CANSLIM Strategy: A Guide to Identifying Growth Stocks

What Is CANSLIM?

CANSLIM is a proven strategy for identifying and selecting growth stocks, combining both fundamental and technical analysis methods. Developed by William J. O'Neil, founder of Investor's Business Daily, this approach empowers investors by highlighting stocks with strong growth potential.

Understanding each component of the CANSLIM acronym can guide investors to stocks poised for above-average growth, making it a crucial tool for seasoned market participants seeking to capitalize on emerging opportunities.

How CANSLIM Identifies Growth Stocks

CANSLIM, or CAN SLIM, is a method to spot stocks likely to grow faster than average. Each letter in the acronym represents a key factor to consider when buying stocks.

CANSLIM stocks possess these key traits:

• C: Current quarterly earnings per share (EPS) have increased sharply from the same quarter in the prior year. Generally, investors using CANSLIM want EPS growth of over 25%, but the higher the better.
• A: Annual earnings increases over the last three years. Again, annual EPS growth should ideally be in excess of 25% over the last three to five years.
• N: New products, management, or positive new events that push the company's stock to new highs. This type of headline news can cause short-term excitement, propelling a surge of optimism within the market and subsequent price appreciation.
• S: Scarce supply coupled with a strong appetite for a stock creates excess demand and an environment in which share prices can soar. Companies acquiring (re-purchasing) their own stock reduces market supply and can indicate an expectation of increased demand along with insider confidence in the firm.
• L: Laggard stocks are preferred within the same industry. Use the relative strength index (RSI) as a guide. The RSI is a momentum indicator that measures the magnitude of price changes to determine whether the price of a stock or asset is overbought or oversold. The RSI ranges from zero to 100. An RSI reading below 30 suggests that the stock is oversold and could be undervalued—creating a buying opportunity (bullish). An RSI reading of above 70 signifies that a stock could be overbought or overvalued and could be a chance to sell (bearish).
• I: Pick stocks that have institutional sponsorship by a few institutions with recent above-average performance. For example, this could be a recently public company, still supported by a small handful of well-known private equity firms. Be cautious of stocks that are over-owned by institutions, as you want to get in before the big money is fully invested.
• M - Determine market direction by reviewing market averages daily. A market average measures the overall price level of a given market, as defined by a specified group of stocks, such as the Dow Jones Industrial Average. CANSLIM stocks tend to be over-performers in bull markets.

Weighing the Pros and Cons of CANSLIM

CANSLIM is a bullish strategy for fast markets, so it is not for everyone. The idea is to get into high-growth stocks before the institutional funds are fully invested.

CANSLIM elements mirror a wish list for growth-seeking fund managers, which may boost buying demand over time. However, CANSLIM stocks can quickly decline if the market shifts and institutional investors move to safer assets.

CANSLIM can be a good fit for an experienced investor with high risk tolerance. These stocks shouldn't be held long-term as their value often relies on expected future growth. Any slowing in the growth trajectory, or the market as a whole, may result in the stock being punished.

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