What Is CANSLIM?
- CANSLIM, created by Investor's Business Daily William J. O'Neil, is a system for selecting growth stocks using a combination of fundamental and technical analysis techniques.
- CANSLIM is a bullish strategy for fast markets, with the goal being to get into high-growth stocks before the institutional funds are fully invested.
- CANSLIM stocks cannot be bought and 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.
CANSLIM, also referred to as "C-A-N-S-L-I-M" or "CAN SLIM," identifies a process that investors can use to pick stocks poised to grow faster than average. Each letter in the acronym stands for a key factor to look for when purchasing shares in a company.
The seven criteria that comprise CANSLIM are as follows:
- C: Current quarterly earnings per share (EPS) has increased sharply from the same quarters' earnings reported in the prior year. Generally, investors using CANSLIM want EPS growth of over 20%, but the higher the better.
- A: Annual earnings increases over the last five years. Again, annual EPS growth should ideally be in excess of 20% over the last three to five years.
- N: New products, management, or new events/information that push 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: Scarce supply coupled with a strong appetite for a stock creates excess demand—and an environment in which share prices can soar. Companies acquiring (re-purchasing) their own stock reduces market supply and can indicate an expectation of increased demand, along with insider confidence in the firm.
- L: Laggard stocks are preferred within the same industry. Use the relative strength index (RSI) as a guide. The RSI is a momentum indicator that measures the magnitude of price changes to determine whether the price of a stock or asset is overbought or oversold. The RSI ranges from zero to 100. An RSI reading below 30 suggests that the stock is oversold and could be undervalued—creating a buying opportunity (bullish). Conversely, an RSI reading of above 70 signifies that a stock could be overbought or overvalued and could be a chance to sell (bearish).
- I: Pick stocks that 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 - Determine 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. CANSLIM stocks tend to be over-performers in bull markets.
Advantages and Disadvantages of CANSLIM
All the elements of CANSLIM 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 CANSLIM strategy can be among the fastest to drop if the market direction shifts and funds prioritize safe havens.
In short, CANSLIM is a good fit for experienced investors with a higher risk tolerance. These 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.