Tutorial-Prefered Stocks to Own
Much of the EV site deals with short term investing with holding periods that measures in days to weeks.
CANSLIM is designed for longer holding periods with a great focus on stocks that might have the requisite staying power. On average a stock breaking out in a new bull market takes 1-2 years to fully develop.
The standard bible of CANSLIM investing is: How to Make Money in Stocks by William J O'Neil. O'Neil is one of the better traders that has ever lived. In his book he talks about the characteristics of stocks that have the capacity to increase 10-fold over a many-months time frame. The primary ingredient being earnings, the "C" and "A" in CANSLIM. In his book he defines many suggested minimum values for fundamental parameters before you buy a stock. In my CANSLIM investing I look for values that far exceed these minimum suggestions. I also look for two things that are not expressed clearly in his book. For example, he suggests that we look for stocks priced above $15 for and that we not buy thinly traded stocks. Bill prefers stocks that traded in the millions of shares per day. I combine these two paramaters into a liquidity measure and look for stocks that trade greater than $40-million per day on average with some stock selection excursions down to $20M per day. Trading stocks in this liquidity range almost guarantees institutional sponsorship (the "I" in CANSLIM.) The "S" in CALSLIM stands for Supply and Demand. The book method being to analyze stock chart price and volume for traits of stocks under accumulation. This should be done and we also may have some effective volume clues to add to the mix. I add a direct measure in my stock selection strategy by computing the Demand/Supply Ratio. Essentially I compute the 50-day average trading volume expressed as a percent of the float. Float is by definition the number of shares available for trading (=Supply). Volume is a direct measure of demand. So I divide average volume by the float and convert to a percentage. When I look at the 4000 or so stocks (not ETFs, ETNs or closed end funds) in the US market trading above $5 I find that stocks that trade more than 3% of the float daily are in the 90-95th percentile of stocks exhibiting high demand/supply. So I look for this 3% in my stock selection strategy and tend to regularly pass any stock exhibiting less than 1% demand/supply.
$40M Liquidity and 3% Demand/Supply are in addition to the following other factors that I look for:
3 quarters of triple-digit (>100%) eanings growth with acceleration
3 quarters of high sales growth
3 quarters of accelerating institutional sponsorship (number of funds owing the stock)
ROE + PreTax Margin > 50%
I finally ask myself if this is the very best stock that I could own.
This strategy cuts the stocks market down to a handful of stocks that I might want to own. Once developed the job shifts to when do I buy and when do I sell.
Short Interest to gauge breakout quality ?
Hi Mike,
Thank you for all the valuable lessons! In your experience, does short interest provide any clues into the quality of a breakout for the BIG STOCK leader ? The underlying thought is that breakout candidate with higher short interest have additional "fuel" from the potential short covering. However, high short interest candidates could potentially be "perceived" by the market as having potential weakness, thus higher probability of breakout failures. I guess it would have to be taken into context of the broader market actions but I'm wondering if all other criterias being equal, would SI ranking provide any edge for candidate selection that you've observed ?
Best,
Ken
Short candidate criterias ?
Thanks Mike. My understanding is that most CANSLIM investors tend to stay in cash during bear markets. However, if you are to play the short side, what would be your candidate selection criteras ? Would the focus continue to be the big leaders from the previous bull legs, especially the ones that went parabolic, or something else ?
Best-
Ken
