Stock investing strategy-CAN SLIM

Hi there,

CAN SLIM is a stock investing strategy developed by William O’Neil.  O’Neil reportedly has made millions by consistently using this approach. He was the youngest person ever to have a seat on the New York Stock Exchange; he founded the U.S. brokerage firm William O’Neil + Co and he also started the business newspaper Investor’s Business Daily. His strategy is called “CAN SLIM”. Given below is my explanation of the method. I have kept things simple as possible.

WHAT IS CAN SLIM?

CAN SLIM is a stock picking strategy that combines both technical analysis and fundamental analysis. CAN SLIM is an acronym. Each letter stands for a quality that a potential stock should pass. It trys to identify stocks that are likely to rise in price and have a high potential for profits. It’s basically a growth investing strategy, works well in bull markets. Basically the technique boils down to the following three steps-

  • Follow the overall market trend, buy when it is going up
  • Search within the best industry groups and narrow to the top stocks within each group fundamentally and technically.
  • Control your asset allocation and buy the best stocks when they break out. Use a 7% to 8% stop loss.

THE 10 STEPS.

T0 pick a stock using CANSLIM method, there are 10 calculations to be made. Those are:

(1)  EPS growth last quarter vs. a year ago.

(2)  EPS growth prior quarter vs. a year ago.

(3)  Sales growth last quarter vs. a year ago.

(4)  Annual EPS growth rate of 3 years

(5)  Long term EPS growth estimate.

(6)  Annual cash flow per share vs actual earnings per share.

(7)  Price as a percentage of 52 week high.

(8)  52 week relative strength percentile.

(9)  Number of Institutional share holders.

(10) NET institutional share purchased.

Those stocks which meets the criteria as mentioned below using the above 10 figures are considered to be potential candidates for investment according to this method.

HOW TO PERFORM CAN SLIM STOCK SCREENING.

C = Current Quarter Earnings

There are 3 figures to be used in this section. Those are the first 3 figures as mentioned in the list above. All three are connected with earnings and revenues.

  • Earnings should be up by 18-20% over the same quarter 1 year ago.  And, there must be positive earnings in this quarter – excluding special one time events. It is important to compare with the same quarter a year ago. For example- this year’s second quarter to last year’s second quarter. The reason for doing this is that many firms have seasonal patterns to their earnings.
  • As already said, remember to exclude one time events which may distort the actual trend in earnings and make the company performance look better or worse.
  • Look for increasing RATE of growth in quarterly EPS (consider selling stock if it has a slowing growth rate for 2 quarters in a row).
  • Same quarter sales growth greater than 25% (or at least accelerating over the last 3 quarters)
  • Earnings growth rate from quarter 1 year ago compared to latest quarter should be higher than similar quarter 1 year earlier.

A = Annual Earnings

There are 3 figures to be used in this section. Figures 4 , 5 and 6 are connected with annual earnings of a company. The benchmarks are:

  • Annual EPS must increase in each of last 3 years
  • The method also recommends an  annual growth rate of 25% over last 3 years for a stock.Consensus earnings estimate for next year should be higher than actual earnings of current year.
  • ROE of 17% or better preferred.
  • Look for annual cash flow per share greater than the actual earnings per share by atleast 20%.

N = New Products, New Management, New Highs

The next two sections are basically  qualitative analysis section. Those stocks which have passed the ‘C’ and ‘A’ are further checked for the following qualities:

  • Stock should be within 10% of 52 week high price.( figure 7)
  • Stocks that hit new highs on big volume worth looking at.
  • Stocks that hit new high after undergoing a period of price correction and consolidation are interesting candidates.
  • Look out for companies with a major new product or service or new management which is positive for the industry.

S = Supply and Demand

  • Stocks with a good percentage of ownership by top management are good.
  • Companies that announce stock buy back plans are good.
  • Look for companies with a lower debt-to-equity ratio or companies lowering the debt to equity ratio over the last few years. It implies that the company generates enough cash to pay off part of it’s debts every year.
  • When choosing between two stocks, stocks with a reasonable number of shares outstanding will in all probability out perform older large capitalization stocks.

L = Leader or Laggard

Figure number 8 from the above list is used here.

  • Buy among the best 2 or 3 stocks in a group.
  • Relative Strength of 80% or better.  I.e. the price performance for a given time and their percentage ranking among all stocks.
  • Buy among best 10-15 groups out of nearly 200.

I = Institutional Sponsorship

Figures 9 and 10 are to be used here-

  • Numbers of shares purchased by institutions should be greater than or equal to the number of share sold by institutions over the last quarter
  • Look for companies that have at least 10 institutional investors invested in it.
  • Look for stocks with increasing number of institutional investors.
  • Always be careful not to consider stocks with a very large single institutional ownership.

M = Market Direction

  • Do NOT fight the trend.  Determine if you are in a BULL or a BEAR market.
  • Understand the general market averages every day.
  • Try to be 25% in cash when market peaks and begins major reversal.
  • Heavy volume without significant price movement MAY signal a top.
  • Follow market leaders for clues on strength.
  • Divergence of key averages/indexes point to weaker/narrow market movement.

Now, the Final rule –  do NOT buy breakouts in a BEAR market.

CONCLUSION

A stock that meets all the requirements as mentioned above is an ideal candidate for investing. That’s CAN SLIM for you.

You may like these posts:

  1. Stock investing strategy – Growth investing
  2. Stock investing strategy- GARP
  3. Stock investing strategy- Value investing

10 Responses to “Stock investing strategy-CAN SLIM”

Anonymous

November 25, 2011 at 1:55 pm

krishna kishore

May 21, 2012 at 11:02 pm

Your blog is really very informative.
Thanks a ton ;)

PRAMOD

July 21, 2012 at 7:33 am

appreciate your thoroughness, excellent keep up..

J Victor

July 22, 2012 at 11:04 pm

thanks:)

Mukesh

May 17, 2013 at 2:45 pm

Good, systematically organized and easy to understand.

Mukesh

May 17, 2013 at 2:47 pm

very resourceful.

Padmanabhan

September 27, 2013 at 9:15 pm

Thank you very much for giving such valuable information By the grace of almighty let you business grow to greater hieghts. I really liked you touch where you mention that the secrets to make money will not be revealed by those who had really made it and I would like to appreciate your honesty about mentioning the compulsions of brokerage firms to force the client to sell or buy to run their business. Your blog was very usefull and thanks a lot for your help.
Regards
Padmanabhan

piter

February 2, 2014 at 9:06 am

your article really taught me so many things about investment.. i am so thankful to you sir… keep posting

kumar ravi shankar

October 12, 2014 at 10:18 am

sir your expanations excellent.
could u plz exlain how to benefit from sip in stock ?
what we take cautions while sip in stock ?

Neeraj

June 11, 2016 at 4:45 pm

Really Appreciable

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