IBD’s CAN SLIM investing method can be described as growth investing, chart analysis and other terms. But probably the single word that best describes CAN SLIM is leadership.
The main idea is to buy leading stocks in leading industries when they make market-leading price moves. Leadership is the L in CAN SLIM, and this week’s topic in our weekly series on the seven-part investing system.
Simply put, you want to buy the leaders and avoid the laggards. That means choosing the No. 1 or No. 2 company in its industry. Don’t assume that a laggard will turn into a leader just because a true leader in the same industry is performing better.
“By number one, I don’t mean the largest company or the one with the most recognized brand name,” IBD founder William O’Neil wrote in “How to Make Money in Stocks,” still the primary authority on CAN SLIM. “I mean the one with the best quarterly and annual earnings growth, the highest return on equity, the widest profit margins, the strongest sales growth, and the most dynamic stock-price action. This type of company will also have a unique and superior product or service and be gaining market share from its older, less-innovative competitors.”
The industry itself should be a leader, preferably in the top 40 of IBD’s 197 industry groups. Often, a stock is part of a broader move in an industry that’s enjoying unusual demand.
Leadings Stocks In Leading Industries
In the first five months of this year, for example, homebuilders and wood products were leading industries amid a housing crunch. LGI Homes (LGIH), PulteGroup (PHM) and other builders broke out to new highs in March. From March to August 2020, internet retail soared 140% as pandemic lockdowns caused a surge in online shopping. Home furnishings retailers soared nearly 600% from March 2020 to April as Americans spent more on their homes and bought furniture for home offices. RH (RH) broke out Nov. 12.
Leadership also means buying stocks when they start big price moves. The best way is to buy when stocks rise past important resistance levels, namely buy points in sound base patterns.
IBD provides tools to identify market leadership. The Relative Strength Rating measures 12-month price performance, and leading stocks generally have ratings of 80 to 99. Price strength is evident even before leading stocks climb to new highs. Studies of market winners show the average RS Rating was 87 before those stocks began big price runs.
The Composite Rating combines the RS and other IBD ratings, providing a broader perspective on leadership. The IBD Stock Checkup ranks the top stocks in every industry group and lists the group’s current ranking in terms of its IBD ratings.
IBD’s MarketSmith includes an Industry & Sector section with detailed ranking data, plus a complete list of companies in the group. The table can be sorted by ratings.
Finding the start of a big price advance is harder, and there are no ratings to identify them. This requires you to know something about recognizing sound bases and buy points. Novices can use the chart analyses in IBD 50 and other screens in IBD Weekly.
Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him @IBD_jarancibia
YOU MIGHT ALSO LIKE: