No one style of investing fits all people, but I subscribe to the 45/45/10 Investing Method. 45% of your investing should in CASH FLOW strategies, 45% growth strategies, 10% (or less) in higher risk, higher reward strategies.
One of the first “systems” I learned in my twenties, was the “CANSLIM” method of investing. A system developed by the founder of “IBD”, Investors Business Daily. This system works very well in an up-trending market, OK in a flat market, and poorly in a down trending market.
All stocks, are companies, and have financials. Some good, some bad, but never equal. O’Neil found that just before a company did very well financially, and in terms of stock growth, there were common characteristics. Common elements, in their financial statistics, that often can predict, stock growth. In addition, he noted some more subjective, but measurable activities, that were good indicators of future stock growth. A very strong indicator of future gains.
Many of these indicators are pure financial bench marks; we can look for in a company, such as: sales growth, and earnings over time. Some a little more subjective, but still quantifiable. For example: product development, being a leader or laggard in the sector (industry) and institutional buying.
Thus O’Neil developed the CAN SLIM method of picking stocks, which has served me and many other investors very well. A checklist of seven common elements that indicate a stock is going to have solid gains in the future. This strategy can reduce risk and increase returns when picking stocks for long- term growth.
“CANSLIM” is an acronym that stands for: Current Earnings. Annual Earnings. New Products. Supply and Demand. Leader or Laggard. Institutional Investing. Market Direction.
The system uses key numbers, and characteristics of the company to check a stock before you buy.
C= Current earnings per share must be up 25%. Accelerating in recent quarters. Quarterly sales should also be up 25% or more.
A= Annual earnings must be up 25% or more in the last three years. Annual return on equity must be at least 17% or more.
N= The company should have new products or services that drive earnings. At this point, you might check the chart of the stock, and see if there is new upward trending or positive pattern (for example: breaking resistance or new highs).
S= Supply and demand. Shares outstanding are large or small. But as the stock price increases, there must be increase in the trading volume too.
L= Leader or laggard. The stock must be in the top 20 percent of the industry or sector analysis. Therefore, you need a Relative Price Strength Rating of 80 or higher.
I= Institutional buying (mutual funds, investment houses) must be increasing. The big boys are buying more of the stock, and therefore, demand is increasing, and supply decreasing.
M= The market needs to be going up. Indexes: Dow, S&P 500, RUT and NASDAQ are positive and moving up. Remember three out of four stocks trend with the market.
Ok. Great what do I do now. Well most on-line brokers, web sites and financial software programs, allow you to do searches based on “parameters”. Therefore, you can drop by a web site like Yahoo Finance, and use their stock screener to find the companies that have these specific elements.
This is a solid strategy for long-term growth. Enjoy.