Fundamental Analysis

Question 1

What is CAN SLIM?

Answer 1

CAN-SLIM is the investment system used by Investors Business Daily. Each letter stands for a characteristic of stocks that outperform the market.

Question 2

When do you buy using the CAN SLIM system?

Answer 2

1. At or near the 52 week high
2. Leading stocks in the leading groups
3. Proper base structure
4. During a confirmed market uptrend

Question 3

What length of time is a leader in an uptrend according to IBD?

Answer 3

12-18 Months

Question 4

According to IBD, how are P/E’s used for buying?

Answer 4

Never use P/E for buying because it is an end result and not a predictor of future price performance.

Question 5

What are the IBD sell rules?

Answer 5

1. Always cut your losses at 8% from your purchase price.
2. Take most profits at 20-25%
3. Cut at a largest one-day point loss on heavy volume (point loss on the one year chart)
4. Cut when key support is broken on heavy volume.
5. Beware of late stage bases (consolidation points)
6. Distribution in the general market.

Question 6

What does the C stand for in CAN-SLIM?

Answer 6

Current quarterly earnings, recent earnings growth of at least 25%. Ideally, you want to see acceleration of these earnings numbers over the last three quarters.

Question 7

What does the A stand for in CAN-SLIM?

Answer 7

Annual earnings growth of at least 25% over the past 3-5 years. Sales minimum 25%, Return on equity of at least 17%, margins: best in industry.

Question 8

What does the N stand for in CAN-SLIM?

Answer 8

New. New products, services, condition in the industry, management, prices. Company within 8 years of their IPO.

Question 9

What does the S stand for in CAN-SLIM?

Answer 9

Supply and demand. Shares outstanding + big-volume demand. Smaller companies will move faster because of the lower number of shares available. Not a big of a deal as in the past because of all the mutual funds and ETFs needing stock.

Question 10

What does the L stand for in CAN-SLIM?

Answer 10

Leader vs. laggard. Buy the leading stock in the leading industry group.

Question 11

What does the I stand for in CAN-SLIM?

Answer 11

Institutional sponsorship. Follow the big/smart money. Look for stocks held by at least 10 funds. Ideally, look for 2-3 quarters of rising sponsorship.

Question 12

What doe the M stand for in CAN-SLIM?

Answer 12

Market. Buy only during a confirmed market rally. All bets are off when the market is in a downtrend.