What is 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. CAN SLIM is intended to help investors identify growth stocks using a combination of both fundamental and technical analysis techniques.
Understanding 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. Generally investors using CAN SLIM want EPS growth of over 20%, but the higher the better.
- A - Annual earnings increases over the last five years. Here again the annual EPS growth is ideally over 20% over the last 3-5 years.
- N - New products, management, or new events/information that pushes the company's stock to new highs. This type of headline news 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.
- 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 as you want to get in before the big money is fully invested.
- 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). CAN SLIM stocks tend to be over-performers in bull markets.
Evaluating CAN SLIM for Your Purposes
CAN SLIM is a bullish strategy for fast markets, so it may not be for everyone. The idea is to get into high-growth stocks before the institutional funds are fully invested. All the elements of CAN SLIM can be read as a wish list for fund managers seeking growth, so it is a matter of time until the buying demand increases. The catch is that stocks that fit the CAN SLIM strategy can be among the fastest to drop if the market direction shifts and funds prioritize safe havens. As such, CAN SLIM is a good fit for experienced investors with a higher risk tolerance. CAN SLIM stocks cannot be bought and simply held as much of the value is being priced in for future growth, meaning any slowing in the growth trajectory or the market as a whole may result in the stock being punished.