CAN SLIM refers to the seven-pronged mnemonic
publicized by the American newspaper Investor's Business Daily, which claims to be a
checklist of the characteristics performing stocks tend to share before their
biggest gains. It was developed by Investor's Business Daily editor William O'Neil who
has reportedly made several hundreds of millions of dollars by consistently
using its approach.
CAN SLIM is a growth stock investment strategy formulated from the study of the 500 best performing stock market winners dating back to 1953 in the book How to Make Money in Stocks: A Winning System In Good Times or Bad, 3rd Edition (May 23, 2002) ISBN 0-07-137361-6. by William J. O'Neil. This strategy involves implementation of both technical analysis and fundamental analysis.
The goal of the strategy is to discover leading stocks before they make major price advances. These pre-advance periods are "buy points" that are emerging from price consolidation areas (or "bases"), typically in the form of a "cup & handle" price pattern, of at least 7 weeks on weekly price charts.
The strategy is one that strongly encourages cutting all losses at no more than 7% or 8% below the buy point, with no exceptions, to minimize losses and to preserve gains. It is stated in the book, that buying stocks from solid companies should generally lessen chances of having to cut losses, since a strong company (good current quarterly earnings-per-share, annual growth rate, and other strong fundamentals) will usually shoot up—in bull markets—rather than descend.
Some investors have criticized the strategy when they didn't use the stop-loss criterion; O'Neil has replied that you have to use the whole strategy and not just the parts you like.
O'Neil has stated that the CANSLIM strategy is not momentum investing, but that the system identifies companies with strong fundamentals—big sales and earnings increases which is a result of unique new products or services—and encourages buying their stock when they emerge from price consolidation periods (or "bases") and before they advance dramatically in price.
The seven parts of the mnemonic are as follows:
The Investing Mechanism and Process
CAN SLIM is a growth stock investment strategy formulated from the study of the 500 best performing stock market winners dating back to 1953 in the book How to Make Money in Stocks: A Winning System In Good Times or Bad, 3rd Edition (May 23, 2002) ISBN 0-07-137361-6. by William J. O'Neil. This strategy involves implementation of both technical analysis and fundamental analysis.
The goal of the strategy is to discover leading stocks before they make major price advances. These pre-advance periods are "buy points" that are emerging from price consolidation areas (or "bases"), typically in the form of a "cup & handle" price pattern, of at least 7 weeks on weekly price charts.
The strategy is one that strongly encourages cutting all losses at no more than 7% or 8% below the buy point, with no exceptions, to minimize losses and to preserve gains. It is stated in the book, that buying stocks from solid companies should generally lessen chances of having to cut losses, since a strong company (good current quarterly earnings-per-share, annual growth rate, and other strong fundamentals) will usually shoot up—in bull markets—rather than descend.
Some investors have criticized the strategy when they didn't use the stop-loss criterion; O'Neil has replied that you have to use the whole strategy and not just the parts you like.
O'Neil has stated that the CANSLIM strategy is not momentum investing, but that the system identifies companies with strong fundamentals—big sales and earnings increases which is a result of unique new products or services—and encourages buying their stock when they emerge from price consolidation periods (or "bases") and before they advance dramatically in price.
Mnemonic
The seven parts of the mnemonic are as follows:
- C stands for Current
earnings. Per share, current earnings should be up to 25%.
Additionally, if earnings are accelerating in recent quarters, this is a
positive prognostic sign.
- A stands for Annual
earnings, which should be up 25% or more in each of the last
three years. Annual returns on equity should be 17% or more
- N stands for New
product or service, which refers to the idea that a company
should have a new basic idea that fuels the earnings growth seen in the
first two parts of the mnemonic. This product is what allows the stock to
emerge from a proper chart pattern of its past earnings to allow it to
continue to grow and achieve a new high for pricing. A notable example of
this is Apple Computer's iPod.
- S stands for Supply
and demand. An index of a stock's demand can be seen by the trading
volume of the stock, particularly during price increases.
- L stands for Leader
or laggard? O'Neil suggests buying "the leading stock in a
leading industry". This somewhat qualitative measurement can be more
objectively measured by the Relative Price Strength Rating (RPSR)
of the stock, an index designed to measure the price of stock over the
past 12 months in comparison to the rest of the market based on the S&P
500 or the TSE 300 over a set period of time.
- I stands for Institutional
sponsorship, which refers to the ownership of the stock by
mutual funds, particularly in recent quarters. A quantitative measure here
is the Accumulation/Distribution Rating, which is a gauge of mutual fund
activity in a particular stock.
- M stands for Market
Direction, which is categorized into three - Market in
Confirmed Uptrend, Market Uptrend Under Pressure, and Market in
Correction. The S&P 500 and NASDAQ are studied to determine the market
direction. During the time of investment, O'Neil prefers investing during
times of definite uptrends of these indexes, as three out of four stocks
tend to follow the general market pattern.
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