CANSLIM: Mastering Growth Stock Selection & Market Timing

Ross Haber, who worked for William O'Neil, noted Bill's exact quote that getting the market's direction correct is more than half the ball game.

When the market isn't trending higher and isn't 'hot,' Haber notes his best bet is to sit on his hands until he is the house.

The strategy emphasizes keeping losses small and letting winners run, a principle associated with traders like Jesse Livermore and Bernard Baruch, who demonstrated that one can be right as little as one-third of the time on stock picks and still be profitable.

Building model books is a practical exercise that does not demand an extensive or overly technical process to be effective, according to Ross Haber.

Haber emphasized that the most significant learning comes from the active process of selecting stocks and making personal observations on their performance.

He suggests that traders start with a manageable three-stock model book to begin the learning process and gain valuable insights.

William O'Neil's CANSLIM methodology requires current quarterly earnings and sales to demonstrate at least 25% year-over-year growth for a minimum of three consecutive quarters, with higher growth being more favorable.

For high-conviction trades, triple-digit earnings growth is particularly desirable, although annual earnings and sales also provide crucial long-term performance context.

New products, services, or management are identified as primary catalysts for market-leading stocks, signifying innovation and potential for significant shifts in industry dynamics.

Historically, from the late 1990s to the 2000s, market capitalization and the number of shares outstanding were significant factors, but currently, even large-cap companies with substantial floats can move like growth stocks if they lead their respective groups.

He employs a 12-month look-back period for calculating relative strength, a technique adopted from William O'Neil and Investor's Business Daily (IBD).

Key screening tools include the 'Up on Volume' screen from institutional software and the 'Deepvue leader screen' designed by Richard, both of which are presets in Deepvue.

In addition to relative strength, institutional sponsorship is a critical indicator, with a focus on accumulation by top-performing funds, as three out of four stocks tend to follow the general market trend.

Ross Haber notes that institutional investors are often willing to invest in such companies if they demonstrate substantial and consistent revenue growth.

In these R&D-intensive firms, the quality of earnings may be secondary to factors like chart patterns, relative strength, and solid sales trends, which often signal future potential despite current unprofitability.

While three out of four leading stocks typically originate from traditional growth sectors, one in four may come from cyclical or commodity groups. During the Chinese industrial revolution around 2005-2006, cyclical stocks in energy, steel, and agriculture offered profitability comparable to that of tech giants.

Identifying which top-performing funds are accumulating shares in a particular stock provides substantial validation.

William O'Neil's strategy, which Ross Haber follows, focuses on long-only position trading, aiming to build concentrated positions over time rather than short-term gains.

Consistently performing daily or weekly market screens is essential for keeping a watch list current and developing an intuitive grasp of market leadership and sector rotation, according to Ross Haber.

This routine allows traders to discern the current stage of stock cycles, differentiating between early-stage bases with high potential and late-stage, exhausted moves that might signal a need for consolidation.

Such consistent practice makes it almost impossible not to understand where market leadership is emerging and where capital is rotating.

The process of screening helps in identifying stocks with the most liquidity, tightest patterns, and highest relative strength, which are then evaluated against fundamental strength and group affiliation.

Ross Haber relies on three primary screens: 'Up on Volume,' 'Deepvue Leaders,' and 'Ameet Rise 60,' with 'Up on Volume' being directly aligned with William O'Neil and IBD's growth investing principles.

He sorts his results primarily by 12-month relative strength, a key metric for identifying leading stocks.

The process involves quickly cycling through results using the spacebar and filtering for sector strength to identify high-potential stocks.

When a stock is identified, he can easily add it to his watchlists or set alerts to monitor its movements closely.

Ross Haber discussed adding a strong IPO stock from a hot sector to his TML report list, noting that the strength of the group was a factor in that decision.

He employs alert lines at the top and bottom of a stock's chart to maintain close surveillance over its price movements.

He noted that while 12-month relative strength is his preferred sorting method, other traders might find different timeframes, such as three-month or one-month relative strength, more suitable for their personal trading styles, especially after market corrections.

The screen filters candidates using criteria such as liquidity, Relative Strength (RS), earnings growth, and sales growth.

Haber noted that he spent a significant amount of time developing this screen, which typically generates about 200 to 350 names for traders to explore.

He remarked that if he could only use one screen, this would be the one.

Deepvue emphasizes its responsiveness to user feedback, with ongoing plans to launch custom indicators and a dedicated trade journal.

The development team focuses on rapid updates and implementing user-requested workflows to enhance the platform's utility.

This approach aims to differentiate Deepvue from older, 'legacy' trading platforms often criticized for their slow update cycles.

The platform's goal is to evolve continuously, incorporating user needs to create an ideal trading environment.

Ross Haber explains that this rule becomes less relevant for later-stage bases, such as third or fourth stages, where the success rate of breakouts decreases.

Haber personally prefers a tighter stop-loss, typically between 3-5% depending on the setup, to manage his trades.

Technical standards for chart patterns have evolved over time.

Currently, cup and handle and double bottom patterns typically require a duration of 6 to 7 weeks, while a flat base can be as little as 5 weeks.

Ross Haber recalled that when he first started with William O'Neil, stricter minimums were enforced, often requiring at least seven weeks for all types of bases.

Ross Haber describes 'retracer' stocks as those that oscillate frequently without achieving significant upward progress, characterized by alternating up and down days.

These stocks are often unprofitable to trade due to their slow movement and the difficulty in holding them for sustained periods.

He distinguishes between genuinely volatile stocks that offer trading opportunities and those with erratic price action that fail to provide consistent gains.

Such stocks are generally avoided, regardless of their liquidity or earnings strength, as they are deemed too challenging to manage effectively.

Ross Haber's fund management experience involved growing portfolios from tens of millions to over a billion dollars, necessitating a fundamental shift in entry strategies.

He explains that buying breakout stocks with market orders becomes increasingly difficult and impractical when managing large positions, especially for most CANSLIM stocks.

Attempting to buy 100,000 to 200,000 shares at market on a breakout is highly risky for typical growth stocks.

Only exceptionally liquid names, such as Apple, can absorb such massive buy orders without causing significant price distortion.

Ross Haber defines adequate liquidity as the ability to exit an entire position in a declining market without causing further downward pressure on the stock's price.

He views minor slippage, mentioning ranges such as 30 to 70 cents on more expensive stocks, as acceptable if it does not significantly impact the position.

Haber notes that what constitutes sufficient liquidity can vary based on individual circumstances and account size, as smaller accounts can sometimes trade thinner, less liquid stocks that larger accounts cannot.

He advises traders to make the learning and trading process enjoyable, avoiding it becoming a burdensome chore.

Pattern recognition and market intuition develop gradually through consistent practice and post-analysis of trades.

The ultimate goal is to foster excitement and engagement when analyzing the market, ensuring a sustainable and effective trading routine.

Historically, large companies like IBM and Hewlett-Packard were characterized by slow movement, offering little 'juice' for growth traders.

In contrast, modern market giants such as Google and Meta provide immense liquidity and can move swiftly while exhibiting comparatively lower volatility.

For the speaker, the objective is to achieve substantial price appreciation over short periods without enduring excessive volatility.

This shift allows the speaker to capture significant gains more efficiently than in previous market eras.

The speaker suggests that using AI is the easiest way to identify the 'New' catalyst in CANSLIM. He notes that users can leverage AI to ask questions such as what a company is doing differently and why they are experiencing rapid growth.

Investor's Business Daily (IBD) remains a resource, as Ross notes their headlines and emails often highlight stories on leaders and clarify information about company leadership.