CANSLIM Investing Strategy: How to Spot Next BIG STOCKS using this Strategy (L in CANSLIM)

Hey Everyone! This is Richard from TraderLion.com, and today, we're diving into the "L" in the CANSLIM investing strategy, which stands for "Leader versus Laggard." CANSLIM is the growth stock trading methodology developed by William O'Neil, the founder of Investors Business Daily. So far in this series, we’ve covered the first four crucial characteristics: current earnings, annual earnings, new products, new highs, new management, and supply and demand.

Understanding Leaders vs. Laggards

William O'Neil emphasizes the importance of focusing on market leaders. Here’s what he has to say:

“From the early 1950s through 2008, the average RS Rating of the best-performing stocks before their major run-ups was 87. In other words, the best stocks were already outperforming nearly 90% of other stocks at the start of their explosive advances. The rule is to look for genuine leaders and avoid laggards and sympathy plays. Don’t buy stocks with relative strength ratings in the 40s, 50s, or 60s.”

He also mentions:

“If the RS line has been trending downward for four months or more, the stock’s price action is questionable and should probably be sold.”

If you're unfamiliar with RS Ratings, it's a score that reflects a stock's performance relative to all others over the past 12 months, rated between 1 and 99. Stocks rated 99 are outperforming 99% of the market.

Key Insights from O'Neil

Let’s uncover more insights from O'Neil:

1. Focus on the Winners: The biggest moneymakers usually have RS Ratings of 90 or higher before breaking out from their bases.
2. Market Corrections: During market downturns, pay attention to growth stocks that decline the least. They’re your best selections and often lead the recovery.
3. Market Behavior: Good market understanding involves distinguishing normal from abnormal actions. Ignoring what the market indicates can lead to losses.
4. Skip Laggards: Investing in lagging stocks, even if they seem cheap, usually doesn’t pay off. Cut losses at 8% below your purchase price.

Finding Potential Market Leaders

So, how do you find the next big stock? Here are two main strategies:

1. Fundamental Scanning

• Earnings growth
• Sales growth
• Annual earnings estimates
• Institutional sponsorship increases

You can use platforms like MarketSmith to filter for these criteria quickly!

2. Technical Scanning

• RS Rating above 80
• Three-month RS Rating above 90

By filtering a massive list of stocks, you can zero in on a much smaller group of potential leaders!

Relative Strength Matters

Understanding relative strength is critical. It measures outperformance compared to the markets. Key metrics include:

• RS Rating
• RS Line trend
• RS new highs before price movement

Check out Duckman's Relative Strength document linked below for even more insights!

The Industry Group Strength

Another essential factor is industry group strength. Here’s why:

This suggests that nearly half of a stock’s price movement relates to its industry group. So, ensure your potential leaders are backed by strong industry trends!

Learning from the Past

To effectively identify leaders, study history. Look at stocks that had substantial gains and analyze:

• What did their fundamentals look like?
• What similar chart patterns do they show?

For illustrative examples, check out the TL 2020 Model Book linked below, and review video walkthroughs with Ross Haber!

Conclusion

In summary, when considering leaders versus laggards, remember:

• The best stocks outperform prior to significant price moves.
• True market leaders boast exceptional fundamentals and positive price action.
• Pay close attention to what the market cues from charts and relative strength.

Thanks for tuning into this exploration of CANSLIM! If you found this insightful, please give us a thumbs up and be sure to subscribe to the TraderLion channel. Catch you in the next one!