CANSLIM

Quick Answer: CANSLIM is an investment strategy developed by William J. O'Neil, founder of Investor's Business Daily. It is a set of criteria for identifying stocks with strong growth potential. The acronym stands for:

C - Current quarterly earnings per share 

A - Annual earnings growth 

N - New products, new management, new highs 

S - Supply and demand 

L - Leader or laggard 

I - Institutional sponsorship 

M - Market direction. 

This systematic approach helps investors find high-quality growth stocks with the best chance of outperforming the overall market.

Understanding the CANSLIM Strategy

The CANSLIM system for selecting growth stocks emphasizes chart patterns and fundamentals, instead of technical analysis techniques, making it more quantitative. It gained popularity with the proliferation of stock charts that allow investors to monitor volume bars and moving averages easily. 

CANSLIM is an investment strategy for a bullish market, helping investors identify stocks poised for above-average growth. When markets grow, you can apply an aggressive strategy to high-growth stocks before institutional funds are fully invested.

Generally, you'll want to buy CANSLIM stocks for short-term growth. CANSLIM serves as a filter to aid in stock picking. Here is a breakdown of what each letter stands for:

C: Current quarterly earnings per share (EPS). You'll want to look for companies with earnings that have increased sharply from the same quarter in the prior year. CANSLIM investors look for EPS growth of over 25%, but, the higher, the better.

A: Annual earnings have increased over the last three years. In addition to one-year growth, you'll want to look for a medium-term trend toward growth. Ideally, annual EPS growth should be higher than 25% over the last three to five years. You can also look at market capitalization. 

N: New products, management, or positive new events. These new changes or positive events can make headlines and create short-term excitement. New management, products, or similar announcements can help generate excitement or investor optimism and push the company's stock to new highs. 

S: Scarce supply and high demand create an environment where share prices can reach new highs. When companies acquire or repurchase their own stock, it reduces market supply. This can indicate insider confidence in the firm and the expectation of increasing demand. 

L: Laggard stocks or Leaders. The L here has dual meanings, and both could indicate a good pick. In the case of laggard stocks, you can use the relative strength index (RSI) as a guide. 

The RSI is a momentum indicator used to measure the magnitude of price changes. The RSI ranges from zero to 100. Investors can use RSI ratings to help determine whether the price of a stock is overbought or oversold. 

An RSI below 30 suggests that the stock is oversold, which means it could be undervalued. This indicates a buying opportunity on a laggard stock. An RSI above 70 indicates a stock that may be overbought or overvalued. This can be a leader with an opportunity to sell or sell short. 

I: Institutional sponsorship. O'Neil's next principle examines the effect of institutions on stock performance. It suggests picking stocks sponsored by a few institutions with recent above-average performance. 

For example, if you find the stock of a public company that well-known private equity firms still support, you could be on to a good pick, especially if it meets other CANSLIM criteria. 

This criterion comes with a warning: you'll want to be cautious of stocks over-owned by institutions, as you may have missed your opportunity to get in before the big money is fully invested.

M: Market direction. A market average measures the overall price level of a market. For example, the Dow Jones Industrial Average is one of the oldest industrial averages, containing 30 prominent companies listed on stock exchanges in the United States. By reviewing the daily market averages, investors can understand overall gains. In general, CANSLIM stocks tend to be over-performers in bull markets.

Benefits 

The benefits of CANSLIM are identifying the potential for fast-growing stocks for short-term investment in a bullish market. However, it requires considerable understanding and research of stocks to get in before institutional funds are fully invested. Other benefits of CANSLIM include:

• Identify stocks with high short-term growth potential in fast markets.
• Good for investors with a high-risk appetite. 
• Possibility for maximum profits in the short term.
• Confirm selection with seven different practically applied attributes.

While CANSLIM can be a good filter for an experienced investor with high-risk tolerance, stocks that meet these criteria may experience some of the largest drops in case of market slowing. 

Drawbacks 

The disadvantage of the CANSLIM principle is the potential for higher volatility due to the focus on growth stocks. In addition, the time commitment required to research and analyze companies using the CANSLIM principle is too much for most casual investors.

Disadvantages of CANSLIM include:

• Higher risk pick with the possibility of major losses
• Not good for long-term buy-and-hold strategies
• Requires significant market understanding that casual investors may not have acquired

Who Should Consider CANSLIM?

CANSLIM is suitable for investors with a higher risk tolerance and a long-term investment horizon who are willing to carefully monitor market trends and adjust positions in the short term. It is not a good choice for buy-and-hold investors who prefer a long time horizon without frequent position adjustments. 

Applying CANSLIM

Applying CANSLIM can be a valuable exercise or trading strategy even for casual investors who want to allocate a small portion of their portfolio to high-risk, high-growth stocks. The CANSLIM approach can identify strong companies. 

By applying this strategy, you must analyze quarterly earnings growth and revenue growth, interpret market direction and trends, and evaluate institutional ownership and sponsorship. 

It can be useful to explore the use of technical analysis to time entry and exit points. However, starting small to gain expertise is essential because of the learning curve and the possibility of high risk. 

You can also consider working with a stock broker to understand the CANSLIM strategy and valuation, find stock screeners, or consider swing trading. 

Frequently Asked Questions