Experience with CAN SLIM®

Portfolio Manager, Paul Krause, completed Investor's Business Daily's (IBD's) CAN SLIM® Masters Course and passed the CAN SLIM® Masters Exam in January, 2015, becoming one of a select group, a CAN SLIM® Certified Advisor licensed under IBD's Certified Advisor Licensing program.  However, IBD decided to eliminate the program for all licensed certified advisors effective January 20, 2017.  IBD has gone through a significant retrenching, and its licensing program has been one casualty.

However, in mid-summer 2016, observing IBD's ongoing retrenchment, but unaware of their eventual decision to eliminate the licensing program, Mr. Krause had begun his own reevaluation of the CAN SLIM® investment strategy and his implementation of it for the benefit of his CAN SLIM® portfolio clients and his own portfolio.  In actual practice, he had developed reservations concerning the suitability of CAN SLIM® in today's market.  The result of that reevaluation is his updated personal Portfolio Management approach which goes well beyond basic CAN SLIM® and is described in the Portfolio Management tab.  

There are real differences between the CAN SLIM® approach as originally developed by William O'Neil over 50 years ago and his approach, and those differences are described below.

 

Similarities and Differences Between Mr. Krause's Approach and Traditional CAN SLIM® Investing

Similarities

The Importance of Strong Institutional Support

One thing that has not changed in his approach is the importance of buying a stock that has strong institutional support.  In the traditional CAN SLIM® setup, this was determined by the accompanying high volume on the base breakout at the pivot price.  But that observation alone is not enough today.  Institutions begin buying well before a base breakout.  In fact, in base breakouts, they are often selling into strength to lock in profits, hence a contributing factor of many CAN SLIM® breakouts today.  The result is that deeper, more sophisticated technical analysis and greater contextual thinking is now required to truly discern when institutions and insiders are accumulating stock.  Institutions are adept at disguising when they are accumulating in order not to push the price higher before they have finished their accumulation, which may take several weeks.

The Presence of Something New as a Catalyst

Both approaches like to see the presence of something new, the 'N' in CAN SLIM®.  The catalyst could be something internal such as a new technology, a new product, new management, or an acquisition, or it could also be something external, such as a change in market conditions, government action or changing consumer tastes.

The Importance of the Market Condition

Both approaches believe the market environment can have as much as 50% or more influence on a company's stock price movement. 

Differences

Emphasis on Past Earnings vs. Projected Earnings

Both his approach and CAN SLIM® focus on quality companies, but with one major difference.  A CAN SLIM® prerequisite was that the company was profitable before purchasing the stock.  Yet, over the past few years, there have been huge upside price moves in a number of stocks of companies that did not meet the CAN SLIM® profit requirements.  An example is Amazon (AMZN), which had no earnings until late 2001, yet had a massive increase in price between 1997-1998 with a 75-fold increase in value over that short time frame.  In other words, it appreciated more than 7400% in less than 2 years.  It became a "big stock" but it would have been considered a non-CAN SLIM® stock during that time because it lacked positive earnings.

Another example would be Tesla (TSLA).  Tesla came public in July 2010 with losses aplenty and $18.6 million in sales growth for the December 2009 quarter.  The stock went sideways for about two years before gapping up out of a "first-stage O'Neil-type base" in April 2013, and was just barely starting to turn a profit within the December 2012 quarter.  But Tesla's stock did not wait around for several quarters of 20% earnings growth or better. It began a sharp move to the upside that took the share price from around $40 to over $100 in seven short weeks.  That was the sharpest upside thrust in the stock's chart up to that time, and it occurred while the stock was barely starting to show a profit, but sales growth was coming in at 677%.  Eventually, Tesla reached 265 in March 2014, making a 640% move from that initial breakout in April of 2013.

Mr. Krause now puts less emphasis on past earnings, i.e., that which everyone can now see.  Instead, he now puts greater emphasis on projected future earnings along with a strong thematic story.   He will still buy stocks of companies with high historical growth and positive earnings, but he has expanded his eligible list to include companies exhibiting current and future growing sales, but not yet profitable earnings.  

Expanded Number of Setups

The traditional CAN SLIM® setup consists of a high growth company's stock breaking out of an O'Neill type base on high volume.  The breakout price is called the pivot point, and the acceptable buy price ranges anywhere from the pivot point up to 5% from the pivot point.  Under this setup,  the stock is bought at a price considerably off its low, and more often than not, at a new 52-week high for the stock. 

Mr. Krause is not abandoning this setup, but today's choppier markets have led to more whipsawing and failed breakouts. 

In response to these changed conditions, he has added other setups to buy what the institutions are buying, only earlier than in CAN SLIM®.

Buying on Pullbacks

CAN SLIM® emphasizes buying breakouts that often are new 52-week highs for the stock.  It may take more analysis, but buying on a pullback closer to a support level, as long as the relevant trend is still favorable, lessens the downside risk and the chance of getting prematurely stopped out of a position. 

A Template-Based Checklist vs. a Contextual Approach

Adhering to the components of CAN SLIM® lends itself to a somewhat mechanical, cookie-cutter like approach.  Past earnings growth?  Check.  Standard base breakout?  Check.  And so on.  But, if everybody can see the same thing, there is no advantage.  Therefore, Mr. Krause believes greater critical, contextual thinking and analysis is required today to gain an edge.  

Adaptability to Different Market Environments

CAN SLIM® focuses on prolonged uptrending markets in which growth stocks typically do very well and generally outperform the S&P 500 index.  A prime example was the 1990s bull market.  Unfortunately, such markets don't occur all the time. The rest are either sideways or bear markets.  Mr. Krause's approach uses different strategies in different market environments, including selling stocks short in bear markets, and swing trading in sideways markets.

Complexity

CAN SLIM® preaches simplicity.  Observe a few  easily recognizable base breakouts on high volume, run through a checklist of readily available past performance numbers, find something new that everybody else is aware of, apply a simple formula to determine market condition, and voila, investing success should follow.  But it is risky to assume that anyone can walk into today's treacherous trading arena part time with a few simple chart setups and indicators and succeed.

The truth is that building expertise in trading can take many years of mistakes, losses and frustration before crossing over into a realm where you know how to filter out all the macro noise with your own solid analylitical tools, diligence and discipline.

Are our brains emotionally hard-wired to break the "golden rule" of trading. Unfortunately, no.  "Cut losses short and let winners run" is hard because human behavior is predisposed to do the opposite.  Most investors hate to take losses and tend to take gains too quickly.

So, even if someone hands you a top trading system with a simple set of rules such as CAN SLIM®, an investor still has to master the mental and emotional game, while developing and sorting through a jungle of technical indicators.  This is the path Mr. Krause has chosen for discretionary portfolio management for himself and for qualified clients.  Will he ever master it completely?  No, no one does, not even phenomenal traders who have achieved great success and amassed great fortunes.  Managing an actively traded porfolio is complex and time-consuming, and not suitable as a part-time endeavor.  The bottom line, as always, will be performance.

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