This growth investing approach combines both fundamental and technical factors. It looks for growing and accelerating earnings and sales; high relative strength and the stock making a new high; support from leading institutions; plus the helping hand of a bull market.
Background to CAN SLIM
O'Neil began his career on Wall Street and eventually founded an investment research firm, William O'Neil & Co., which publishes, among other things, Investor's Business Daily. The “original” CAN SLIM approach published in "How to Make Money in Stocks” is based on O’Neil’s analysis of 500 of the biggest stock market winners from 1953 to 1993, although the sample period has since been extended significantly. O’Neil extended his analysis of past market winners to 600 companies and released new findings in the third edition in 2002, along with a fourth edition in 2009.
O’Neill does not believe in value investing as he feels that stocks generally sell for what they are worth. He prefers to focus on companies that are still in a stage of earnings acceleration before they make major price advances. O'Neil has stated that the CANSLIM strategy is not "momentum investing", but rather that the system identifies companies with strong fundamentals— enjoying big earnings increases as a result of innovation — and encourages buying them when they emerge from price consolidation periods and before they advance dramatically in price.
Calculation/Definition of CAN SLIM
CANSLIM is an acronym used to describe the following characteristics of growth stocks. It's hard to do justice to O'Neill's writings using purely quantitative criteria but we have tried to set out some illlustrative screening metrics.
Current earnings. O’Neil’s study revealed that winning stocks generally have strong quarterly earnings per share performance prior to their significant price run ups.
- Last quarter/half EPS growth > or = 20%
- EPS, excluding one-offs, is positive for the current quarter/half
- Increased EPS in the current quarter/half versus same period last year
- In his latest edition, O’Neill specifies that same-quarter/half growth in sales should be > 25% or at least accelerating over the last three periods.
- At least one stock in same industry shows strong earnings growth in last quarter/half.
Annual earnings. Winning stocks in O’Neil’s study had a steady and significant record of annual earnings in addition to a strong record of current earnings.
- EPS up 25% in each of the last three years
- Consensus next year earnings estimate above last year
- Return on Equity >17%
New product, service or highs. O’Neill’s view is that a company should have a new basic idea that fuels the earnings growth seen historically (e.g. Apple Computer's iPod). This is a qualitative idea that does not lend itself easily to screening. However, a second consideration that he emphasizes is that investors should pursue stocks showing strong upward price movement. O’Neil says that stocks that seem too high-priced and risky most often go even higher, while stocks that seem cheap often go even lower.
- Share price is within 10% of its 52 Week High
- Trading above its rising 50-day moving average
- Trading above its rising 50-week moving average
Supply and demand. Shares outstanding should be a small and reasonable number. The less stock available, the more buying will drive up the price. Companies buying back their stock on the open market are preferred, as well as companies with management stock ownership.
- Shares outstanding < 25 million shares. This may not be so relevant in a UK context.
Leader or laggard? O'Neil suggests buying "the leading stock in a leading industry". O’Neil suggests using relative strength to identify this (relative strength compares the performance of a stock to a given Index).
- 52-week relative strength rank versus the FTSE-All Share of 80% (i.e. stocks that have performed better than 80% of all stocks).
Institutional Sponsorship: O’Neil feels that a stock needs a few institutional sponsors for it to show above-market performance, but suggests avoiding stocks that are institutionally over-owned.
- At least ten institutional owners of the shares
- Institutional ownership < 50%
Market Direction: O'Neil prefers investing during times of definite uptrends, as most stocks tend to follow the general market pattern.
- Index trading above its rising 50-day moving average
- Index trading above its rising 50-week moving average
Does it Work?
No rigorous, published studies of CANSLIM performance exist to our knowledge. However, AAII data suggests that this screen has seen a 26.5% return versus 0.7% for the S&P 500 over the last ten years, and a 28.2% return versus 2.4% since inception.
How can I run this Screen?
Watch Out for
CANSLIM is a strategy that strongly encourages cutting all losses at no more than 7% or 8% below the buy point, with no exceptions, to minimize losses and to preserve gains. Some investors have criticized the strategy when they didn't use the stop-loss criterion but O'Neil has replied that you have to use the whole strategy and not just the parts you like.
From the Source
O'Neil discusses his approach in "How to Make Money in Stocks: A Winning System in Good Times and Bad”. This book serves as the primary source for this screen. The summary above is based on the second and third editions.
- CAN-SLIM entry on Wikipedia
- AAII: How to use the CAN-SLIM approach to screen for Growth Stocks
- Create a CAN SLIM stock screen
- CAN-SLIM stock screeners
- CANSLIM – A Growth Stock Investing Strategy