence in major averages – may signal a change in the type of market • Put/call ratios, short-interest ratio (short selling on NYSE) • Fed changing rates quickly and sharply • Pay attention to the ‘defensive’ stock indices such as utilities, tobacco, foods, etc. M= The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since three out of four stocks follow the market's overall trend

Overview • CANSLIM is not a fool-proof system, but a summary of observations made over 50-60 years. If you think that the market is truly cyclical, you can apply this methodology • Some items in the model are difficult to measure – ‘new’ products and services and finding the true market peak and bottom. • Use fundamental and technical analysis to gauge a company’s health, but when searching for companies you may want to use some of the following parameters derived from this model:

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??? • Questions? • Comments? • Insults?