How to Make Money in Stocks [PDF- Summary] outlines the CAN-SLIM method for stock investing. It emphasizes selecting stocks with strong current and annual earnings growth (C, A), new developments (N), high demand (S), industry leadership (L), institutional backing (I), and favorable market trends (M).
The book details chart patterns (e.g., cup-with-handle) for timing buys, stresses cutting losses quickly, and identifies sell signals like climax tops. It also explains market cycles, using volume and price indicators to spot tops and bottoms, advocating disciplined, technical, and fundamental analysis for success.
Excerpts
Individual investors
Have advantages over institutions
Can invest in only the very best stock
Can get in and out at any time
Institutional Investors
Can only buy companies with large supply of stocks, which usually under perform
Are limited to a narrow set of stocks because of their stated strategy
Can not move in and out of a stock quickly because of the size of their trades
CAN-SLIM Method in a Nutshell
Buy only stocks of companies with superb growth, whose stocks are performing superbly.
Buy and sell at the right time based on proven patterns
CAN-SLIM Method
C – Current Quarterly Earnings – The higher, the better
A – Annual Earnings Increases – Significant Growth
N – New products, new management, new highs
S – Supply and Demand – Volume drives demand
L – Leader or Laggard
I – Institutional Sponsorship – Follow the leaders
M – Market Direction
C=Current Quarterly Earnings
Research has shown that super performing stocks had substantial earnings in the quarter or two before
a major price advance. 3 out of 4 best stocks over 40 years had earnings increase > 70% in the latest
quarter compared to the same quarter the year before. The one in four that didn’t, did so in the very
next quarter.
EPS increase in the latest quarter should be at least 25%
EPS increase in the latest quarters should show accelerating growth
Next quarter EPS estimates
o At least 15%
o Increase should be more than latest quarter
Sales growth should be acceleration and in-sync with EPS increase
Signs of financial trouble:
o Large sales increase but low EPS increase might mean company:
Issued shares (diluted)
Took large charge
o One-time earnings
o Cost reduction measures
A=Annual Earnings Increases
Annual EPS ideally should have increased every year for the past 3 years
Latest annual EPS increase of at least 25%
Next annual EPS increase estimate at least 15%
IBD’s EPS rating measures EPS growth against all other stocks
o It factors the last 2 quarters and the last 3 years
o Historically, the best performing stocks had EPS rating > 80
ROE at least 17%
Annual cash flow per share = 25% > actual EPS
IBD’s EPS stability < 25
N=New Products, new Management, New Highs – Buy point
Paradox: What seems too high in price to the majority usually goes higher and what seems cheap usually goes
lower.
Search for companies that have important new products or services, or that are benefiting from new
management or new industry consolidation
Stocks close to or making new highs after a consolidation show strength
S=Supply and Demand – Volume drives demand
Supply and demand move the market, more important than any analyst opinion.
Shares float = Total shares outstanding – shares closely held.
Management should own > 2% of shares
Look for companies buying their own stock back, EPS will grow.
Low debt-to-equity ratio