An Overview of the CAN SLIM® Investment System
Each of the letters represents one of the seven characteristics of top-performing stocks:
The CAN SLIM® Investment System Defined
• +25% or more in recent quarters
• +25% or more in each of the past three years
Research shows earnings growth is the No. 1 indicator of a stock’s potential to make big gains. That’s why it’s important to look for stocks with strong current results, as well a history of solid earnings growth.
“There is absolutely no reason for a stock to go anywhere if the current earnings are poor.”
-- William J. O’Neil, Chairman and Founder of Investor’s Business Daily
Many people miss out on the big winners because they believe they must get in on the ground floor. They waste time and money guessing which cheap stock will become the next household name.
Research shows that you will have more success by starting your search a floor or two higher.
Let a stock become institutional quality -- which means it trades $15 and up with significant daily volume -- and it’s more likely to catch the eye of professional investors, like mutual funds and banks. And always let a stock’s earnings tell you if it’s a winner.
Does that sound like a formula for buying too late? It isn’t.
Yahoo’s stock price surged 277% in 21 months starting in March 2003. During the four quar- ters before this big move, Yahoo offered clues it would become a winner when it reported quarterly earnings growth of 100%, 200%, 400% and 167%. By that fourth quarter of triple- digit growth, it was as if the stock was flashing “buy me” in neon.
Conventional wisdom said those earnings gains were already priced into the stock, and it was too late to buy. But Yahoo was just gearing up.
And was Yahoo unusual? Not at all.
Our studies of the greatest stock market winners have shown big gainers reported huge earnings growth before they began their big run-ups.
Many of these stocks, however, weren’t well-known names when they launched their runs. For example, Cognizant Technology Solutions climbed 315% in 91 weeks starting in June
2003. During the four quarters leading up to that big move, it logged earnings growth gains
of 41% to 68%. Again, it wasn’t too late to get in on a leader before that big price move!
Yahoo and Cognizant are not abnormal for the greatest stocks. Rather, they are part of the pattern our research found regardless of the time period studied.
We have examined stocks that led the market during various periods as far back as the
1880s. And we continue to delve into what’s currently working in the market.
Each study has consistently found that a company’s earnings track record is one of the strongest indicators of its potential.
Definition: Earnings & Earnings Growth
Earnings -- also called profit or net income -- are what a company makes after paying all its obligations.
Earnings are reported in two ways: a bottom-line total and a per-share amount. The per- share figure is calculated by dividing the total earnings by the number of shares outstanding.
Earnings can exclude one-time items or include special items, such as the sale of a plant or the settlement of a lawsuit. When comparing a company’s earnings on a year-ago basis, be aware of anything that skews the comparison.
Quarterly earnings refer to a company’s earnings during a particular quarter.
Quarterly earnings growth is calculated by comparing a firm’s quarterly earnings to its earn- ings during the same quarter a year earlier. For example, if a company earned 26 cents a share in the first quarter of 2008 and 20 cents a share in the first quarter of 2007, it has a
30% quarterly earnings growth rate.
Annual earnings refer to a company’s earnings during a particular fiscal year.
Annual earnings growth compares a firm’s annual earnings to what it earned during the pre- vious year.
Winning stocks often share another trait: their earnings growth accelerates from quarter to quarter.
For example, if a company’s earnings rise 20% in the first quarter, 25% in the second quarter and 30% in the third quarter, its earnings growth is accelerating. That means its growing at a faster pace each quarter.
As earnings growth becomes stronger each quarter, it often attracts the attention of profes- sional investors like mutual funds, hedge funds, pension funds and banks. They are the true movers of the stock market and they have the buying power to send a stock’s share price fly- ing.
It’s also important to look at a firm’s earnings in relation to other aspects of its business.
A huge increase in earnings could be the result of a recent merger or acquisition rather than good old-fashioned organic growth. A merger or acquisition is not necessarily a bad thing
— often, it’s the catalyst for plenty of future growth — but it helps to understand why profit is growing. And that gives you a better picture of the company’s overall health.
Take a look at the firm’s sales growth, as well as its earnings growth. If sales are sluggish while earnings surge ahead, that might indicate cost-cutting moves that boost earnings now, but will disappear when the company runs out of things to slash.
And don’t be impressed by a company’s claim of “record earnings.” The firm’s earnings
could rise just 1% and it could still make that claim. You want to see standout growth in earn-
ings. So look for quarterly and yearly increases of at least 25% -- or higher is even better.
The CAN SLIM® System: Current & Annual Earnings
The best earnings performance now, not just a promise of future earnings.
Quarterly earnings-per-share growth of at least 25% vs. the same quarter the year
Preferably, accelerating earnings in recent quarters.
• Annual earnings-per-share gains of at least 25% in the past three years.
• Firms with EPS Ratings of 80 or higher.
Explosive stock growth doesn’t happen by accident. The biggest stock winners had new products, new management or new conditions in an industry that propelled the company to astounding heights.
That’s why it’s important to look for the new angle in a company. The Basics
New Products Ignite Growth
Stocks don’t double, triple or quadruple in a vacuum. There’s usually a breakthrough product or service that fuels their advance:
• Syntex rocketed up more than 480% in just six months in 1963, when it developed the
technology behind the birth-control pill.
• McDonald’s surged 1,100% from 1967 to 1971 as its low-cost, fast-food franchising
business model and newly introduced Big Mac burgers swept the nation.
• Shares of stun gun maker Taser climbed more than 2,730% between July 2003 and
April 2004 as police departments around the country bought the non-lethal weapon.
For the best companies, success isn’t about luck. It also isn’t about cutting costs and then waiting for “things to turn around.” Rather, it’s about innovation. As soon as one new product is introduced, winning companies are working on the next upgrade or new ways to sustain their leadership.
The right leader can make a big difference for a company and its investors. On the flip side, inept management can turn a company’s stock into a laggard.
Sometimes the “new” factor that supercharges a stock is a change in industry conditions. For example, China’s opening to a more free economy unleashed a boom that provided a wide range of new opportunities:
• Commodities: Australian miner BHP Billiton’s sales to China boomed between 2002
and 2005, with China accounting for 10% of its total sales. By 2007, China sales
made up 20% of the firm’s revenue. Meanwhile, BHP Billiton’s shares soared more
than 500% between late July 2003 and early November 2007.
• Shipping: DryShips benefitted as China’s demand for commodities drove up shipping
rates. It came public at $18 a share in February 2005, then raced up as high as
$131.34 in less than three years.
• Gambling: In 2004, Las Vegas Sands opened a casino in Macao, a Chinese territory.
By 2006, Macao had passed Las Vegas as the world’s top gambling center. The stock
made its market debut in late 2004, then more than doubled in price in less than
New conditions can generate a powerful wave that can lift the right stocks to new heights. Just the same, don’t buy a stock on that metric alone. Insist on the strongest fundamentals across the board — that includes things like solid earnings growth, sales growth and return on equity.
New Price Highs Offer New Opportunities
Some investors pass over a great stock because it’s already reaching a new price high. But that’s precisely the point where many of the best stocks gain steam and begin their biggest price moves!
The greatest stock winners of all time had something “new” going on. Sometimes it was a new product that beat the competition or a new management team that infused new goals and direction into the company. And in many cases, those new price highs were a sign of what was to come.
A stock climbing to new heights can look risky to some investors. On the flip side, a stock falling to new lows may look safe. But appearance is one thing. Reality is another.
The best-performing stocks make new price highs before they make their major leaps in price. Moreover, stocks at new highs tend to continue moving higher, while stocks making new lows tend to continue to move even lower.
But don’t buy a stock just because it’s hitting a new price high. Make sure it has strong fun- damentals, is part of a strong industry group, is riding along with a general market uptrend and is breaking out of a chart base pattern on strong volume.
The Wrong Path
How many times have you heard the phrase, “buy low, sell high”?
Many investors find it very difficult to abandon that idea. Naturally, everybody likes the idea of getting something that seems to be low-priced and a bargain. But many people also assume it’s too late to buy a stock that’s already hit an all-time high, and they’re more comfortable buying low. Yet stocks need to prove themselves to you and new highs are a critical hint to the successful investor.
Think about it: If a stock climbs from $15 to $50, it has to notch new price highs along the way at $16, $17, $18 and so on. And IBD’s research has found: Stocks making new highs tend to go higher.
Stocks plunging to new depths, on the other hand, can hit new low after new low.
Trying to guess where the bottom is and buy at the lowest possible price can be like trying to catch a falling knife: You might luck out and grab the handle, but you’re taking a dangerous risk.
Your mantra for success means remembering:
“Stocks making new highs tend to go higher — While stocks making new lows tend to go lower.”
For instance, some stocks may have strong fundamentals or great stories, yet they don’t climb because there’s little interest from large investors. So while you wait for a stock to be discovered — if it ever is — other stocks are moving into the spotlight.
When a stock is rallying to new 52-week price highs, it’s a sign big institutional investors are buying shares. And they have the buying power to propel the stock still higher.
Often, the best is yet to come.
Would you shy away from a stock that more than doubled in the past year or less? Consider what happened with these stocks:
Coach had a great run in 2002 as its share price rose nearly 70%. That was a hefty gain and you might have thought the stock’s best days were behind it. But it still had some energy left. After taking a short break, Coach resumed its climb in late February 2003, then went on to gain more than 430% in just over four years.
After its initial public offering in August 2005, Baidu.com climbed almost 80% in a little more than two years. Was it too late to buy at that point? The China-based Internet company was part of the IBD® 100 in the Sept. 10, 2007 issue of the paper and its chart was highlighted with a heavy black border because the stock was near a buy point. IBD also had this insight:
“Near 219.35 buy point after clearing it on above average vol.”. The stock went on to climb nearly 60%.
The CAN SLIM® System: The “New” Factor
• New management that can drive a stock to new heights
• New products or services or new industry conditions can send stocks soaring
• Fundamentally strong stocks making new highs (as they emerge from sound chart
bases on higher volume) are likely to climb further, while stocks making new lows
often head lower. Therefore, focus on the new price highs list for the best
• The great paradox of the stock market is that what seems too high and risky to most
investors is likely to continue rising. And what seems low and cheap usually
Think of a stock’s price as a measure of its quality (called “institutional quality”) and, conse- quently, its potential. Typically, stocks higher in price reflect higher quality.
One of the most basic economic principles is the law of supply and demand. And one of the places its power is most sharply demonstrated is in the stock market.
Remember our earlier discussion of new price highs? The law of supply and demand is what’s driving those new highs.
Strong demand for a limited supply of available shares will push a stock’s price up. On the flip side, an oversupply of shares and weak demand will cause the price to sag.
That’s why supply is the S in the CAN SLIM® System.
Daily Trading Volume Is Key
So how do you measure supply and demand? Start with its daily trading volume.
When a stock’s price climbs sharply, you want to see its daily trading volume rise as well. That shows you that institutional investors like mutual funds and hedge funds are buying in.
If volume is below average, it tells you big traders aren’t behind the move and the stock may not be able to hold onto its gains. And when a stock’s price drops, you want to see light vol- ume — that tells you there’s no significant selling pressure.
But if a stock’s price plunges as its volume surges higher, it’s a sign big investors are head- ing for the exits. And you might want to follow their lead.
This is particularly true if a stock tumbles below a key moving average line -- like the 50-day or 200-day -- on heavy volume. As their name implies, moving average lines track a stock’s average price over a period of time.
Institutional investors will often step in to buy shares of a stock when it dips down to one of its key moving average lines. That’s often to bolster an existing position in the stock to keep their investment from dropping lower. Their buying power will, in turn, propel the stock high- er. You frequently see stocks finding this kind of support at a key moving average.
Alternatively, if a stock falls below one of its benchmark moving average lines it’s a sign insti- tutions are selling — rather than buying — shares.
The CAN SLIM® System: Supply & Demand
• IBD’s stock tables, online quotes and other tools provide a quick way to assess the
size of demand for a stock’s shares.
• Volume % Change is the percent change above — or below — a stock’s average trad- ing volume over the last 50 trading days. This uncovers companies not yet widely known, but that are experiencing emerging demand.
• Price increases should be accompanied by increases in volume. That shows you insti-
tutional investors like mutual funds and hedge funds are buying in.
• Price declines should come in lower volume, which tells you there’s no significant sell-
• If a stock’s price plunges as its volume surges higher, it may be a sign big investors
are heading for the exits.
• Institutional investors will often buy shares when a stock dips to a key moving average
• The Accumulation/Distribution Rating tracks a stock’s supply and demand. Look for
stocks with an A or B Rating.
• 9 •
Leaders: Choosing To Win
In the world of fiction, the underdog often wins. Unfortunately, it rarely works that way in investing. Steer clear of stocks that are laggards. In the stock market, that sad-looking stock at the bottom of the pack often just falls further behind the leaders.
But when you choose stocks that have solid fundamental characteristics — like earnings growth and profit margins — and are thriving in the best sectors, your prospects are better because you are selecting “institutional quality” stocks that get noticed by the biggest traders
— the institutional investors like mutual fund and pension fund managers.
In one of our largest studies of the greatest stock market winners from the early 1950s through 2000, on average the big winners outperformed 87% of the market before they began their most dramatic price advances.
In a bull market, stocks that are doing the best tend to keep doing well, while those slumping are likely to drop further.
Turnaround candidates exist, but the odds are against them and it can be tough to pick the right one.
So a better strategy is to stick with proven winners -- companies with CAN SLIM® traits. Leadership Can Pay Off
A leading company with a cutting-edge product, a much-needed service, or a company that comes from an in-demand industry will pull to the front of the pack.
• Brought to U.S. shores by an Australian surfer in the 1970s, Ugg sheepskin boots
were rebranded as high-end luxury footwear by Deckers Outdoor in the mid-
1990s. Then in 2003, Oprah Winfrey featured the sheepskin boots on her list of
top holiday gifts. Uggs raked in $37 million for Deckers that year. Was it
a one-season fad? Hardly. In fiscal 2007, Ugg boot sales totaled $347.6 million. By late
2007, Decker’s shares had climbed nearly 700% in just four years.
• Starbucks made its stock market debut June 1992. How far can a coffee-shop concept
take you? In its first eight years on the market, the stock price jumped more than
• Titanium Metals carved out a niche for itself by milling more of the pricey, lightweight metal than any other U.S. firm. Customers like Boeing and Airbus use the titanium it mills to make more fuel efficient jets. When the firm’s stock surged in late January
2005, it had already climbed more than 80% in the previous 12 months. Was it too late to buy in? Not at all! During the year that followed, Titanium Metals’ stock climbed another 460%.
The CAN SLIM® System: Leadership
• When choosing investment candidates, stick with the leaders. These tend to be firms
with in-demand products or services.
• Steer clear of lagging stocks. They’ll likely remain laggards.
• Don’t overlook a stock simply because its shares have already logged some big gains.
Many of the largest winners were already outperforming the market when they
launched their big price moves.
Big institutional investors, like mutual funds, hedge funds, banks and insurance companies, are the driving force behind much of the trading activity in the stock market.
And when it comes to investing, it pays to watch the pros. Because they have millions - and often billions - of dollars to invest, their decision to buy or sell a stock can determine its fate. If they choose to buy a stock, their increased demand for its limited supply of shares can push its price higher. Conversely, their decision to unload their holdings can send its price tumbling.
The term “institutional sponsorship” refers to the shares of stock owned by large institutional investors.
Institutional investors make their money buying, holding and selling stocks. They dig deep for information before they invest in a company, and once they do, they keep a close eye on their investment. Their analysts and researchers study the firms they put their money into, meeting with top executives, evaluating industry conditions and gauging the firm’s outlook.
These pros don’t buy a stock — also known as taking a position — in one swift move. That would push the stock’s price up too quickly.
Instead a fund manager will buy some shares, let the price settle down, and then buy more. An institutional investor may spend several weeks — or even months — taking a position in a stock.
That’s good news for individual investors. If you can learn to spot the signs that institutional investors are buying a stock, you can follow their lead.
Selling is a bit different. When these large traders decide to sell a stock in their portfolio, the process may sometimes be orderly. But if they choose to get out quickly — which in today’s fast-moving news cycle often happens — a stampede can result. That’s why as an individual investor, you should sell a stock as it is rising, rather than trying to pinpoint exactly when it has reached its peak. A stock will usually flash a series of warning signals when it’s nearing the end of its price run.
Follow the Institutional Footprints
As we mentioned earlier, Institutional investors usually look for firms with solid earnings and sales track records and they avoid thinly traded, cheap stocks with spotty histories. That’s because it’s tough for a fund that’s investing millions of dollars to take a position in a thinly traded, cheap stock without sending its share price soaring.
Instead, they tend to buy stocks priced at least $15 on the Nasdaq and at least $20 on the NYSE. They also opt for stocks that trade at least 300,000 shares a day on average. You should as well.
And keep in mind: Most of the greatest winners start their big price runs when they’re trading at $30 a share and higher. So don’t be afraid of those higher-priced stocks. Those are the ones the institutional investors are putting their money into — and that’s what makes a $30 stock climb to $40, $50 and more.
The CAN SLIM® System: Institutional Sponsorship
• IBD’s Mutual Funds & ETFs section regularly profiles top-rated mutual funds and talks to their mangers about which stocks they’re buying and selling.
The section includes tables spotlighting top-rated funds which list the stocks that fund is holding, buying and selling.
To find top-performing mutual funds, look at the fund’s 36-Month Performance Rating.
It runs from A+ to E and appears in the top right corner of the charts in the mutual fund sec-
tion. It also runs on Mondays and Fridays in IBD’s mutual fund tables.
Buying a stock during a market downturn can be like trying to swim against the ocean tide: You might make some progress, but the going will be tough, and a big enough wave of sell- ing could drown you.
That’s because the majority of stocks tend to follow the market’s general direction. They’ll rise if the market is rallying and they’ll fall if it’s in a downturn.
A better strategy is to follow the market’s general flow and make the trend your friend. In other words, buy when the market’s in an uptrend and sit on the sidelines when it’s working through a correction.
This section will help you learn to size up the health and direction of the stock market. The Basics
When folks talk about the stock market or the general market, they’re usually referring to one of the four major stock market indexes. These consist of companies from a range of sectors and industries. Some indexes are made up of smaller stocks, others are home to bigger, more established companies. By watching the indexes, you’ll get a well-rounded perspective of the overall market:
• The Dow Jones Industrial Average — made up of 30 well established companies with
large market capitalizations.
• S&P 500 - 500 companies with market capitalizations ranging from more than $400 bil-
lion down to about $1 billion. It’s a broad index, representing a wide swath of
• Nasdaq Composite- Consists of about 3,000 companies from all sectors, but with a
heavy emphasis on technology firms, as well as newer growth stocks.
• The NYSE Composite which includes more than 2,000 stocks listed on the New York
Stock Exchange. Companies range from smaller caps to those worth hundreds
of billions of dollars.
It’s also a good idea to keep an eye on other indexes such as the S&P SmallCap 600 - These are 600 smaller companies tracked within one index.
In addition to the major indexes, follow IBD’s proprietary indexes. These show you the perfor- mance of top growth stocks.
The IBD® New America Index tracks the stocks of all companies covered in The New America section for six months. The stocks that comprise this index will change slightly each day, as newly profiled stocks are added, and stocks that we reported on exactly six months ago are removed. This index gives you an excellent glimpse into the overall performance of entrepre- neurial firms and companies with products and services that are in heavy demand.
The IBD® 100 index tracks the performance of stocks in the IBD 100. These are the top 100 performing companies each week, sorted by a combination of fundamental and technical strengths. The companies listed on the IBD 100 and their rankings are revised after the mar- ket close every Friday. The index tracks the performance of each stock for the duration that it remains on the IBD 100. Once a stock is removed from the IBD 100, it is no longer tracked in the index.
By following the major indexes, as well as IBD’s own, you’ll have a greater feel for the types of stocks the market is favoring right now. Watching their daily price and volume moves will help you keep your finger on the market’s pulse. The indexes will flash signals when they’re launching a new rally or when they’re ready to take a break.
Interpreting the stock market’s many nuances is a learned skill. You can become more famil- iar with market timing by watching Market Wrap Videos each day. IBD market experts explain the current action, and what you should be looking for.
Other sources for market information:
• IBD’s The Big Picture column gives you a road map to help size up the stock mar- ket’s daily action. It also alerts you to market-leading stocks that are breaking
out of bases or breaking down. The column appears daily in the newspaper’s A
section and is available to subscribers at Investors.com.
• The Market Pulse, which accompanies The Big Picture column, gives you a quick run down of the day’s market action. It also tells you the market’s current outlook, lists quality stocks making big moves and during a rally, any distribution days that have cropped up.
• During the trading day, IBD’s market writers post online updates at Investors.com in the Markets Update column. Updated multiple times a day, it alerts readers to leading stocks that are heading higher or nearing buy points. Its writers also keep close tabs
on how the major indexes are faring.
• The Markets Update column appears in the Top Stories carousel on the homepage.
During trading hours it also appears in the IBD Stock Research Tool. In addition, a link
in the IBD Stock Research Tool makes it easy for subscribers to include the column in
the My Routine feature.
The CAN SLIM® System: Market Direction
• Don’t fight the market’s trend — follow its lead. Buy when the market is in an uptrend
and sit on the sidelines when it’s working through a correction.
• The follow-through day occurs sometime after the third day of an attempted rally,
when one of the four major stock indexes climbs sharply one day and volume
rises from the previous session.
• Not every follow-through day guarantees a rally — some fail. But no new bull market
has started without one.
A distribution day occurs when one of the major stock indexes falls more than 0.2% in one day on higher volume than the previous session. When the market piles up four or five dis- tribution days in just a few weeks, and the uptrend seems to have stalled, chances are it’s heading into a correction.