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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 in the 1950s by Investor's Business Daily editor William O'Neil who has reportedly made several hundreds of millions of dollars by consistently using its approach.
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 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:
- 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. The number of shares outstanding is a measure of supply, companies with fewer shares outstanding make bigger price gains than those with lots of shares.
- 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.
Books Referencing CAN SLIM
- Master Traders: Strategies for Superior Returns from Today's Top Traders (Wiley Trading), by Fari Hamzei and Steve Shobin (Hardcover - Oct 6, 2006)
- Technical Analysis: The Complete Resource for Financial Market Technicians, by Charles D. Kirkpatrick and Julie R. Dahlquist (Hardcover - Aug 18, 2006)
- Technical Analysis from A to Z, 2nd Edition, by Steven B. Achelis (Hardcover - Oct 2, 2000)
- Online Investing Bible (Bible (Wiley)), by Jill S. Gilbert, Thomas S. Gray, Claire Mencke, and Jill Gilbert Welytok (Paperback - Jan 2001)
- Short Term Trading, Long-Term Profits: The Complete Guide to Short-Term Trading, by Jon Leizman (Hardcover - Feb 15, 2002)
- The McGraw-Hill Investor's Desk Reference, by Ellie Williams (Hardcover - Oct 19, 2000)
- International Encyclopedia of Technical Analysis, by Jae K. Shim, Anique Qureshi, Jeffrey Brauchler, and Joel G. Siegel (Hardcover - Feb 2000)
- Trading Crowd, The (Cambridge Studies in Social and Cultural Anthropology), by Ellen Hertz (Paperback - Aug 31, 2005)
- Applying Elliott Wave Theory Profitably, by Steven W. Poser (Hardcover - Jul 18, 2003)
- Trade Your Way to Financial Freedom (2nd ed), by Van K. Tharp (Hardcover - 2007)
- The Vital Few vs. the Trivial Many : Invest with the Insiders, Not the Masses, by George Muzea (Paperback - Oct 29, 2004)
- Understanding Stocks, by Michael Sincere (Paperback - Aug 19, 2003)
- All About Retirement Funds : The Easy Way to Get Started by Ellie Williams Clinton (Paperback - Sep 17, 2003)
- The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies (Wiley Trading), by Mark Boucher (Hardcover - Oct 30, 1998)
- How Legendary Traders Made Millions by John Boik (Paperback - Mar 23, 2006)
- Dave Landry's 10 Best Swing Trading Patterns and Strategies by Dave Landry (Paperback - Nov 1, 2003)
- How to Make Money Selling Stocks Short by William J O'Neil and Gil Morales (Paperback Dec 24, 2004)
- The How to Make Money in Stocks Complete Investing System: Your Ultimate Guide to Winning in Good Times and Bad by William J O'Neil (Paperback August 10, 2010)
- Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market by Gil Morales and Chris Kacher (August 23, 2010)
- Market Wizards, by Jack D. Schwager (Paperback - 1993)