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As you spend more time in the world of investing, you’ll probably hear the term “CAN SLIM” thrown around sooner or later.
It may sound like the latest diet fad (“drink CAN SLIM before going to bed and watch the fat melt away”) but it ain’t.
The CAN SLIM investing system is actually an investing strategy developed by William O’Neill, the founder of Investor’s Business Daily. He writes about the strategy in his highly regarded investing book “How to Make Money in Stocks: A Winning System in Good Times or Bad”.
This book is on the list of “must read” investing books – especially for those interesting in growth investing. I think it is a great book and recommend it… but do have a few issues with it which I’ll get to in a bit.
For now, just understand that CAN SLIM is a strategy for investing in Growth stocks. It involves aspects of both fundamental analysis and technical analysis.
The idea behind it basically comes down to finding high growth stocks before institutional fund managers dump gobs of money into the stocks (which pushes stock prices way up).
Here’s what all the letters stand for…
O’Neill says that Earnings Per Share (EPS) is the most important number to look at when it comes to picking a stock. You want to look for companies to invest in that have shown big ass increases in their currently quarterly earnings per share compared to the prior year’s same quarter.
Bigger is better (at least in this case Romeo). According to the book, 25% to 50% increases in EPS is the minimum you wanna look for. That said, 75% of the best performing stocks between 1952 and 2001 averaged over a 70% increase in quarterly earnings per share (year over year) before they began their big moves.
You also wanna look for annual EPS increases in each of the last 3 years. Ideally you want to focus on companies with annual earnings growth of 25% – 50%. If they’re over 100%, even better.
You also want to look at Return on Equity (ROE) which is a company’s net income divided by shareholder’s equity (shareholder’s equity is a company’s total assets minus its total liabilities). ROE is a way to tell how efficiently a company uses its moolah.
For CAN SLIM, you wanna see ROEs of at least 17%. 25% – 50% is even better.
This really comes down to the thought that there has to be something new to cause a stock price to blast off like a SpaceX rocket.
You want to find companies with that newness factor. Like a new product/service or new management. Then when you see the stock starting to emerge from a strong base on its stock chart, at a price that’s close to or at an all-time high and it does this on increased trading volume… it’s a good time to buy.
The volume of trading in a stock is a super important thing to keep your eye on.
When stocks pull back in price, you ideally want to see the volume dry up at some point. This means most of the sellers are out of the stock.
When stocks rally, you wanna see surges in volume which usually means institutions are gobbling up shares.
When a stock breaks out of a base, it should be on high volume (50% or so above normal). This can be a good sign it’s time to buy and the price can keep movin’ on up.
Stocks are often lumped together in industry groups. Software. Banking. Healthcare.
And often they’re further lumped into subdivision of those main groups.
For the CAN SLIM model your job, if you choose to accept it, is to find the top 1, 2 or 3 stocks in a specific sector.
“Top” is defined as the companies that have the best quarterly and annual growth, highest ROE, best profit margins, strongest sales growth and most dynamic stock price action.
The thinking is that companies that check these boxes have unique/superior products or services and will keep growing their market share at the expense of their competitors.
Look for companies that are being scooped up by institutional buyers. Cuz institutional buyers move stock prices.
However, the ideal is to find companies that have a smaller number of institutional investors that have above average performance.
If too many institutions are already on board, however, you may have missed the boat.
This is a super important factor of the CAN SLIM strategy. Maybe the most important even.
This is why I think the title of O’Neill’s book falls short. It promises “A Winning System in Good Times and Bad”. But that’s not really true. In a bad market, you should be largely sitting on the sidelines if you’re following the CAN SLIM method.
I guess if you do that and don’t lose money in stocks when everyone else is, that could be considered a win. But that’s not what the title implies.
The CAN SLIM investing system is not a strategy for the newbie. You should take some time to learn the ropes of investing (and, especially reading charts) before jumping into it.
That said, I’d highly recommend newbies pick up a copy of How To Make Money in Stocks.
It’s got some great information that’ll help speed up your learning curve. There’s a lot of the book (the 2nd half in particular) that’s a thinly veiled sales pitch for Investor’s Business Daily. But you can gloss over that stuff if you want and focus on the investing meat and potatoes the book offers.
At the end of the day, CAN SLIM can deliver great returns if you do all the homework required to pick the right growth stocks. Just keep in mind than when a market shifts from bullish to bearish, these growth stocks can plummet the fastest.
If the CAN SLIM investing system sounds like a good strategy to you, that’s awesome. Have at it!
If it ain’t your cup o’ Red Bull, there are plenty of other strategies out there you can use. When it comes to investing the most important thing is to just have a sound strategy and rules that you stick to. Cuz just winging it is a great way to go broke (if not into serious debt).
For a list of other strategies that may better suit your style than CAN SLIM check out our investing strategies article here.