Tuesday, March 28, 2006

CANSLIM Review Part 2

A: Annual Earnings Increase.
Apart from quarterly earnings, the author also looks at the annual growth of the company for the past 3 years. He suggests a good pick would be one with annual earnings pre share increase every year for the past 3 years. Further, the increase should be at least 25-50% each year. Keeping this in mind, it is then possible to sort out the "winners" and the "losers" from the group. More discussion on a normal stock market cycle and the significance of the EPS is documentated in this chapter. In summary, concentrate on stocks with significant earnings in growth each year for the past 3 years. In addition to strong recent quarterly earnings.

N: New Products, New management, and New highs
It is always heartening to hear good news in the market, and when it comes to investors, nothing beats the attractiveness of a company which is launching a new and innovative product or service. The author adopts a belief that we should purchase stocks when they are emerging from a price consolidation or are close to hitting a new high. He draws this conclusion from "The Market's Great Paradox", where he illustrates scenarios where shares which dip tend to stay down, and stocks going up tend to stay up before any consolidation. He believes that this is due to the investors' mindset: that investors feel that as a stock moves higher, it seems riskier to buy, and when a stock is at a low, it seems more of a bargain.

S: Supply and Demand
It is self-evident that supply and demand of a stock greatly influences its price. Shares with large volume tend to have more inertia, and less fluctation to daily trading. However, situations might still arise which causes a large cap stock to crash. Small cap stocks, on the other hand are more prone to fluctations. There are pros and cons in each type of shares. Larger cap stocks tend to be lower in volatility and possess greater liquidity. The opposite can be said of small cap stocks. The Author notes that the CAN SLIM method can be applied to any cap stock, and that the market, from time to time, shifts its emphasis between small cap and large cap stocks. An example of this would be the prior introduction of Mutual Funds (or Unit Trusts as they call it locally). Fund managers allocated more on large cap stocks to reduce risk, and so alot of money was pumped into the latter.


At 2:10 AM, Blogger tradingdiary said...

I have read this book before and I think its a good book, though not really great. I believe in some points and pratice those too, like the C in CANSLIM which is current quarterly earnings but sometimes future (projected) quarterly earnings are more important. I.e. to say future EPS or PE ration is more important. Will state an example of stocks in property sector in my next post.

At 2:16 AM, Blogger tradingdiary said...

Buying at new highs are sometimes a dangerous and unwise move too. I use to buy at high too before I read the book Sun Tsu on Investing, which give me a good insight on why is it unwise.


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