How to Make Money in Stocks

by William J. O'Neil

2014-03-09

Intro

presents his simplified system called CANSLIM. Each letter will be developed in chapters ahead.
claims that many practitioners are using this system and seeing results of some 25 to 100% per year.

Chapter 1: Current Quarterly Earnings

only select stocks that are showing big earnings increases, year over year
should see at least 18 to 20%, perhaps use 25 to 39% as a target minimum
omit extraordinary gains from calculations
look for accelerating growth
two quarters of deceleration could hint at trouble
use logarithmic scales to easily chart and see growth acceleration
often other key stocks in industry group will also see growth

2014-03-10

Chapter 2: Annual Earnings

only select stocks that are showing strong annual compound earnings growth for past 5 years
should expect 25 to 50%, perhaps 100% increases, year over year
ignore P/E ratios, they (high or low) are not indicative of anything
stocks sell for generally what they are worth, so high or low P/Es
but earnings growth is the best fundamental indicator of a stock worth buying

Chapter 3: New Highs, Management, Product, etc.

only select stocks that are at or approaching a new price high, after undergoing a consolidation
the price correction and consolidation period will be from eight weeks to fifteen months

Chapter 4: Supply and Demand

select stocks with a small number of shares outstanding, 5 to 10 to 25 million shares
having strong insider ownership is a good sign
good stocks are of companies that have been buying back shares over a long period
avoid stocks that have large split ratios, or those that split often, too close together
and companies that are lowering their debt to equity are better choices

Chapter 5: Leader, not Laggard

select stocks that are the market leaders in their group
avoid the beleif that laggards will move in sympathy, avoid laggards
those stocks that drop less during a decline, and move up earlier afterward, are better

[NB: This is starting to sound a bit like "Buy low, sell high," or "Buy good stocks, avoid losers." I'm anxious to read through the entire book, but so far I'm getting the feeling that while this 'system' may be more or less sound, carrying it out with amateur tools could be rather difficult. And it somehow sounds like 20/20 hindsight. Let's see if this system is 'predictive', not 'explanative'.]

Chapter 6: Institutional sponsorship

select stocks that that have at least some institutional ownership
learn which institutional buyers are savvy to the market, and watch their trades