In the world of equity securities and stock market investing, traders tend to be split into two schools of thought: those who base their decisions on fundamental analysis and those who take market positions according to technical analysis. Within these two camps, many traders will strictly adhere to one analysis method while eschewing the other; fundamental traders dismiss technical analysis as junk science while technical traders say they are too busy reading the market to bother with reviewing financial statements.
Dynamic investors who recognize the value of both fundamental and technical analysis will often approach the market with strategies that include the best of both worlds. Billionaire investor George Soros, for example, is known to review fundamentals while keeping an eye on technical indicators. CAN SLIM is an investment system that blends elements of fundamental and technical analysis to provide investors with a sound exit strategy. To a great extent, the system follows money management principles to protect portfolio holding.
CAN SLIM is an acronym that can be explained as follows:
* Current earnings: Investors should look for stocks of companies posting 25 percent or higher quarterly earnings growth.
* Annual earnings: Similar to the above, investors should look at companies with earnings growing at a 25 percent annual rate or better in the last three reporting periods. In other words, long-term growth companies.
* New factor: Companies innovate by means of presenting new products, services, brands, or even management teams. This has the effect of creating awareness among prospective investors.
* Supply and demand: This is essentially a technical analysis factor because it considers heavy buying volume, which often indicates interest by institutional investors.
* Leadership: Blue chip stocks tend to be those of companies that are leaders in their respective market sectors. The CAN SLIM strategy gives preference to market leaders.
* Institutional preference: Some stocks tend to be darlings among mutual fund managers, pension funds and Wall Street investment banking firms. Choosing these stocks is a matter of following the big money.
* Market direction: This is another investment factor or criteria borrowed from technical analysis. Following the herd instinct is an established Wall Street strategy that the CAN SLIM system observes. The “M” initial can also be interpreted as momentum.
CAN SLIM has been around since the 1950s, and it is mentioned in numerous guides that introduce beginners to Wall Street. The IBD 100 list has been published on a weekly basis for decades by the respected financial publication Investor’s Business Daily. A few exchange-traded funds follow the CAN SLIM system for investors who wish to outperform the S&P 500 with the convenience of following a single stock.
For investors observing the bullish path that Wall Street has been following in recent years, the CAN SLIM system may seem tech-heavy, but this is not always the case. Traders who learn this system will not only fill their portfolio with bullish stocks but will also have exit strategies that are in line with sensible money management strategies.