IBD Investment Strategy: A Focus on Growth

Investor’s Business Daily (IBD) offers a specific, disciplined investment methodology often referred to as the CAN SLIM investment strategy. This strategy focuses primarily on growth stocks and seeks to identify companies poised for significant price appreciation. It’s a rules-based approach that emphasizes both fundamental and technical analysis.

CAN SLIM: The Acronym Unveiled

The core of IBD’s strategy is encapsulated in the CAN SLIM acronym, with each letter representing a crucial investment criterion:

• C – Current Quarterly Earnings: Look for significant increases in a company’s current quarterly earnings per share (EPS) compared to the same quarter of the previous year. IBD emphasizes growth rates of at least 25%, but higher is better.
• A – Annual Earnings Growth: Focus on companies with a proven track record of annual earnings growth over the past three to five years. Consistent, substantial growth indicates a healthy and thriving business.
• N – New Products, New Management, New Highs: Identify companies that are launching innovative products or services, undergoing positive management changes, or consistently reaching new price highs. These factors can signal a catalyst for future growth.
• S – Supply and Demand: Analyze the supply and demand dynamics of a stock. A stock’s price should rise on heavy trading volume, indicating strong institutional demand. Look for stocks trading with relative strength compared to the overall market.
• L – Leader or Laggard: Invest in leading companies within their respective industries. Focus on stocks that demonstrate superior earnings growth, profit margins, and relative strength compared to their peers.
• I – Institutional Sponsorship: Track institutional ownership. Companies with increasing institutional sponsorship, particularly by top-performing mutual funds and other institutional investors, are more likely to experience sustained price appreciation.
• M – Market Direction: Understand the overall market trend. IBD emphasizes the importance of investing with the market, rather than against it. A rising market tide lifts most boats. Knowing the market’s direction is crucial for timing entries and exits.

Beyond the Acronym: Risk Management

While CAN SLIM focuses on identifying potential winners, IBD also stresses the importance of risk management. Stop-loss orders are a critical component of the strategy. Investors are encouraged to set stop-loss orders at a predetermined percentage below their purchase price, typically 7% to 8%, to limit potential losses. Disciplined adherence to stop-loss orders is essential to protect capital.

Technical Analysis and Chart Reading

IBD heavily incorporates technical analysis and chart reading to identify optimal entry and exit points. They look for specific chart patterns, such as cup-with-handle or double-bottom formations, which can signal potential breakouts and uptrends. Volume analysis is also key; ideally, a stock should break out on above-average volume.

A Growth-Oriented Approach

In conclusion, the IBD investment strategy, built upon the CAN SLIM principles, is a growth-oriented approach that combines fundamental analysis with technical analysis and emphasizes disciplined risk management. It seeks to identify leading companies with strong earnings growth, innovative products, and institutional support, while mitigating risk through the use of stop-loss orders and awareness of market direction. While no strategy guarantees success, CAN SLIM provides a structured framework for identifying and capitalizing on growth opportunities in the stock market.