CANSLIM: What Is It?
CANSLIM is a growth stock selection strategy that combines technical and fundamental research methods.
William J. O’Neil, the creator of Investor’s Business Daily, established it.
Sometimes the acronym is spelled as CAN SLIM.
Knowing CANSLIM
Investors may utilize CANSLIM, or may SLIM, to find companies that have the potential to expand at a quicker rate than average.
Every letter in the acronym represents an important consideration for share buyers.
The following characteristics are present in stocks that are CANSLIM candidates:
C: Compared to the same quarter last year, the current quarterly profits per share (EPS) have climbed significantly.
EPS growth of above 25% is generally what investors utilizing CANSLIM look for, but the greater the better.
A: Rising yearly profits throughout the previous three years.
Once again, during the previous three to five years, yearly EPS growth should ideally have exceeded 25%.
N: New management, improved goods, or noteworthy recent developments that raise the company’s stock to all-time highs.
Such headline news has the potential to create short-term excitement, causing the market to experience a rise in optimism and consequent price increase.
S: Share prices may rise when there is a great demand for a stock and a limited supply, which leads to excess demand.
Businesses that repurchase their own shares decrease the amount of stock on the market and may be a sign of insider confidence in the company as well as an anticipation of higher demand.
L: In the same industry, laggard stocks are favored. As a guide, make use of the relative strength index (RSI).
The RSI is a momentum indicator that assesses the size of price fluctuations to identify overbought or oversold conditions in the price of a stock or asset.
The RSI has a range of 0 to 100. If the stock’s relative strength index (RSI) is less than 30, it may be oversold and provide a good chance to purchase (bullish).
A stock may be overbought or overpriced, and a reading of more than 70 on the RSI suggests that it may be time to sell (bearish).
I: Choose equities that have recently performed better than average and are sponsored by a small number of institutions.
This may be, for instance, a freshly listed business that is still backed by a select group of well-known private equity companies.
Institutionally over-owned companies should be avoided if you wish to buy before the big money has completely bought in.
M – Examine daily market averages to ascertain the direction of the market.
A market average, such as the Dow Jones Industrial Average, gauges the general level of prices in a certain market as determined by a particular set of companies.
In bull markets, CANSLIM stocks often outperform other equities.
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The letter L in CANSLIM
In O’Neil’s original CANSLIM concept, the letter L could represent either “Leader” or “Laggard”.
There are others who contend that stronger fundamentals and membership in a leading industry group or sector make leading companies a better investment choice than laggards.
Benefits and Drawbacks of CANSLIM
As a bullish strategy for quick markets, CANSLIM is not suitable for all investors.
Investing in high-growth companies ahead of the institutional funds’ full allocation is the plan.
It is just a matter of time before there is a greater demand for purchases since the components of CANSLIM are akin to a wish list for fund managers looking for expansion.
The problem is that if the market turns and those large-spending institutional investors start moving to safe-haven assets, equities that align with the CANSLIM strategy may be among the first to decline.
An experienced investor with a strong tolerance for risk may find CANSLIM to be a suitable choice.
These equities are not buyable; the majority of their value is priced in for future appreciation.
Instead, they must be retained. The stock can be penalized for any slowdown in the market’s overall growth trajectory.
Investopedia does not provide financial advice or services related to taxes or investments.
The material may not be appropriate for all individuals and is provided without taking into account the financial situation, risk tolerance, or investment goals of any particular person.
Performance in the past does not guarantee performance in the future. Investing has risk, which includes the potential for principle loss.
Correction—December 2, 2022: This item has been updated to clarify that, in the original William J. O’Neil CANSLIM model, the L represents both “Leaders” and “Laggards,” not only “Laggards.”
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