Can slim

What Is CAN SLIM?

CAN SLIM is an investment strategy that combines both fundamental analysis and technical analysis to identify high-growth companies with the potential for significant stock price appreciation. This approach falls under the broader category of investment strategy and is specifically geared towards growth stocks. The name CAN SLIM is an acronym, with each letter representing a specific criterion that William J. O'Neil, its creator, identified as common among top-performing stocks before they experienced major price gains. The objective of the CAN SLIM method is to help investors discover leading stocks before they make substantial price advances, focusing on companies demonstrating strong earnings, innovative products, and significant institutional interest.

History and Origin

The CAN SLIM investment strategy was developed by William J. O'Neil, a successful stockbroker and entrepreneur. Frustrated by the lack of comprehensive data in financial newspapers, O'Neil founded Investor's Business Daily (IBD) in 1984.²⁰ IBD was initially launched as Investor's Daily, a national business newspaper, and its name was changed to Investor's Business Daily in 1991.

O'Neil systematically studied hundreds of top-performing stocks dating back to the 1950s to identify common characteristics shared by these market leaders. His extensive research led to the formulation of the CAN SLIM methodology, which he detailed in his best-selling book, How to Make Money in Stocks.¹⁹ The core idea behind CAN SLIM was to provide individual investors with a systematic approach to stock selection, mimicking the data-driven research often available only to institutional investors.¹⁷, ¹⁸

Key Takeaways

• CAN SLIM is a growth-oriented investment strategy combining fundamental and technical analysis.
• It is an acronym representing seven criteria: Current Quarterly Earnings, Annual Earnings Growth, New Products/Management/Highs, Supply and Demand, Leader or Laggard, Institutional Sponsorship, and Market Direction.
• Developed by William J. O'Neil, founder of Investor's Business Daily, it aims to identify top-performing stocks.
• The strategy emphasizes buying stocks as they break out of price consolidation patterns, often with a strict stop-loss order to limit potential losses.
• CAN SLIM is generally considered a bullish strategy, performing best in bull market conditions.

Formula and Calculation

While CAN SLIM does not involve a single mathematical formula in the traditional sense, each letter represents a quantitative or qualitative criterion that an investor evaluates. Many of these criteria require specific calculations or thresholds:

• C - Current Quarterly Earnings Per Share (EPS): This criterion looks for companies with significant growth in their most recent quarterly earnings per share compared to the same quarter in the prior year. O'Neil generally suggested looking for EPS growth of at least 25%, with higher percentages being more favorable.¹⁶
• A - Annual Earnings Growth: This refers to consistent and strong annual EPS growth over the last three to five years. Ideally, annual EPS growth should exceed 25%. A strong annual return on equity (ROE) of 17% or more is also considered.
• N - New Products, New Management, New Highs: This factor emphasizes innovation, significant corporate changes, or the stock reaching new price highs, often emerging from a sound chart pattern.¹⁵
• S - Supply and Demand: This refers to the dynamics of a stock's shares outstanding and trading volume. A lower supply of shares coupled with high demand, especially during price increases, can drive prices higher.¹⁴
• L - Leader or Laggard: Investors should aim to buy leading stocks within leading industries. This is often assessed using a stock's relative strength rating, which compares its price performance to the overall stock market.
• I - Institutional Sponsorship: This criterion examines the presence and quality of institutional investors holding the stock. Increasing institutional ownership indicates growing confidence in the company.¹³
• M - Market Direction: This final, crucial factor involves assessing the overall market trend. O'Neil emphasized that even the best individual stocks are unlikely to perform well in a declining market.¹²

Interpreting the CAN SLIM

Interpreting CAN SLIM involves a systematic review of a company's financial and market characteristics to determine its suitability for investment. For example, for the "C" and "A" criteria, a company's recent and historical earnings reports would be scrutinized for accelerating growth rates. A company showing consistent quarterly EPS growth of 30% and annual growth of 28% for the past three years would be a strong candidate. For the "N" criterion, investors would look for recent news of groundbreaking product launches, significant management shake-ups, or the stock hitting a 52-week high after a period of consolidation.

The "S" component requires examining share structure and daily trading volume to gauge buying and selling pressure. For "L," investors would compare the stock's performance to its peers and the broader market using relative strength indicators. The "I" component involves checking recent filings and reports to see if reputable institutions are accumulating shares. Finally, "M," the market direction, is paramount; even if a stock meets all other CAN SLIM criteria, investing during a confirmed bear market is generally advised against. The strategy encourages a disciplined approach to portfolio management, emphasizing quick loss-cutting and allowing winning positions to run.

Hypothetical Example

Imagine an investor, Sarah, is looking for growth stocks using the CAN SLIM strategy. She identifies "Tech Innovators Inc." (TII) as a potential candidate.

1. C (Current Quarterly EPS): Sarah checks TII's latest earnings report. Its most recent quarterly EPS is $1.20, a 35% increase from $0.89 in the same quarter last year. Pass.
2. A (Annual EPS Growth): She reviews TII's annual reports for the past three years, noting EPS growth of 30%, 28%, and 32%. Pass.
3. N (New Products, New Management, New Highs): Sarah learns TII recently launched a revolutionary AI-powered software that is gaining significant market traction. The stock also just broke out of a multi-month base pattern to a new all-time high of $150. Pass.
4. S (Supply and Demand): TII has a relatively low number of shares outstanding, and its trading volume has significantly increased on up days, indicating strong demand. Pass.
5. L (Leader or Laggard): TII is a clear leader in the burgeoning AI software industry, consistently outperforming its competitors. Its relative strength rating is in the top percentile. Pass.
6. I (Institutional Sponsorship): Sarah sees that several well-regarded mutual funds and hedge funds have recently increased their stakes in TII. Pass.
7. M (Market Direction): Sarah confirms that the overall stock market is in a confirmed uptrend, a bull market, with major indexes like the S&P 500 and Nasdaq Composite advancing.¹¹ Pass.

Based on this analysis, TII appears to be a strong CAN SLIM candidate for Sarah to consider for investment.

Practical Applications

The CAN SLIM methodology is primarily applied by individual investors and active traders seeking to identify companies with robust fundamentals and strong price momentum. It is a structured approach for stock selection, particularly popular among those who follow the principles of William J. O'Neil and Investor's Business Daily. Investors use CAN SLIM criteria to screen for potential opportunities in various market conditions, although it is best suited for bull market environments.¹⁰

Beyond mere stock picking, CAN SLIM integrates elements of risk management by advocating for quick loss-cutting. The strategy explicitly recommends using a strict stop-loss, typically at 7% or 8% below the purchase price, to limit downside exposure. This systematic approach helps investors protect their capital gains and manage losses in volatile markets. Studies have explored the effectiveness of the CAN SLIM strategy, with some indicating its potential to outperform market benchmarks when applied correctly. For instance, research applying a modified CAN SLIM strategy found that it outperformed the NASDAQ 100 Index by 0.94% per month over a specific period.⁷, ⁸, ⁹

Limitations and Criticisms

Despite its proponents and reported successes, the CAN SLIM strategy faces several limitations and criticisms. One significant challenge is its requirement for active portfolio management and continuous monitoring of market conditions and individual stock performance.⁵, ⁶ This active approach can be time-consuming and difficult for average individual investors who may lack the expertise or resources for consistent analysis of earnings per share reports, price-volume action, and industry dynamics.

The strategy's reliance on "new highs" as a buy signal can also be perceived as buying into strength, which may increase the risk of buying at inflated prices just before a correction, especially if the broader stock market reverses direction. Furthermore, while historical studies have sometimes shown favorable results, some analyses suggest inconsistent performance, with certain CAN SLIM-based funds underperforming market benchmarks in recent years.³, ⁴ Critics also point out that the strategy is inherently bullish, and its focus on high-growth stocks can lead to higher volatility and larger drawdowns during bear market phases or significant market corrections.¹, ² Adherence to the strict stop-loss rule is crucial, as failing to cut losses can lead to substantial capital impairment, especially in rapidly declining markets.

CAN SLIM vs. Value Investing

CAN SLIM and Value Investing represent two fundamentally different philosophies for approaching the stock market. The core distinction lies in their primary focus for identifying investment opportunities.

While CAN SLIM prioritizes companies demonstrating current strength and potential for continued rapid expansion, Value Investing seeks companies whose inherent worth is not yet reflected in their stock price, often viewing temporary weakness as an opportunity. The confusion sometimes arises because both aim for capital appreciation, but their methods of identifying opportunities and managing risk management differ significantly.

FAQs

What does each letter in CAN SLIM stand for?

Each letter in CAN SLIM represents a specific characteristic: Current quarterly earnings per share; Annual earnings growth; New products, new management, or new highs; Supply and demand; Leader or laggard; Institutional sponsorship; and Market direction. These are the criteria William J. O'Neil identified for selecting top-performing growth stocks.

Is CAN SLIM a good strategy for beginners?

While the CAN SLIM strategy provides a structured framework, its detailed requirements for analyzing earnings per share, technical analysis chart patterns, and understanding market trend can be complex for beginners. It requires significant time commitment for research and active portfolio management. Beginners might find it challenging to apply all criteria consistently without prior experience.

Does CAN SLIM work in all market conditions?

The CAN SLIM strategy is primarily designed for and performs best in bull market conditions, where the overall stock market is in an uptrend. While it includes criteria for identifying strong individual stocks, even the best stocks can struggle in a prolonged bear market. The "M" for Market Direction is a critical component, suggesting that investors should largely sit on the sidelines when the market trend is negative.