What is the CAN SLIM

CAN SLIM, also referred to as "C-A-N-S-L-I-M" or "CANSLIM," is a system for selecting stocks, created by Investor's Business Daily founder William J. O'Neil. Each letter in the acronym stands for a key factor to look for when purchasing shares in a company.

BREAKING DOWN CAN SLIM

CAN SLIM's seven-part criteria is as follows:

C - Current quarterly earnings per share has increased sharply from the same quarters' earnings reported in the prior year. (NB: Beware of items in financial statements that can cause earnings distortions. These can involve inflated current period earnings and/or deflating corresponding expenses, the creation of fictitious assets, and several other methods.)

A - Annual earnings increases over the last five years. (Again, it is possible for management to inflate these numbers, such as by recording revenue prematurely.)

N - New products, management, and other new events. In addition, the company's stock has reached new highs. Often, sudden events can cause short-term excitement, propelling a surge of optimism within the market and subsequent price appreciation.

S - A relatively scarce supply, coupled with strong demand for a stock creates excess demand. This is an environment, in which stock prices can soar. Companies acquiring (re-purchasing) their own stock reduces market supply and can indicate their expectation of increased demand, along with insider confidence in the firm. Also: be on the lookout for low debt-to-equity ratios.

L - Choose leading over laggard stocks within the same industry. Use the relative strength index (RSI) as a guide. The RSI ranges from zero to 100. A RSI indication above 30 suggests a buying opportunity (bullish), while above 70 signifies a chance to sell (bearish).

I - Pick stocks, which have institutional sponsorship by a few institutions with recent above average performance. For example, this could be a recently public company, still supported by a small handful of well known private equity firms. Be cautious of stocks that are over owned by institutions. Small stakes by a plethora of institutional investors (e.g. private equity firms, family offices, hedge funds, and large asset managers, among others).

M - Determining market direction by reviewing market averages daily. A market average measures the overall price level of a given market, as defined by a specified group of stocks, such as the Dow Jones Industrial Average (a price-weighted average of 30 blue chip stocks listed on the NYSE). Also known as the DJIA, the Dow Jones Industrial Average is also considered a measure of the overall health of the U.S. economy.