CANSLIM is an acronym which describes seven characteristics that stock usually have before making the biggest price gains. The approach was developed by the founder of Investor’s Business Daily, William O’Neil. In this article, we will explain what CANSLIM means and how to incorporate it into your trading strategy.
CANSLIM – What do the Letters Stand for?
C – Current earnings. The earnings should always be accelerating and this is never a bad sign. Furthermore, according to the CANSLIM trading style, current earnings per stock should be up no less than 25% compared to the same financial order last year.
A – Annual earnings growth. Yearly earnings should also be up at least 25% compared to the previous year. When it comes to annual returns on equity, they need to be at least 17%.
N – New product or service. This refers to the idea that companies should always innovate their products and services and develop new ones. This allows the stocks to reach new high prices.
S – Supply and demand. The relation between supply and demand has the power to make stock prices soar. If the supply is relatively scarce and the demand grows strong, excess demand is created which makes the prices rise.
L – Leader or Laggard. Be the leader and purchase “the leading stock”. This is quite relative and not easy to measure, but Relative Price Strength Rating of the stock can help. It should always be at least 80. The stocks should also be in a leading industry.
I – Institutional sponsorship. This means you should always buy stocks that are increasingly owned by large institutions, like mutual funds and banks. You can measure this by using the Accumulation/Distribution Rating.
M – Market Direction. Nasdaq and S&P 500 market indexes should be consulted in order to determine the market directions. It’s best to invest when you notice definite uptrends.
CANSLIM Strategy Explained
So far, we have explained the basic principles of the CANSLIM trading style. However, they might seem too rigorous if you are a newcomer to stock trading. So what exactly should you look for in a stock?
C: You don’t really have to set the bar at 25%, but you should always look for stocks that have earnings increasing quarterly. Any stock that has earnings steadily increasing might be worth keeping on your watchlist.
A: Annual growth becomes more important if you are searching for stocks with a steady growth that you can keep in your portfolio for longer periods of time. It’s a good idea to always look at returns on equity, but you don’t really have to set the threshold at 17%.
N: Nobody can deny the importance of new products and services of a company for creating a growth pattern. Some investors like to go even further and look for stocks that are new in general.
S: Our advice regarding supply and demand is to always look at the trade volume. It’s a good sign if the trading volume is 50% greater compared to the 50-day average.
L: This one is really a question of style. Choosing a leading stock in a leading industry is definitely the safest choice. However, choosing a stock outside of leading industries which has the Relative Price Strength Rating steadily increasing might also turn out to be a good investment.
I: This one is very important, and it’s a great piece of advice even if you are not using CANSLIM in your strategy. The ones who move the market are the big institutional investors, so it’s always a good idea to look for stocks with increasing institutional sponsorship.
M: This is probably the most important characteristic of the CANSLIM trading style. Be informed about the market trends and avoid trading in the opposite direction. It’s a good idea to make a personal index of the stocks you feel are most successful in the market and monitor their action.