CAN SLIM is a system for stock picking, coined by William J. O'Neil. Each letter in the acronym corresponds to a specific key factor to look for when buying shares in a company. This strategy is intended to help investors identify growth stocks using a combination of both basic and technical analysis techniques. The idea is to get into high-growth stocks before the institutional funds are fully invested.
C - Current quarterly earnings per share has increased sharply from the same quarters' earnings reported in the prior year. Generally investors using CAN SLIM want EPS growth of over 20%, but the higher the better.
A - Annual earnings increases over the last five years. Here again the annual EPS growth is ideally over 20% over the last 3-5 years.
N - New products, management, or new events/information that pushes the company's stock to new highs. This type of headline news can cause short-term excitement, propelling a surge of optimism within the market and subsequent price appreciation.
S - A relatively scarce supply, coupled with strong demand for a stock creates excess demand. This is an environment in which stock prices can soar. Companies acquiring (re-purchasing) their own stock reduces market supply and can indicate their expectation of increased demand, along with insider confidence in the firm.
L - Choose leading over laggard stocks within the same industry. Use the relative strength index (RSI) as a guide. The RSI ranges from zero to 100. A RSI indication above 30 suggests a buying opportunity (bullish), while above 70 signifies a chance to sell (bearish).
I - Pick stocks, which have institutional sponsorship by a few institutions with recent above average performance. For example, this could be a recently public company, still supported by a small handful of well known private equity firms. Be cautious of stocks that are over owned by institutions as you want to get in before the big money is fully invested.
M - Determining market direction by reviewing market averages daily. A market average measures the overall price level of a given market, as defined by a specified group of stocks, such as the Dow Jones Industrial Average (a price-weighted average of 30 blue chip stocks listed on the NYSE). CAN SLIM stocks tend to be over-performers in bull markets.