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'L' Stands For Leaders; Buy Only The Best Stocks

The L in CANSLIM doesn't stand for laggards or losers. It stands for leaders. Investing in leading stocks is the cornerstone of the system.

Buying leaders means that you're buying the cream of the crop; it is not about buying beaten-down issues and hoping for a rebound. If the environment is right and your timing and money management skills are good, you stand a solid chance at making big money with the top stocks.

In the 1980s and 1990s, America Online, Cisco Systems (CSCO) and Dell (DELL) were leaders that racked up monster gains in their heydays. Apple (AAPL), Google (GOOG) and SolarWinds (SWI) are some of today's leading stocks.

Leaders are companies with top-notch fundamentals and charts. They are the ones being bought by growth-oriented mutual funds and hedge funds. They have innovative products and services that are head and shoulders above their competitors.

America Online introduced million of users to online communities and the Internet. Dell blew away rivals by selling computers directly to consumers and using a just-in-time inventory system.

Even before a leader's big run starts, it's not uncommon to see triple-digit earnings and sales gains on a quarterly or annual basis.

Leading stocks also carve strong prior uptrends that have outperformed their peers and other stocks. To see if a stock is a leader, check out its Relative Price Strength Rating.

The market's best stocks tend to have RS Ratings of at least 85.

One problem to watch for: When a true market correction hits, leading stocks can fall 1-1/2 to 2-1/2 times more than the general market.

Chipotle Mexican Grill (CMG) was the top stock in the restaurant in 2010. The company offered consumers high-quality, fast-casual Mexican food. The company racked up quarter after quarter of solid double-digit earnings and sales gains.

The stock blew past a 154.53 entry from a in the week ended Sept. 3, 2010 1 and surged 70% before retreating to its 10-week line for the first time. 2  BJ's Restaurants (BJRI) and Buffalo Wild Wings (BWLD) rivals also broke out that week. They rose 46% and 14%, respectively, before pulling back sharply.