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CAN SLIM is the seven step acronym publicized by the American newspaper Investor's Business Daily, which is a checklist of the characteristics stocks tend to share before their biggest price gains. It was created by Investor's Business Daily editor William O'Neil who has made several hundreds of millions of dollars by consistently using the canslim method.
CAN SLIM is a growth stock investment formula created 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, by William J. O'Neil. This strategy involves implementation of both fundamental and technical analysis.
The goal of the strategy is to discover leading stocks before they make major price advances. The aim is to be able to identify these stocks as they are breaking out of a basing consolidation pattern, typically in the form of a cup & handle chart pattern, of at least 7 weeks tight 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 - indeed many professional traders will even cut losses at half this rate or less. It is stated in the book, that buying stocks from solid companies should lessen the chances of having to cut losses, since a strong company with good current quarterly earnings-per-share, annual growth rate, and other strong fundamentals will usually shoot up in bull markets rather than decline.
Some investors have critized the strategy when they didn't use the stop loss criterion, however O'Neil has stated that you have to use the whole strategy and not just the parts you like.
O'Neil has said that the CANSLIM strategy is not momentum investing, but that the system identifies stocks with strong fundamentals, big sales, and earnings increases which is a result of unique new products or services. Critics of the technique include Warren Buffett and Peter Lynch, as well as Buffett's investing guru, Benjamin Graham, all of whom prefer the value investing approach to establishing an effective stock portfolio.
The seven parts of canslim system are below:
- 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 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 indexes, particularly the Dow Jones, S&P 500, and NASDAQ. During the time of investment, O'Neil prefers investing during times of definite uptrends of these three indices, as three out of four stocks tend to follow the general market pattern.