If you’re looking for a method to pick high-potential stocks, William J. O’Neil’s CAN SLIM strategy is a powerful option to consider. Created by the founder of Investor’s Business Daily, this strategy combines the best of both worlds—technical analysis and fundamental analysis—to help investors identify stocks with the potential for growth. It’s been used by countless investors to find stocks that outperform the market.
In this guide, we’ll break down each component of the CAN SLIM strategy, explore its advantages, talk about some potential risks, and explain how you can use it to boost your chances of making money in the stock market.
What is CAN SLIM?
CAN SLIM stands for seven key criteria that you should evaluate when looking for promising stocks:
- C: Current Earnings Growth
- A: Annual Earnings Growth
- N: New Products, Services, or Leadership
- S: Supply and Demand
- L: Leader or Laggard
- I: Institutional Sponsorship
- M: Market Direction
These seven factors help you narrow down your stock picks to companies that have strong growth potential. Let’s explore each in more detail.
C: Current Earnings Growth
The first thing to check is a company’s earnings for the latest quarter. Ideally, the company should have posted earnings growth of 25% or more compared to the same quarter last year.
Why it matters: Companies with rapidly growing earnings often attract more investors, which can drive up stock prices. Steady growth shows that a company is in a strong financial position.
A: Annual Earnings Growth
This focuses on a company’s performance over a longer period…usually three years. The company should have an average annual earnings growth rate of at least 25% over this time frame.
Why it matters: If a company can grow its earnings consistently over multiple years, it’s likely to have strong fundamentals and management, making it a good long-term investment.
N: New Products, Services, or Leadership
Companies that are innovating—whether it’s through introducing a new product, service, or even leadership—often have a higher chance of growing fast. Businesses that adapt and change can create new revenue streams and boost investor confidence.
Why it matters: Innovation can be a key driver of growth. When a company does something new and different, it often sees a positive impact on its stock price as it captures attention and expands its market.
S: Supply and Demand
This criterion looks at how many shares are available for trading (the supply) versus how many people want to buy them (the demand). Stocks with fewer available shares but high demand are more likely to see their prices increase.
Why it matters: Like any product, when the demand is high but the supply is limited, the price tends to go up. For stocks, this principle holds true, and limited availability can drive prices higher.
L: Leader or Laggard
To use CAN SLIM effectively, you should focus on market-leading companies…those that outperform their peers. Stocks in the top 20% of their industry are usually better positioned to keep growing, while laggards struggle to keep up.
Why it matters: The strongest companies in a sector typically outperform during market up trends and weather downturns better than their competitors. By focusing on leaders, you increase your chances of finding stocks that can outperform.
I: Institutional Sponsorship
Institutional investors, such as mutual funds or hedge funds, play a significant role in the stock market. This part of the CAN SLIM strategy suggests that you should look for companies with institutional support, meaning they’re being bought by these large, professional investors.
Why it matters: Institutions usually have deeper resources and research capabilities. When they invest in a stock, it often signals long-term confidence, which can result in more sustained price growth.
M: Market Direction
Lastly, you need to keep an eye on the overall market direction. Even the best stocks can decline in a market downturn, so O’Neil stresses the importance of buying when the broader market is in an uptrend.
Why it matters: Timing matters. A strong company’s stock price might still fall if the overall market is declining. Investing during confirmed up trends improves your chances of making gains.
The Benefits of Using CAN SLIM
The CAN SLIM strategy has several key advantages that make it appealing for growth-focused investors:
1. Proven Success: O’Neil used this strategy himself to achieve high returns, and many other investors have done the same by applying it.
2. Growth-Oriented: The focus is on finding companies with potential for high earnings growth, which can lead to significant price appreciation.
3. Combines Multiple Approaches: The strategy is a mix of fundamental and technical analysis, providing a well-rounded approach for evaluating stocks.
4. Institutional Backing: You’re aligning your strategy with where the big money is going, which can lead to more informed decisions.
5. High Probability of Success: By filtering out under performing stocks and only focusing on high-growth companies, you’re more likely to find winners.
Possible Downsides of CAN SLIM
While CAN SLIM is a powerful strategy, it’s not without its challenges:
1. Time-Consuming: To apply this strategy properly, you’ll need to invest significant time in researching earnings, market trends, and company developments.
2. Timing is Crucial: Getting into the market at the wrong time can still lead to losses, even if you follow all the rules. Knowing when to buy is key.
3. Volatility Risk: The focus on high-growth stocks means the strategy can lead you to companies that are more volatile. These stocks can experience sharp declines during market downturns.
4. Short-Term Focus: CAN SLIM prioritizes fast-growing companies, which might lead you to overlook slower but stable, long-term performers.
How to Make Money with CAN SLIM
If you’re ready to put the CAN SLIM strategy into action, here’s how to get started:
Step 1: Screen for Stocks
The first step is to find stocks that meet the CAN SLIM criteria. You can use a stock screening tool (many are available online) to look for companies with strong quarterly and annual earnings growth, institutional support, and a small supply of available shares.
Step 2: Dig into Earnings
Look carefully at the company’s earnings—both quarterly and annually. You want to see consistent earnings growth of at least 25%. This is one of the most important metrics in the strategy.
Step 3: Check the Market Trend
Before you buy, make sure the broader market is in an uptrend. This helps ensure that you’re not buying just as the market is about to drop. Use market indicators like moving averages and volume to confirm the market’s overall health.
Step 4: Follow Institutional Money
Look for stocks that have strong institutional sponsorship. If mutual funds, hedge funds, or other big investors are buying shares, it’s a sign that the stock could have strong long-term potential.
Step 5: Buy with a Plan
Once you’ve identified a stock that fits the CAN SLIM criteria, buy it. However, don’t forget to set a stop-loss order, typically around 7-8% below your purchase price. This will help limit your losses if the stock drops unexpectedly.
Step 6: Monitor Your Investments
After buying, continue to track the company’s performance and market conditions. If the company’s earnings start to slow or the market shifts, be prepared to sell.
Final Thoughts
The CAN SLIM strategy offers a disciplined way to find high-potential growth stocks. By focusing on earnings growth, market leadership, and institutional sponsorship, you increase your chances of picking stocks that can outperform. However, like any investing strategy, CAN SLIM has its risks. Market timing is crucial, and volatile growth stocks can swing widely in price.
That said, for investors who are willing to do the research and keep a close watch on the market, CAN SLIM can be an effective tool for making money in the stock market. By sticking to the strategy’s principles and using it thoughtfully, you can improve your chances of success and potentially see significant returns on your investments. In today’s world of AI, a lot of the heavy lifting in research can be completed in a very short period of time, which makes CAN SLIM much easier for retail investors to make money with it.
Suggested Additional Reading:
“How to Make Money in Stocks Getting Started: A Guide to Putting CAN SLIM Concepts into Action” – by Matthew Galgani
Through both bull and bear markets, Investor’s Business Daily’s CAN SLIM® Investment System has consistently been the #1 growth strategy, according to the American Association of Individual Investors. How to Make Money in Stocks―Getting Started shows you how to put the CAN SLIM System to work for you.
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