Stock Trading Books

Investors Business Daily (IBD)

Not really a newsletter as much as a newspaper. Just about the most respected stock picking newspaper available. It has been a round for over 30 years and is based on a set of sound principals for finding winning stocks based it's CANSLIM rules.

The CANSLIM Theory was invented by William J. O'Neil, a self-educated investor who discovered that winning stocks of the past all displayed similar characteristics before they made huge price gains (breakouts). He classified these characteristics and associated them with the CANSLIM acronym.

Here is a summary of the CANSLIM system.

CANSLIM: The C in CANSLIM stands for "current quarterly earnings". Most of the big winners from the past had a large percentage increase in their most recent current quarterly earnings compared to the same quarter in the prior year before their breakout, or the quarter right after their breakout. For some stocks, there was an earnings increase of 25% while others made earnings increases of 50% to 100% or more. Many of these winning stocks also had increasing earnings over a few prior quarters. The CANSLIM Theory says this is the most important single characteristic for winning stocks.

CANSLIM: The A in CANSLIM stands for "annual earnings". Most winning stocks from the past displayed decent annual percentage earnings increases for the last couple of years. It is good to look for increases of 25% or more over the prior year.

CANSLIM: The N in CANSLIM stands for "new". For a stock to do well, it should be on the leading edge of its industry, thus giving investors a reason to demand its shares. This could be in the form of a new product, a new management, or a new 52-week high in price. A lot of winning stocks display more than one of these "new" characteristics.

CANSLIM: The S in CANSLIM stands for "supply and demand". Companies are usually classified in three different areas - large cap, mid cap and small cap. When looking for a winning stock, it is usually better to stick with stocks on the smaller end of the scale. They tend to have fewer shares outstanding, which means that buying by institutions will drive the price up quicker. The smaller companies can also adapt better to the changing economic environment and are usually better innovators. Even the large companies of today once started out small.

CANSLIM: The L in CANSLIM stands for "leader or laggard". When looking for winning stocks, try to pick stocks from those industry groups that are currently performing the best. Stocks tend to move in groups, which can add to your stocks' chances for success. Also, look for the best stocks within leading industry groups. The leaders within a group usually make the best gains. It is very important to constantly review your stocks to ensure you cut your laggards and concentrate on your leaders.

CANSLIM: The I in CANSLIM stands for "institutional sponsorship". As most investors know, it is the institutions that really drive the market and individual stocks. They can't hide their tracks when they decide to take a position in a stock, and their buying power can keep the price moving higher. It is smart to follow the institutions as they have the manpower and knowledge to delve into a company and ensure there is a reason to buy. Individual investors can use that to their advantage by picking stocks that have at least a certain degree of institutional sponsorship.

CANSLIM: The M in CANSLIM stands for "market direction". Without this one in your favor, there is not much use trying to buy breakouts. It is extremely important to follow the daily price and volume action of the market and the major averages to ensure that the market's trend is in your favor. CANSLIM looks for a rally attempt with a confirmation day between the 4th and 10th days of a new rally. That is the sign that it is safe to try and enter breakouts.

see also [ Nightly Business Report ] [ Technical Analysis ]

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