CANSLIM Explained

If Thanos was an investor in a bull market, CANSLIM would be his gauntlet. 

Like the gauntlet, CANSLIM is powered by multiple elements that combine together to form one mighty tool. And you can fast-track your retirement goals too, just like Thanos, if you use it properly.

Instead of offering ultimate control over all realms, CANSLIM offers something less dramatic yet equally enticing for a retail investor—a solid system for picking the absolute best growth stocks in bull markets. 

First published in 1995, CANSLIM is one of the most popular growth investing strategies today. It was designed to search for growth stocks with the most significant potential gains in a bull market. Considering that many consider the current market conditions to be “fully bullish,” it might be worth looking into this time-tested strategy for both new and veteran investors alike.

In this article, we break it down and go through the elements individually and then look at the strategy as a whole. We also ponder its advantages and disadvantages and whether it’s still relevant for the modern retail investor in today’s charged markets.

What Does CANSLIM Stand For? 🤔

CANSLIM sounds like a GTA cheat code, but it’s actually a stock market cheat code (sometimes).

It is an investment strategy that utilizes both technical analysis and fundamental analysis. The goal is to find growth stocks with very high upward potential. Thus, it is particularly suitable to use during bull markets. 

It was created by William O’Neil (founder of the Investor’s Business Daily) after studying 500 of the biggest stock market winners from 1953 to 1993. CANSLIM was first published in “How to Make Money in Stocks: A Winning System in Good Times or Bad” (1995). 

According to William O’Neil, stocks with high growth potential share several common characteristics and conditions. When you compile all those meticulously researched factors into a memorable acronym, you get CANSLIM.

Each letter of the acronym stands for an essential aspect that investors should look out for in a stock. Here are all of them in order:

• ☑️ C –  Current quarterly earnings
• ☑️ A – Annual earnings growth
• ☑️ N – New product or service
• ☑️ S – Supply and demand
• ☑️ L – Leader 
• ☑️ I  – Institutional sponsorship
• ☑️ M – Market Direction

For seasoned investors, some or most of these terms will be familiar. You also might have noticed that the strategy considers both the fundamental factors, such as the company’s potential to innovate and technical factors like the market trend in general.

Over time, CANSLIM has proven to hold a lot of merits and is widely regarded as one of the most successful investment strategies in general. In fact, an ETF was launched in 2015 that focused on companies listed on the IBD 50 list published by Investor’s Business Daily.

Of course, no investment strategy can work all the time as markets are unpredictable by nature. Yet even though all models might not be 100% accurate, some are more useful than others. Even if you do not plan on using CANSLIM as a strategy, learning more about its elements and rules can be a valuable lesson and a root for new investing ideas of your own.

The Elements of CANSLIM 💡

There are seven elements in CANSLIM, each represented by a letter. This section takes a very in-depth look into each component to see how they work on a practical level. 

To demonstrate the strategy, we also look at why one of the most hated footwear companies in America at one point can have an explosive price action over the next few years by putting it under the scanner of CANSLIM.

C – Current Quarterly Earnings 💰

The first element of CANSLIM, ‘C,’ stands for the current quarterly earnings of the company. Since we’re looking for growth stocks, it’s natural to focus on growth metrics in the latest quarterly earnings.

According to CANSLIM, the stock should have a quarterly earnings-per-share (EPS) growth of at least 25% for us to be interested in it. 

In practice, the stock might (and ideally should) have a much higher growth rate. So a high growth rate in the EPS, along with growing sales and a healthy return-on-equity (ROE), should be expected too.

The logic behind it is the simple assertion that companies with growing revenues will likely see an uptick in their stock price soon, especially if the market conditions remain bullish. 

Let’s look at a practical example of a stock (one that you might not have expected) that fulfills this criterion: Crocs, Inc (CROX). It might be surprising news to some, but the stock has been rising quite well recently, beating expectations and looking forward to a great future. 

So does CROX satisfy the conditions in CANSLIM? Let’s first take a look at its quarterly earnings growth to find out!

CROX (up 166.74% from 31st Dec 2020 to 31st Jun 2021)

Since CROX does have a healthy growth in EPS (way above the required 25%), we can move ahead and see if it qualifies when put under the lens of the other conditions.

Key pointers:

• ☑️ ‘C’ in CANSLIM stands for current Quarterly earnings.
• ☑️ Ideally, a stock should have a quarterly EPS growth of at least 25%.
• ☑️ Why – A company with rapidly growing sales in the short-term is likely to continue rising in a bull market.

A – Annual Earnings Growth 💸

The next element in CANSLIM also relates to earnings. ‘A’ stands for annual earnings growth and is the next filter we make the stock go through. 

In the previous section, we looked at the strength of the company in recent times. Now we scan for stocks that have decent growth in the EPS and a strong track record of growth in their annual earnings. According to CANSLIM, growth stocks should show at least a 20% growth in the last three years. 

The last section discovered that CROX fulfills the first condition of having strong quarterly earnings growth. So let’s see if it qualifies for this condition as well. 

CROX Annual Earnings Data

Since the growth rate is well beyond 20% over the past three years, CROX still qualifies as an investable stock and off we go to the next element!

Key pointers:

• ☑️ ‘A’ in CANSLIM stands for Annual earnings growth.
• ☑️ Ideally, the company should have shown a growth rate of at least 20% over three years.
• ☑️ Why – Combined along with current quarterly earnings, this element allows us to look at companies that not only are growing in the current times but have shown an ability to grow over the last few years as well. It is an indicator that the current growth is not abnormal but a logical consequence of the stock’s price action and the company’s fundamentals. 

N – New Product or Service 💪

The next element, ‘N’ in CANSLIM, stands for “New product or service.” So along with showing strong revenue growth, a company must also keep developing and introducing new products and services to be considered worth investing in.

It is easy to see that companies that innovate the most stand to gain the most in the markets. Usually, this kind of innovation is seen from young companies willing to take risks or companies that are pioneers in a new industry. 

We can also look at new markets or verticals the company plans to explore for more extensive and established companies (heavyweight stocks). New highs in prices can also be considered.

Let’s go back to CROX. We can’t know whether CROX will create a new product or service that’ll add innovation to their current product mix.

However, let’s take a look at the news about the company. We come across quite a few interesting things—such as the fact that the company aims to expand into the Asian market and expects 25% of the brand’s business to come from the continent in the next five years, which should provide a massive boost to the revenue as well. The stock price is also hitting new heights that were previously unseen. The new opportunity is enough to keep us interested in CROX, so we move on to the next element.

Key pointers:

• ☑️ ‘N’ in CANSLIM stands for New product or service.
• ☑️ A company must be “looking forward” for it to be considered a growth stock.
• ☑️ However, it is important to consider that innovation can come in many forms.
• ☑️ Why – If a company is not constantly innovating and looking for new opportunities, it is likely that it will not be able to sustain its growth over time, making it undesirable as an investment.

S – Supply And Demand ⚖️

The ‘S’ in CANSLIM stands for supply and demand. It applies the basic economic principle of supply and demand to stocks. If the supply is low but the demand is high, then the price should go up, and if the supply is high, but the demand is low, the price should go down.

For stocks, the average trading volume is a valuable metric for gauging the supply and demand aspect of a stock. A stock with more demand than supply should ideally have a high average trading volume even when the price rises. It is usually a sign of institutional buyers aggressively investing in the stock, which pumps the trading volume up.

After going through this condition, let’s again take up the example of CROX to see if it still qualifies as an investable stock by taking a look at the stock chart, shall we? 

The average trading volume for CROX seems to be stable over time, with a few pumps corresponding to high price movement. After looking at the data, we can safely conclude that there is demand for the stock, and it is very likely that institutional money is buying in. This should give us more confidence as we move on to the next element.

Key points:

• ☑️ ‘S’ in CANSLIM stands for supply and demand.
• ☑️ For a stock to grow well in the near future, there should be adequate demand for it.
• ☑️ For the stock market, the average trading volume of a stock can serve as a metric.
• ☑️ Why – Institutional money accounts for most of the big moves in the market. A stock showing consistent or rising demand even when the price is rising is often a sign that old and smart money is being invested into it. Naturally, we want to join along for the ride.

L – Leader or Laggard? 🔎

The ‘L’ in CANSLIM is often misunderstood on the internet. In the book, the chapter for ‘L’ is titled ‘Leaders or Laggards: Which is your Stock?’. According to its creator, it is clear that L in CANSLIM stands for leaders and not laggards, and that’s the vision we follow for this article.

In fact, CANSLIM explicitly advises against investing in laggard stocks in a bull market. Instead, investors should focus on finding the stocks with the best potential for the near future. 

Many investors may buy stocks that they feel are undervalued, yet in reality, many of these stocks will have limited upside potential. If one is to follow CANSLIM, they should invest only in companies that are leaders in their industry. The most significant moves are usually made by the top two or three stocks in any sector in a bull run.

Going back to our example, let’s examine if CROX is a leader or not. The footwear industry is very competitive, but the company has managed to position itself remarkably well. 

In terms of revenue, it is far away from giants like NIKE and VF Corporation. However, it can be argued that instead of competing in the more significant footwear industry, CROX competes in the comfort footwear category, where it does have the edge over its competition.

IBD advises using their proprietary RS Rating but investors can also use the relative strength index for technical analysis. Ideally, a stock should have a high price strength relative to the market with at least 80% minimum. 

Key points:

• ☑️ ‘L’ in CANSLIM stands for Leaders.
• ☑️Buying undervalued stocks with hoping they will realize their value could lead to losses.
• ☑️ Why – The leading stocks will usually offer the best returns compared to the rest of the stocks in the same industry.

I – Institutional Sponsorship 🏦

The ‘I’ in CANSLIM is meant to represent institutional sponsorship. In other words, it refers to the interest in a stock by institutions like mutual funds, pension funds, and banks. When it comes to the stock market, most trading is done by institutions, and a growth stock should have serious interest from institutions to be worth investing in.

A stock with a lot of institutional sponsorship is also likely to have a high trade volume. It results from institutions preferring more liquid stocks to invest in, allowing them to make big meaningful moves without spooking the market too much.

Considering all this, let’s see if CROX has enough institutional sponsorship for us to be interested in. Fortunately, one can easily find the list of CROX’s institutional buyers publicly. Since CROX has no shortage of institutional money from investors like Blackrock, Vanguard, Morgan Stanely, and Goldman Sachs, we can conclude that it meets this criterion.

Key points:

• ☑️ ‘I’ in CANSLIM stands for Institutional sponsorship.
• ☑️ Ideally, we want a growth stock to have a significant number of institutional buyers.
• ☑️ Why – Institutional buyers are often considered smart money in the market, and make moves that are researched and planned thoroughly. If the stock we’re looking at has a significant institutional interest, it’s a positive sign for buying.

M – Market Direction 🏛️

Up last, the ‘M’ in CANSLIM stands for market direction, and it is one of the most important aspects to consider when using this strategy. A stock might tick all of the previous boxes, but if one fails to take the market direction into account, its returns will likely be less than ideal at the end.

CANSLIM was designed to be used during bull markets only. It can be difficult to estimate if the stocks are in a bull or a bear market since they tend to be relative terms rather than absolute. Taking a look at the border market indexes like the NASDAQ or the DOW Jones Industrial Average can help too.

The word on the street is that we’re currently in a bull market that’s expected to run for a while as the economy recovers from the effects of the global coronavirus outbreak. 

Set’s suppose that we can be assured that the market direction is upwards, and we’re expecting a bull market in the near future. In that case, it means we have successfully evaluated CROX with CANSLIM and have concluded that it could be a massive growth stock.

Key points:

• ☑️ ‘M’ in CANSLIM stands for Market direction.
• ☑️ CANSLIM was meant to be used during a downtrend and won’t provide high returns.
• ☑️ Why – At the end of the day, most growth stocks grow during bull markets and not bear markets. In general, we should only invest in these stocks if we expect the market to keep going up.

Putting It All Together 📊

Together, all the elements of CANSLIM scan for technical and fundamental signals for a growth stock. It is important to note that one should not use the method selectively but together as one cohesive filter to get the most benefits.

While it might seem intimidating at first, the truth is it’s really easy to filter stocks with the leading stock analysis software available today. For example, StockRover offers two pre-built CANSLIM scanners in its premium version with one of them also available in its free version.

Advantages of Using CANSLIM 📈

As demonstrated by our rudimentary CANSLIM analysis of CROX, it can definitely help us screen for growth stocks. But there are several other advantages of using CANSLIM:

Fantastic Framework for Thinking about Growth Stocks 💭

CANSLIM is a comprehensive framework that accounts for several factors relating to the stock and the market at large. If you’re just getting started, having such a framework can be very helpful in understanding the market and creating an investing strategy. 

Prevents You from Trading with Emotions ✅

Humans are irrational creatures, and emotions are a vital part of our lives. However, it is usually better to make decisions on facts and not hopium when it comes to trading and investing. CANSLIM provides an unemotional, robotic approach for selecting stocks and prevents investors from making sentimental mistakes, ideally leading to higher profits.

It Is a Tested and Proven Strategy 💵

CANSLIM is not a cutting-edge methodology. It was published in the 1990s, yet has endured through time and is still relevant. Unlike some investing strategies you find on YouTube, CANSLIM has stood the test of time and proven profitable. So even if one doesn’t personally want to use CANSLIM, they can still learn a great deal from it. 

Limitations of CANSLIM 📉

Here’s what CANSLIM is not:

1. ☑️ A magical formula that will always find winners.
2. ☑️ A fool-proof way to make money.
3. ☑️ A passive strategy that requires no thought from the investor.
4. ☑️ An excellent match for every trading style.

Instead, CANSLIM is just like any other investment strategy, albeit being a very successful one. It might be the ideal way to invest for some, but others could have problems with some of its rules. 

For example, CANSLIM strictly advises cutting your losses at 8% no matter what. Many young retail investors might not fully agree with the rule and may prefer to double down on their position instead of exiting. If the investor has a really high-risk tolerance and a sizable crypto portfolio, an 8% stop-loss can be too restricting. 

And yet, investors and traders have studied CANSLIM for decades now. It was voted the top-performing investment strategy from 1998-2009 by the American Association of Individual Investors. It might not be everybody’s cup of tea, but everyone can benefit from understanding the elements of CANSLIM and why they indicate a stock is about to pump.

How to Use CANSLIM Effectively 🧠

There are some rules that CANSLIM comes with, along with the framework for selecting the stocks. While the rules are straightforward to understand, what’s vital is following them with discipline. According to its creator, expecting CANSLIM to work without following the trading rules can be pretty futile. Here are the trading rules you should follow:

Limit Losses at 8% 💲

Ideally, an investor should limit their losses at 8% with CANSLIM. According to O’Neil, one of the most significant advantages of being a retail investor is being more nimble than institutions. Therefore, an investor should look for growth positions and discard losing positions before it gets out of hand.

Take Slow Profits 💳

Academic evidence suggests that investors are more likely to hold on to their poorer-performing stocks and sell the better-performing ones in their portfolios.

This is because investors are more sensitive to losses than gains and often make more mistakes when it comes to selling stocks than when buying them.

This rule ensures that investors do not fall into that trap. Instead of selling for meager gains, O’Neil suggests waiting to take profits until the stock increases by 20/25%. If the stock pumps that much within 2 weeks, it is advised to hold it for another 8 weeks before booking profits.

Average Up Instead of Down 💶

Averaging up means buying more stocks and adding to your initial position over time effectively ‘layering’ your holdings. Since we’re investing in the stock expecting it to go up, we should be okay with investing more even if the price moves up by 2% to 3%. 

Buy at Bases 💷

When using CANSLIM, investors should also ideally “buy at bases.” Price basis refers to consolidation areas in the price action that can be identified with technical analysis. It can be hard to estimate price bases without a working knowledge of technical analysis.

Additionally, it is recommended to use CANSLIM only during bull markets. According to O’Neil, three out of four stocks do not outperform the market during a bear market, making it unlikely for most CANSLIM picks to perform well.

Conclusion 🏁

Now that we’ve covered CANSLIM in detail, we hope this knowledge can help you strengthen your investing strategy, if not provide a ready-made one. 

To summarize, CANSLIM is a beautiful way of thinking about growth stocks. Focusing on all the significant aspects of the stock can provide a complete picture of its growth so far and its potential for the current bull market. Used effectively, CANSLIM can be highly effective and helpful for retail investors.

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