1. Stock-Picking Strategies: Introduction
  2. Stock-Picking Strategies: Fundamental Analysis
  3. Fundamental Analysis: Figuring Discounted Cash Flow
  4. Stock-Picking Strategies: Qualitative Analysis
  5. Stock-Picking Strategies: Value Investing
  6. Stock-Picking Strategies: Growth Investing
  7. Stock-Picking Strategies: GARP Investing
  8. Stock-Picking Strategies: Income Investing
  9. Stock-Picking Strategies: CAN SLIM
  10. Stock-Picking Strategies: Dogs of the Dow
  11. Stock-Picking Strategies: Technical Analysis
  12. Stock-Picking Strategies: Conclusion

The CAN SLIM model for selecting stocks was developed by William J. O’Neil, founder and chairman of Investor’s Business Daily. The system is described in his best-selling book, “How to Make Money in Stocks: A Winning System in Good Times and Bad” – now in its fourth edition. The goal of the strategy is to identify companies with strong fundamentals and buy them as they emerge from periods of price consolidation, before they make major price advances.

The Elements of CAN SLIM

The seven letters in the CAN SLIM mnemonic stand for the key traits O’Neil found that stocks display just before they make their biggest price gains. These are described below.

C = Current Quarterly Earnings

Substantial earnings-per-share growth can attract the large institutional players – something that can fuel big price moves. According to CAN SLIM, investors should look for companies with a minimum quarterly EPS growth of 25% in the most recent quarter – though gains of 50% to 100% are even more attractive. Of course, you want those gains to be sustainable, so the company should also have at least 20% sales growth in the most recent quarter and a minimum 17% return on equity.

A = Annual Earnings Growth

While good quarterly earnings are important, a company should also boast strong annual earnings growth. This can help confirm that the company doesn’t have any underlying problems, such as falling demand for its products, deteriorating profit margins or negative industry trends. CAN SLIM investors look for an annual EPS growth rate of at least 25% to 50% in each of the previous three to five years.

The first two parts of the CAN SLIM system – strong quarterly and annual earnings – are logical steps employing quantitative analysis. The beauty of the system is that it applies five more criteria to selecting stocks.

N = New Product or Service

The third trait that CAN SLIM investors look for is something new in the company – whether that’s a new product, service, CEO or high stock price, or an innovative industry trend that benefits the company in some way. Wall Street is always on the prowl for the next best thing, whether that’s an entrepreneurial company disrupting an industry or an established company that reinvents itself by pivoting to new products. Either way, something new can equate to profits. 

A perfect example of how newness spawns success can be seen in McDonald's early history. With the introduction of its new fast food franchises, it grew over 1100% in four years from 1967 to 1971! This is just one of many compelling examples of companies that – through doing or acquiring something new – achieved great things and rewarded their shareholders along the way.

S = Supply and Demand

The law of supply and demand governs all market activities: strong demand for a limited supply of available shares will drive price up, and an oversupply of shares coupled with weak demand will drive price down. CAN SLIM investors watch for sharp price increases backed by spikes in trading volume. These events indicate demand – especially from mutual fund managers and other institutional investors – that can lead to even bigger price moves.

L = Leader or Laggard

In any industry, there are companies that lead and provide big gains to shareholders, and companies that lag and deliver gains that are at best mediocre. The idea is to buy leaders and avoid laggards; CAN SLIM investors look at the relative price strength of a stock to differentiate between the two. A stock’s relative price strength ranges from one to 99; a rank of 75, for example, means the company has outperformed 75% of the stocks in its market group over a particular period of time. CAN SLIM investors look for stocks that have relative price strengths of at least 70 – though stocks in the 80 to 90 range are generally more likely to be the major gainers.

I = Institutional Sponsorship

This trait refers to whether the stock is owned by banks, mutual funds, pension funds and other institutional investors. Such ownership can be viewed as positive confirmation of a potential winner. Professional investors have teams of analysts who research thousands of potential investments. When one of them starts buying a stock you’re considering, it can increase demand for the stock – and potentially trigger rising share prices. CAN SLIM investors should focus on stocks that have at least three to 10 institutional owners.  

M = Market Direction

The final trait in the CAN SLIM model is market direction. When picking stocks, it’s always important to recognize whether you are in a bull or bear market. CAN SLIM investors believe you should invest with the market, as opposed to against it. The theory here is that, according to CAN SLIM, three out of four stocks move in the same direction as the general market – as measured by the major indices (the NASDAQ Composite, the S&P 500 and the DJIA). If you buy a stock when the market is in an uptrend, the theory goes, you have a 75% chance of being right; conversely, you have a 75% chance of being wrong if you buy when the market is in a downtrend. (See Determining Market Direction with VIX for more.)

One Thing Leads to Another

It’s important to note that these seven traits work together. For instance, when big earnings growth and a new product or service (the C, A and N of the CAN SLIM model) happen together, it can attract the attention of mutual fund managers and other institutional investors. That attraction can trigger the S in the CAN SLIM system – supply and demand – which can drive share prices higher, and so forth. Successful CAN SLIM investors look at the “big picture” and understand how each individual trait affects – and can be influenced by – the others.

Stock-Picking Strategies: Dogs of the Dow
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