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The 8 Steps of CANSLIM Investing

Getting mixed up between a bullish and bearish trend is not uncommon, especially if you’re just beginning your investing journey.

A perfect analogy gets pretty literal — when a bull charges at you, its horns point up. But if a bear charges at you, its head points down. 

So you apply that to analyzing the stock of your choice. If it’s on an upward trend, the stock is bullish. If it’s downward, it’s bearish. 

Selecting a stock can follow bearish or bullish tendencies as well. Think of long-term investments like a bear going into hibernation; there are many situations where a downward trend in a stock would cause investors to purchase and hold on to them. In a stubborn and fast-paced fashion, a bullish approach to the stock market calls for strategies like CANSLIM.

Look, we’re going to be facing a lot of acronyms in the investing world. There are a lot to remember, and shortening them does wonders for the average investor. 

As much as it sounds like a trending diet, we’re going to put CANSLIM into perspective: Imagine you and your friends are betting on NASCAR. You don’t know much about it, so you search up the stats of the names all your friends are throwing around so you can line them up and see who has the best chance of winning. 

William J. O’Neill invented the term CANSLIM, which is a very optimistic and arguably very competitive-driven approach to the stock market. This defaults any sort of focus on an underperforming stock and prioritizes dominating companies. 

It’s a lot more common than you think. If you look up stocks for the very first time just on a simple Google search, you’re not going to go toward anything glowing red, right?

That’s practically enacting CANSLIM without thinking about it, honestly. 

But it goes a little more in depth than you would think. 

Breaking down the seven-part acronym isn’t as convoluted as it seems either. 

We have seven letters to cover, so let’s get cracking.

Current Earnings

Usually you’d measure this out by the fiscal quarter (or roughly every three months). 

Keep in mind that this seven-step process is along the lines of creating your own winner’s circle here. 

With that in mind, the golden rule of the first step in CANSLIM is to choose a stock that has increased 20%–25% in its most recent quarter sales-wise. 

Earnings per share, or how much a company makes per share of its stock, requires a 25% minimum of growth within a quarter.

If you truly want to be thorough instead of searching it up, you can calculate earnings per share using three things.

We’re going to use Apple (NASDAQ: AAPL) as an example. 

To calculate earnings per share, you’re going to need Apple's net income (the amount earned before any deductions), preferred dividends (money given to preferred investors on behalf of the company), and weighted average shares outstanding (the dollar amount of any changes in the number of a company’s shares outstanding over a fiscal period).

Thankfully, these are all easily accessible online. 

Apple announced a net income of $57.41 billion, $3.61 billion in preferred dividends, and $16.94 billion in weighted average shares outstanding. 

earnings per share, equation

So Apple makes $3.17 per share. 

The quarter before, Apple was making significantly less per share — 88% less. By that logic, Apple is considered a qualified investment.

We’ll get into the nitty-gritty on how this logic could flop on certain stocks like Apple later on. 

Annual Earnings

Remember how in the previous section we only focused on a fiscal quarter? You guessed it — this one focuses on annual growth...

And 25% is the golden number here as well. Usually you’re looking for signs if a stock has increased its EPS 25% or more.

You can analyze the earnings per share in accordance with a company’s annual record two more ways: 

  • You can compare the earnings year by year. For instance, you can say Apple had an annual growth rate of X% in 2020 but was Y% in 2019 and then deduce if there was an increase or decrease between the years and by how much. 
  • You can observe the company’s growth rate over the allotted year. Say Apple’s EPS was $X in January 2021 but $Y in June 2021. Same rule applies as the first option — find the difference between the time frames, whether it's an increase or decrease.

This is kind of like when you zoom out of a certain thing in a picture. You see a broader perspective. 

It’s safe to say that A LOT can change in a year (I’m looking at you, 2020). 

So putting together quarterly and annual growth can average things out in a way. 

GameStop (NYSE: GME) is a great example of why you should “zoom out” of the picture to see the whole thing but not exclude the reason why we zoomed in all together. 

If you look at GameStop's progress in its most recent quarter without an ounce of context, you would probably think, Gosh, I thought this company was obsolete! It must be doing well.

This is where the buzzer goes off in a game show when you answer wrong. 

If you’ve been living under a rock and didn't hear about the infamous GameStop short squeeze, you wouldn’t know that the first fiscal quarter of GME was nothing but complete and utter chaos. 

Herds of internet trolls on Reddit woke up and chose violence when a hedge fund disclosed its plans to bet on GME falling even lower in price, making the trolls flock to investment apps to buy shares and make GME’s share price skyrocket. 

If you’re willing to invest in a stock with a similar performance to GME’s without taking the company's history into account, you might as well start writing a eulogy for your bank account now. 

You can’t ignore a company’s growth within a fiscal quarter — with or without context. But the next step is to compare it with its annual growth to gain some more perspective. 

New Products/Management/Information

Things aren’t new forever.

This factor is obviously short term, but if a company is smart, it could easily ride out the high through press, advertising, or innovation. 

Using Apple again as an example, when the first iPhone came out, it was revolutionary. It wasn’t the first music-playing phone, but it was marketed as a phone unlike any other and now every year people wait in lines for the newest model to be released. 

It’s not a coincidence that after the release of the iPhone 12, Apple’s stock prices haven't faltered or fallen under $100 a share. 

In the beginning of its infamous short squeeze, GameStop also found itself appointing three more people to its board of directors who had previous experience with online animal goods retailer Chewy (NYSE: CHWY).  

The day the new board members were announced was around the second week of January 2021. At that point, shares were already up 70%. 

No, the announcement of new board members did not serve as a catalyst for the inhuman pace of GME's share price increasing. The point is that attention being brought to a company tends to prompt a decent increase in its share price. 

Sage Therapeutics (NASDAQ: SAGE) shows a clearer correlation between introducing something new and its share price increasing. 

On December 16, 2020, the biopharmaceutical company announced a new CEO as its previous CEO moved to the role of chief innovation officer. 

SAGE's share price hit a high $75.68 and as of March 2021, the price has not fallen under. 

Obviously, tech and biotech are a hot commodity these days… which brings us to our next step...

Supply and Demand

Let’s use Tesla (NASDAQ: TSLA) as an example. 

Elon Musk recently dethroned Jeff Bezos as the richest man in the world. 

You wouldn’t be too far off target if you said Elon Musk probably doesn’t struggle in his production endeavors. 

In Q4 2020, Tesla raked in over $30 billion in worldwide revenue and delivered over 180,000 vehicles. 

But something interesting happened with Tesla in late February 2021…

Its Model 3 line shut down production briefly because of parts shortages involving semiconductors. 

The day after news hit of the production halt, Tesla's share price went down 8%. The stock price since then still looks a little bit shaken with signs of a slight struggle. 

It was basically a domino effect where the semiconductor shortage affected a company that one would think is untouchable from such things. 

That’s how fragile supply and demand can be — if a common supplier can’t provide for its customers, its demand decreases. 

Tesla will probably bounce back because of the power of its brand, but even a bloated stock like Tesla is not impervious to the negative effects of supply and demand. 

Laggard/Leader

Now that we’ve mentioned Elon Musk, the face of a company plays a large part in its credibility. Like it or not, Tesla is the leader of the EV industry given its ranking.

The market winners always tend to be the fastest-growing ones in an industry, and Tesla is no exception. 

If you go through each step of CANSLIM so far and the company you chose is meeting all the criteria, the “L” part reflects it.

Usually, the way to rate the company you’ve chosen is through the relative price strength

This is a series of calculations that rate whether a company is overbought or oversold. You can calculate this over the duration of 14 days or up to a year. The standard is a 14-day period.   

The average gain is divided by the average loss of a company and then subtracted from 100. This gives you a rough estimate of the relative strength index (RSI). 

To make it more accurate, you can multiply the average gain of a company by the chosen time period and then add the current gains of the company. Then you do the same thing with the current losses. You divide the two numbers, add 1, and then that number is divided by 100. That number is then subtracted by 100.

It’s a great deal of math, but thankfully companies have their ranking on their websites, which saves you a good amount of time and brain power. It’s not lazy, it’s practical.

If the company's RSI falls under 30, that’s a red flag — but in a good way. It's a red flag that entices a bull to charge. The overselling of a company provides an ideal opportunity to purchase shares. 

If the RSI is above 70, it's a sign to sell the shares. Since CANSLIM is a more bullish approach, your focus may shift to RSI scores under 30.

For example, Apple is oversold, which is shown in its 14-day RSI of 28.47%, meaning you would want to buy shares. 

Apple, RSI

What’s really cool is that if you use Robinhood, you can enable settings to track the RSI of a chosen company. 

Institutional Sponsorship

Think of the Olympics. Gold medalists end up having their faces plastered on a cereal box, right? It’s because an Olympian face is what sells the box. 

Think of that but with mutual funds, banks, and large institutions owning stocks. 

The institutions that own shares of companies tend to consist of “professional investors,” so in theory it looks like they know what they’re doing and you should follow suit. 

This is definitely not uncommon — almost two-thirds of stocks are owned by institutions or held by institutional investors. 

For example, institutional sponsors make up 45.21% of Tesla, 57.57% of Amazon (NASDAQ: AMZN), and 58.50% of Apple.

These three companies are all well-known brands. In 2017, a Forbes study reported $60 billion going into institutional sponsorship just from 2007–2017.

A company pays to be part of another company’s brand, letting it reach a wider audience and basically giving a chunk of its credibility to the company it sponsors. 

Market Direction

We sure have covered a lot of ground. But keep in mind that even if every single section of CANSLIM meets the criteria before the “M,” you could still find yourself in some trouble. 

If you do your research on your chosen stock and find a red line pointing down, it will not be CANSLIM.

The CANSLIM strategy believes that 75% of the time a stock on an uptrend will give you solid returns. If you apply the same math but on a stock's downtrend, 75% of the time you’ll find yourself at a loss. 

We’re focusing on the winner's circle, remember? The whole philosophy behind CANSLIM is to take a downtrending stock out of the equation. If it’s in the negatives, we don’t even consider it. 

Just because this is the last part of the system doesn’t mean you’re exempt from more math. Don’t worry, it’s a lot simpler than calculating relative price strength. 

We’re going to use the Dow Jones Industrial Average as an example.  

The reason behind this is because of the “winner's circle” focus we’re attempting to attain; blue chip stocks tend to be big winners. The Dow Jones Industrial Average consists of 30 blue chip companies on the New York Stock Exchange or Nasdaq that give an idea as to how the stock market is performing overall.

Dow Jones Industrial Average

Source: Market Watch

Investors will take in the combined assets of the entire group and then divide by the amount of overall shares within it. Remember, these are 30 blue chip companies that are household names.  

The Eighth Step

If you take away anything from these ambitious steps, it should be that toxic positivity can be a real thing. 

Tesla may have been used a lot as an example, but take that with a grain of salt. Tesla is one of the most bloated and overvalued stocks — by over 400%. That was after it took a hit from the semiconductor shortage. Earlier this year, the percentage of its overvaluation was much higher. 

According to Forbes, Tesla is 55% more likely to fail in returning its value to its investors. 

If you weren’t aware and figure “why not?” since Tesla is a big name and the stock price is high so the returns must be too, you’re just putting money into empty promises.

I’m not alluding to CANSLIM being inefficient. It could definitely be a handy tool if you find your investment tactics getting stale and you want to change things up a bit. 

Focusing on the winners isn’t a bad thing; they’re winners for a reason! But if it were that easy, CANSLIM would be just “C” or just one step of the seven going into selecting an uptrending stock. 

Just try to avoid the tunnel vision. 

You can apply CANSLIM to the stocks you have in mind now OR you can check out Wealth Daily.

There, you’ll find daily updates, newsletters, and more. Bullish tactics, bearish companies, and everything in between is at your disposal if you go to Wealth Daily now! 

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