CAN SLIM is a growth stock strategy developed by investing expert and editor for Investor’s Business Daily, William O’Neil. The basic principle is to buy high growth stocks when they are making a large upward move based on a cup and handle price pattern.

This style of trading is a mix of heavy fundamental analysis with a more simple chart pattern technical analysis.

The CAN SLIM Mnemonic

Below are the seven basic facets to the trading methodology.

• C = Current quarterly earnings
• A = Annual earnings
• N = New products, management, or conditions
• S = Supply and demand
• L = Leaders over laggards
• I = Institutional Sponsorship
• M = Market Direction

Overview of CAN SLIM Trading

The high growth strategist is essentially looking for a high quality company that is aggressively growing. The earnings should be growing by at least 25 percent and accelerating. The relative strength of the price should be high which means the stock outperforms the market. Institutions should have a decent amount of ownership, but more importantly be increasing their position. And one should always trade with the market trend.

Cup and Handle Analysis

William O’Neil’s CAN SLIM method will indicate which stocks to buy, but does not provide specific entry and exit values except to time trades with bull and bear markets. That is why he included the chart signal of cup and handles to indicate timing.

The cup and handle formation represents a drop in price followed by accumulation of stock. This is the cup. The handle is a small pullback to shake out weak investors before the price rockets up. It should be noted that this is not the only formation used, but perhaps the most famous one.

CAN SLIM Strengths and Weaknesses

The high growth strategy outlined by William O’Neil provides a very strong mix between the two styles of trading: fundamental and technical.

The American Association of Individual Investors’ independent study claimed that IBD’s CAN SLIM investing achieved a 1521.7% gain vs. 54.92% for the S&P 500 from 1998 through 2007.

The criticisms against this method would be that neglecting one step could be devastating. For instance, the method requires liquidating in bear markets, and having a stop loss 7 or 8 percent below the purchase price. Since high growth stocks are also the biggest fallers in bear markets, it is absolutely essential to exit when the market is giving distribution clues.

As well, the strategy for bear markets is much more weak than the one for bull markets. Some investors also dislike that lower priced stocks, under 20 or even 10 dollars, is discouraged.

Who is CAN SLIM Trading For?

This is a great strategy for investors who are willing to put forth the due diligence for stock selection. Active investors who enjoy tracking the market sentiment will find this method useful. As well as people who have an eye for chart pattern recognition. Whatever the case, many investors for a long time to come will likely follow William O’Neil’s high growth CAN SLIM trading methods for many more years to come.

Sources

Kathleen Sherman, “IBD’s CAN SLIM(R) Investing System Outperforms: +1521.7 vs. S&P 500 +54.92”, 31 January 2008, Reuters.

William J. O’Neil, “IBD University”, Investors.com.

“The Greatest Investors: William J. O’Neil”, Investopedia.