CAN SLIM is an investing strategy which represents seven characteristics typically present in well performing stocks before. As a result, those traits typically manifest right before a stock sees its price increase. The term CAN SLIM or “C-A-N-S-L-I-M” is an acronym, with each letter representing one of the system’s key factors.
CAN SLIM Origins
The CAN SLIM system was created in the 1950s by William J. O’Neil, the founder of Investor’s Business Daily. Since its introduction, the system regularly outperforms the S&P 500.
The strategy dates back to 1953, when it featured in the book “How to Make Money in Stocks: A Winning System In Good Times or Bad.” The basic strategy is finding high-performing stocks before their price jumps. That period, the “buy point,” typically follows at least 7 weeks of price consolidation.
The strategy encourages investing in solid companies with good earnings-per-share growth and annual growth. However, it also suggests cutting losses at 7% to 8% below the buy points. Following the first half of the strategy without the latter stop-loss can prove devastating to an investment.
CAN SLIM Factors
The idea behind CAN SLIM is to find stocks that will attract the attention of large institutional investors. Once you own that kind of stock, its value should increase once institutional investors buys into the company. Those big investors tend to create demand, but the following CAN SLIM factors can indicate which stocks institutional investors might love.
The “C” Factor
Current quarterly earnings per share should increase sharply when compared to earnings per share (EPS) reported in the same quarter of the year before. Investors using the CAN SLIM system usually want EPS growth above 25% in the most recent quarte. However, the higher the growth is, the better. The best stocks often have EPS growth that ranges from 50% to 100% or higher. Preferably, EPS growth would rise quarter by quarter.
You’ll also want to make sure that this growth is reliable. Also, find out if the company can sustain these EPS gains. The company’s return on equity (ROE) can indicate how sustainable the EPS growth is. You’ll want to look for ROE that is 17% or higher.
The “A” Factor
Annual earnings – or annual EPS – should have increased over the last five years. A company can boost earnings for a quarter or two, but it’s harder to maintain earnings growth for a sustained period of time.
The annual EPS growth would ideally be more than 25% over the last three to five years, although, as with quarterly growth, top stocks will often have even stronger increases. Google’s three-year annual EPS growth rate was 293% before it launched a five-fold gain in 2004.
The “N” Factor
New events – such as new products, new management, or information about a company may push its stock to new highs. That type of news can cause short-term excitement. In turn, that can create a swell of optimism about a company and raise its stock price.
Wall Street is always looking for companies with game-changing products. The companies could be new and just had their initial public offering (IPO). However, they could be established companies reinventing themselves and getting new corporate leadership.
The “S” Factor
Scarce supply, combined with strong demand for a stock, will create excess demand. Stock prices may soar in that environment. Companies that are re-purchasing their own stock are a good example of this. Consequently, a buyback reduces market supply and may indicate an expectation of increased demand and insider confidence in the firm. It can also mean that institutions are beginning to take interest in the company, and you should get in before all the other big institutions do.
The “L” Factor
Leading over laggard. When choosing between stocks in the same industry, pick leading stocks over laggard – which can also be called underperforming – stocks. You can use the relative strength index (RSI) to choose leading stocks. The RSI ranges from zero to 100. A RSI indication above 70 suggests a good chance to sell, while an RSI above 30 suggests a good opportunity to buy.
The “I” Factor
Institutional sponsorship. If a company is supported by a small handful of institutions with above-average performance, it may be a good choice for you. However, if there are to many institutions involved, it likely isn’t such a good buy. Remember, you want to buy before a lot of institutions have invested in the company. As a result, when those institutions do invest, they’ll end up raising the stock price, and your profits.
The “M” Factor
Market direction is in many ways the most important factor in the CAN SLIM system. Review market averages on a daily basis to determine the market direction. Market averages measure the overall price level of a given market, which is defined by a specific group of stocks. One example of a market average is the Dow Jones Industrial Average, a price-weighted average of 30 blue chip stocks that are listed on the New York Stock Exchange.
You want a bullish market, where everyone is buying and stock prices are going up. Consider avoiding bearish market, where everyone is selling andd stock prices are going down. Stocks chosen using the CAN SLIM method tend to over-perform in bull markets.
If the overall market is in a downtrend, it can be very hard for even the best stocks to move up. Say three of four stocks move in the same direction as major market indices, such as the Nasdaq Composite, S&P 500 and the Dow. As a result, 75% of stocks will go up if the market is going up, and 75% of stocks will go down if the market is going down.
The Bottom Line
The idea behind CAN SLIM is to get into high-growth stocks before fund managers are fully invested. Essentially, you look for stocks that fund managers seeking growth would look to invest in. Then, it may be only a matter of time before the buying demand (and your profits) increase. The downside is that the market direction may shift. Consequently, funds may prioritize safeguarding their money over investing in growth stocks. As a result, stocks that fit the CAN SLIM strategy may end up being the fastest to depreciate in value.
Essentially, using this strategy can make you a lot of money relatively quickly in the stock market, but if the market goes the wrong way, it may also cause you to lose a lot of money relatively quickly. The success of CAN SLIM stocks can depend heavily upon the direction of the market.
- You may want professional help with your investments. A financial advisor can help you put together the investing plan that works bests for your financial goals. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- If using the CAN SLIM strategy works for you, you may end up owing capital gains tax. SmartAsset can help you figure out how much you’ll owe when you sell your stocks with our capital gains tax calculator.
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