I use the easy-to-remember acronym CANSLIM.

Each letter of this name represents one

of the seven chief characteristics of the all-time great winning stocks during their early
developing stages, just before they made huge advances.
The "C" stands for current earnings per share. The best performing stocks showed a 70
percent average increase in earnings for the current quarter over the same quarter in the
prior year before they began their major advance. I am continually amazed by how many
individual investors, and even pension fund managers, buy common stocks with
unchanged or lower current quarter earnings. There is absolutely no reason for a stock
to go up if the current earnings are poor. If, as our research demonstrated, the best stocks
had large profit increases before they advanced rapidly in price, why should anybody
settle for mediocre earnings? So, our first basic rule in stock selection is that quarterly
earnings per share should be up by at least 20 to 50 percent year to year.
The "A" in our formula stands for annual earnings per share. In our studies, the prior five-
year average annual compounded earnings growth rate of outstanding performing stocks
at their early emerging stage was 24 percent. Ideally, each year's earnings per share
should show an increase over the prior year's earnings.
It is a unique combination of both strong current earnings and high average earnings
growth that creates a superb stock. The EPS rank, which is published in lnvestor's Daily,
combines a stock's percent earnings increase during the past two quarters with the past
five-year average percent earnings and compares that figure to every other stock we
cover. An EPS rank of 95 means that a company's current and five-year historical
earnings have outperformed 95 percent of all other companies.
The "N" in our formula stands for something new. The "new" can be a new product or
service, a change in the industry, or new management. In our research we found that 95
percent of the greatest winners had something new that fell within these categories. The
"new" also refers to a new high price for the stock. In our seminars we find that 98 percent
of investors are unwilling to buy a stock at a new high. Yet, it is one of the great paradoxes
of the stock market that what seems too high usually goes higher and what seems too
low usually goes lower.
The "S" in the formula stands for shares outstanding. Ninety-five percent of the stocks
that performed best in our studies had less than twenty-five million shares of capitalization
during the period when they had their best performance. The average capitalization of all
of these stocks was 11.8 million shares, while the median figure was only 4.6 million.
Many institutional investors handicap themselves by restricting their purchases to only
large-capitalization companies. By doing so, they automatically eliminate some of the best
growth companies.
The "L" in our formula stands for leader or laggard. The 500 best-performing stocks during
the 1953-1985 period had an average relative strength of 87 before their major price
increase actually began. [The relative strength measures a stock's price performance
during the past twelve months compared to all other stocks. For example, a relative
strength of 80 would mean that the given stock outperformed 80 percent of all other stocks
during the past year.] So, another basic rule in stock selection is to pick the leading
stocks—the ones with the high relative strength values—and avoid the laggard stocks. I
tend to restrict purchases to companies with relative strength ranks above 80.
The "I" in the formula stands for institutional sponsorship. The institutional buyers are by
far the largest source of demand for stocks. Leading stocks usually have institutional
backing. However, although some institutional sponsorship is desired, excessive
sponsorship is not, because it would be a source of large selling if anything went wrong
with the company or the market in general. This is why the most widely owned institutional
stocks can be poor performers. By the time a company's performance is so obvious that
almost all institutions own a stock, it is probably too late to buy.
The "M" in our formula stands for market. Three out of four stocks will go in the same
direction as a significant move in the market averages. That is why you need to learn how
to interpret price and volume on a daily basis for signs that the market has topped.
At any given time, less than 2 percent of the stocks in the entire market will fit the
CANSLIM formula. The formula is deliberately restrictive because you want to pick only
the very best. If you were recruiting players for a baseball team, would you pick an entire
lineup of .200 hitters, or would you try to get as many .300 hitters as possible?