The seven key characteristics of high-growth stocks
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What is CAN SLIM?
CAN SLIM, also referred to as “CANSLIM,” is an acronym where each letter identifies key characteristics to look for in a company. Developed by American William O’Neil, CANSLIM is used to aid in investment decisions by identifying strong-performing growth stocks.
Summary
- CAN SLIM is an acronym developed by American William J. O’Neil, founder of Investor’s Business Daily.
- CAN SLIM is used to identify strong-performing growth stocks.
- The acronyms of CAN SLIM are C – current quarterly earnings, A – annual earnings, N – new product, service, or management, S – supply and demand, L – leaders or laggards, I – institutional ownership, and M – market direction.
Who is William O’Neil?
William O’Neil, born March 25, 1933, is an American writer, entrepreneur, and stockbroker who is best known as the founder of Investor’s Business Daily – a competitor of The Wall Street Journal. O’Neil wrote several books, including How to Make Money in Stocks, The Successful Investor, and 24 Essential Lessons for Investment Success. The CAN SLIM investing system was developed by O’Neil during his time as a stockbroker in the late 1950s.
Breaking Down CAN SLIM
According to CAN SLIM, the key characteristics to look for in a growth company are:
C – Current Quarterly Earnings
Current quarterly earnings per share (EPS) should increase by at least 25% when compared to the same quarter from the year before. Additionally, accelerating EPS growth in recent quarters is a strong positive sign.
A – Annual Earnings Growth
Annual earnings should be increasing over the last five years. Additionally, yearly EPS should be growing at least 25% or more over the past three years.
N – New Product, Service, or Management
There should be new things that are positively affecting the company’s future and driving the stock price – new products, services, or a newly-appointed strong management team.
S – Supply and Demand
The company should have a high trading volume during price increases and have a small float (fewer shares outstanding) relative to other companies.
L – Leader or Laggard?
The company should have a relative price strength of 80 or higher. Relative price strength is a technical indicator and shows the performance of a stock relative to the market.
I – Institutional Sponsorship
The company should have an increasing number of institutional investors buying the stock. Examples of institutional investors include mutual funds, pension plans, banks, government bodies, and insurance companies.
M – Market Direction
Stock purchases should only be made when the market direction is upwards. O’Neil indicates that a stock may satisfy the first six factors of CAN SLIM and still sink if the market is on a decline.
Using CAN SLIM
By reading each criterion above, it should be apparent that the criteria are used to identify strong growth stocks (not value stocks!). CAN SLIM should be only used in a bullish market (see seventh criteria – market direction). Additionally, CAN SLIM should be used by seasoned investors as stocks that satisfy CAN SLIM are typically the ones that drop the fastest when market direction shifts and sentiment becomes bearish.
Additional Resources
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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