The short version
- The CANSLIM is an investing strategy that William J. O'Neil of Investor's Business Daily came up with.
- The words are an acronym that stands for: Current quarterly earnings per share increasing, annual earnings increasing, new products or service, small capitalization and strong market demand, leader or laggard — look for industry leaders, institutional ownership, and market direction.
- The strategy uses fundamental and technical analysis that is best employed during periods of strong market growth.
What is the CANSLIM investing strategy?
CANSLIM is an investing strategy created by William J. O'Neil of Investor's Business Daily. It relies on a combination of fundamental and technical analysis methods to assist investors in choosing the best potential stocks.
The letters in CANSLIM represent these criteria:
- C: Current quarterly earnings per share increasing
- A: Annual earnings increasing
- N: New products or services
- S: Small capitalization and strong market demand
- L: Leader or Laggard — Look for industry leaders
- I: Institutional ownership
- M: Market direction
Based on these criteria, CANSLIM investors are poised to find stocks with short- to mid-term growth potential. It's a bullish strategy where investors try to find and buy high-growth stocks before the majority of institutions buy shares, driving up demand and price.
Here's a deeper look at what each of these criteria represents in stock analysis. You may use these to guide your choices when setting up a stock screener or browsing the market for new investment ideas.
More: Technical analysis vs fundamental analysis
Breaking down CANSLIM
Letters C (current quarterly earnings per share increasing) and A (annual earnings increasing) are related and focus on the company's profits. C suggests finding stocks with a trend of strong increasing quarterly earnings per share. A focuses on the annual earnings trend. For CANSLIM, a faster growth rate is better.
The N (new products or services) points to companies with new things that could drive outsized revenue and profits. Only innovative companies get CANSLIM approval.
S (small capitalization and strong market demand) focuses on smaller companies with high growth potential. It's easier for a company worth $100 million to grow by 10x than a company worth $10 billion to grow 10x. The market prices of stocks with strong demand are bound to go up.
L (leader or laggard) advises investors to narrow their search to industry leaders. If there are many competing companies in an industry, some are bound to stand out while others may lag. O'Neil urges you to invest in the former, not the latter.
I (institutional ownership) requires finding stocks with some institutional ownership already but not by an overwhelming margin. Buying in before the majority of funds and other institutional investors allows you to capture a period of rapid price improvement.
M (market direction) looks at market momentum. If a company's daily moving average is trending upward and the stock meets the rest of the criteria on the list, CANSLIM argues that the stock is likely to continue the trend in an upward direction.
CANSLIM is an active investing strategy focused on growth stocks. Active investing is riskier than long-term passive strategies like value investing. It's best for investors with some investment experience and tolerance for volatility and losses.
When to use the CANSLIM investment strategy
CANSLIM investing is best in periods of market growth. If you try to employ CANSLIM during a recession or market downturn, your efforts will likely fall flat. There are exceptions. But CANSLIM works best in a good economic period.
There is no specific time of year when CANSLIM works better than another. The most important part is picking the right stock during the right set of market conditions.
Remember that there's never any guarantee in the stock market. Even if you pick the perfect CANSLIM stock, there's a chance company performance or market conditions could lead to significant investment losses.
When looking for CANSLIM stocks, use your regular trading account, such as a traditional online brokerage account. Long-term retirement assets may be better allocated to low-fee index funds.
Don't have a broker? Check out our list of Best Online Stock Brokers.
Pros and cons of the CANSLIM investing strategy
- Clear criteria for picking stocks: CANSLIM includes a clear set of rules to help you narrow down a list of stocks poised for growth.
- Uses a combination of financial data and market trends: Relies on a mix of fundamental and technical analysis rather than purely focusing on one set of metrics.*
- Follows sound investment strategies: Each of the components of CANSLIM is based on reasonable inputs that could indicate a stock will go up in value.
- Short-term investment strategy: This is a short-term active strategy that involves more volatility and risk than passive long-term investment plans.
- May be difficult for newer investors: Beginner investors may struggle to understand CANSLIM criteria and implement their findings in a successful investment portfolio.
- Opportunities for losses: Active, hands-on strategies bring an outsized chance of losses compared to other investment theories. Keep in mind that any investment can go down in value.
Does CANSLIM investing really work?
CANSLIM investing works. But nothing is 100% in the stock market. Several studies show that CANSLIM stocks tend to outperform the market as a whole.
The American Association of Individual Investors has performed several tests that consistently show CANSLIM works. In the most recent update, CANSLIM stocks outperformed the S&P 500 by about 2x over a 10-year period.
Keep in mind that these results came during a specific set of market conditions. CANSLIM may be more or less effective in the future. However, based on many tests and studies, CANSLIM is a reasonable investment strategy.
Who is the CANSLIM investing strategy best for?
CANSLIM is best for intermediate to experienced investors. Some of the CANSLIM criteria require investment knowledge and the use of financial ratios. Most expert investors should easily understand CANSLIM.
You may find that CANSLIM makes sense for part of your portfolio but not your entire strategy. As discussed above, you may use CANSLIM to pick stocks in an active brokerage account while leaving retirement accounts invested in diverse index funds.
Should you follow the CANSLIM strategy?
Investment decisions are personal. There's no one-size-fits-all answer for everyone. If you're in doubt, consider working with a financial professional to review your investment strategy. For investors looking to start with CANSLIM, it's a good idea to start slowly. Avoid any investments you don't fully understand. When you go into an investment plan like CANSLIM with your eyes wide open, you're in the best position for success.