How does CAN SLIM Investing Work?
In Brief
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 CAN SLIM® 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®
CAN SLIM® 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.
Illustrative Criteria:
- 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.
Criteria:
- 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.
Criteria:
- 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.
Criteria:
- 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).
Criteria:
- 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.
Criteria
- 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.
Criteria
- 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 CAN SLIM® 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?
The official site for CAN SLIM® is Investors Business Daily. You can also run our CAN SLIM® inspired screen on Stockopedia Premium! Sign up now for a two week free trial.
Watch Out for
CAN SLIM® 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.
Other Sources
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
4 comments
Hi,
Very interesting, I've not seen this approach before.
It resonates with me in some ways, as my biggest ever investing mistake was buying 500,000 ASOS shares at about 4p, and then selling them at 9p, because they looked too expensive on conventional grounds! So if I'd just held those shares, I'd be worth over £26m more than I actually am worth today!
Trouble is, for every ASOS, there are literally dozens (or even hundreds?) of other Listed companies where riding the shares to an over-valuation would have ended in spectacular failure. So it really is like looking for a needle in a haystack, and I don't think screening methods can necessarily identify companies in the right place at the right time, but could at least provide a shortlist for things to research which are showing some signals of potential big future winners.
Also, looking back at my biggest ever investment gain, it was my original investment in Indigovision (LON:IND), when the shares were bombed out, and below the company's own net cash. Yet they were showing the first signs of having strong growth potential, with an innovative product. The shares were over a 30-bagger for me, and I put most of my portfolio into them & held all the way up ... and down again! Trouble was, they just screwed up the execution after an initial period of great results. That only became apparent after the event, and by that time it was too late to sell, as the shares had come most of the way back down again.
So very difficult to know when to hold, and when to sell. I think top-slicing might be the strategy with this type of stock - just selling a few into each big rise, and running the balance.
Anyway, thanks for an interesting article & discussion. I shall look into this approach in some more detail.
Cheers, Paul.
Hi Paul,
"The shares were over a 30-bagger for me, and I put most of my portfolio into them & held all the way up ... and down again! Trouble was, they just screwed up the execution after an initial period of great results. That only became apparent after the event, and by that time it was too late to sell, as the shares had come most of the way back down again."
If that isn't the best lesson ever for a stop loss I do what is. Was the decline just a drop of cliff edge or a slide then dip? If it's the latter surely it indicates that the market knew something of the decline before you got hold of the news. To me that is the biggest weakness of a value only based strategy. It relies on you knowing everything and being able to move faster than everyone else.
Personally I dont use a hard stoploss, rather I track my portfolio tweaking the stops as the stocks rise. I've noticed in the past that you also tend to ell out of stocks quite early preferring to take the profit when you evaluate that they are fairly priced. Perhaps using a tighter stop in this scenario would allow you to benefit from some of the excellent recommendations you have made, e.g. Staffline (LON:STAF)
On another recent thread you seem non-plussed as to why Spaceandpeople (LON:SAL) had slipped recently. I held the share and had been watching the slide over recent weeks and eventually sold out. What convinced me to sell was the reductions in forecasts which I believe drove the decline in share price. I notice you're adding to your position. I'll consider rebuying when and if they crop up on my screens.
Anyway each to their own and thanks for your updates they really are useful.
Cheers
Phil
Ok - with the rudimentary screeners available to UK private investors it is very difficult to build an adequate screen for CAN SLIM (something we are addressing in our upcoming PRO offer). But with the dataset I have looking for stocks with...
The list of stocks generated are... Abcam (LON:ABC), Domino's Pizza (LON:DOM), SDL (LON:SDL), Devro (LON:DVO), Immunodiagnostic Systems (LON:IDH), Ncc (LON:NCC), Albemarle & Bond (LON:ABM), Craneware (LON:CRW), Games Workshop (LON:GAW), Brooks Macdonald (LON:BRK), Education Development (LON:EDD), H&T (LON:HAT), Animalcare (LON:ANCR)
Education Development is in the midst of being acquired so shouldn't be on the list at all. Dominos has sold off hard, and on technical grounds CAN SLIM would ignore it even though plenty of investors will be thinking it is becoming better value at these levels. That's not the CAN SLIM style - this strategy is looking for breakouts and strong relative strength.
Of the remaining, the two pawnbrokers are the furthest away from a breakout, and on applying the qualitative factors of 'does the company do something new' some others could probably be dropped. But it generates quite an interesting list of stocks, some of which are on premium multiples to the market. ASOS was on this list several weeks ago and has been filtered out due to its market cap growth.
Recent conversations with City brokers and Institutional types have commented on companies like Abcam and Craneware as being 'far too expensive' - so it will be an interesting test of Bill O'Neil's ideas if the market can resume its uptrend and these companies do start to breakout to the upside in the wake of ASOS's breathtaking run.
The CAN SLIM methodology is a bit of a cult in the USA, so much so that many marketmakers take advantage of the private investors that trade on it as it's quite predictable - but in the UK, far less trade on it.
Personally, Bill O'Neil's book is one of my favourite investment books due to the fact that it has a very fresh approach and good understanding of how the market actually works based on practice rather than theory. If you look at the recent ASOS (LON:ASC) breakout, you'll see a classic CAN SLIM move - a company with rapidly growing sales and earnings, offering something new, on growing institutional support, breaking out of a consolidation base on strong volume. These moves according to Bill O'Neill tend to reach 25% above the 'pivot point'. In ASOS's case this would predict a move to somewhere around £24 or so before reversal, which ASOS has nearly reached. In the book O'Neil advises selling stocks after they reach the 20-25% target in order to use the capital to invest in other low risk breakout opportunities.
O'Neill though also theorised in the book that the stocks that move 20-25% within days are the ones to hang on to for the next six months, as the institutional support will continue to drive it higher. It's interesting in ASOS's case - so many brokers have had SELL notes on it for years, but the stock keeps trucking. Its on a nosebleed PE ratio and no value investor would touch it - any slip up in earnings momentum will drop the share price like a stone. But when Goldman Sachs starts putting out £29 price targets it becomes the plaything of momentum traders and you would have to be very brave to bet against it.
This is the point that Bill O'Neil makes. Schooled by reapplying the trading lessons of Nicholas Darvas, Jesse Livermore and Gerald Loeb, he learnt to understand how the stock market actually works, rather than how it 'ought' or 'should' work. On that note there's a lesson in watching ASOS fly and realising that the best stocks in the market aren't held back by peer group valuations or broker hesitance. Personally though, I would find ASOS just way too expensive to make an investment case for.
I've got a rudimentary stock screen running with CAN SLIM style stocks that highlights names to watch as a means to play their breakouts. I'll try and publish the whole list and the set of criteria later.