Anyone who has spent at least a few weeks reading Investor's Business Daily has come across this acronym: CAN SLIM. What are CAN SLIM stocks?
XThe seven letters represent the most important elements that go into the success of a stock. That's been determined from decades of studies of the biggest stock market winners in past bull cycles.
CAN SLIM is the brainchild of William O'Neil, a successful Los Angeles stockbroker who saw the value of computer analysis years before the personal computer revolution. He used computers to help reverse-engineer the most successful stocks and identify their characteristics, going back to the inception of their huge price runs. Later, in 1984, O'Neil founded IBD and served as its longtime chairman.
How To Identify CAN SLIM Stocks
Here's how CAN SLIM stocks are characterized, letter by letter:
C — Current earnings. One of O'Neil's most important findings was the power of high earnings growth. Every winning stock has it, and research specifically found that at least a 25% quarterly increase in earnings per share separated the winners. So, look for such a gain in EPS in the company's most recent one or two quarters. Sales growth also should be at least 25% in the most recent quarter.
A — Annual earnings. A fast increase in earnings can be short-lived. So choose those with at least a 25% rise in the past three years. Strong sales increases are also preferred.
N — New products, new trends, new highs. It's no coincidence that history's winning stocks shared a breakthrough product or service. Or, they were part of an industry wave. For example, homebuilders soared during the housing bubble of 2001-2005. New highs relates to buying stocks when they rise to new highs from proper chart patterns, such as the cup with handle, saucer, double bottom or flat base.
S — Supply and demand. This also relates to stock charts, and specifically the importance of volume. The amount of shares traded should be at least 40% above average when a stock clears a proper buy point. Volume also should be higher on up weeks while the base forms.
CAN SLIM Stocks: Leadership, Sponsorship, Market Direction
L — Leadership. If you're aiming for the most successful stocks, be picky. Choose the No. 1 or No. 2 stock in its industry group in terms of fundamentals and share-price performance. With IBD Stock Checkup, finding the leaders is a breeze. They'll be the stocks with highest Composite Ratings, a tool devised to measure stocks by the main elements of CAN SLIM.
I -Institutional sponsorship. Stocks will increase in value when institutional investors accumulate shares. So look for stocks with rising numbers of funds owning it, especially top-rated funds. Use the Accumulation/Distribution Rating and the Sponsorship Rating in IBD MarketSmith to gauge this.
M — Market direction. A stock can have all the above traits, but if the general market is weak, it won't be able to rally. Most stocks, good or bad, will follow the market's direction. It's best to buy stocks when the market is in a confirmed uptrend, and don't buy when the market is under pressure or in a correction. Check The Big Picture for the current status.
This article originally was published Feb. 28, 2020. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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