CANSLIM is touted to be a highly profitable stock market strategy. We will discuss in-depth what it is, how it works, its performance and how to implement it in a stock screener that might just beat the market.
Plus we introduce an additional strategy that helps you select the CANSLIM stocks for your portfolio using Buffett’s Margin of Safety.
What is CANSLIM?
CANSLIM is a stock investing strategy designed by William J. O’Neil to produce market-beating profit performance. Using the CAN SLIM criteria in your investing should mean profitable returns. Current Earnings, Annual Earnings, New Products, Supply, Leaders, Institutional Sponsorship & Market Direction are key criteria.
CAN SLIM has the following stock selection criteria:
- C – Current Earnings
- A – Annual Earnings
- N – New Products or Management
- S – Supply and Demand
- L – Leaders
- I – Institutional Ownership
- M – Market Direction
Pioneered by William J. O’Neil The CANSLIM method is the basis for his classic investing book “How to Make Money in Stocks”.
Many people believe that the CANSLIM methodology is a Value Investing strategy, but this is incorrect, as the system criteria are not targeted at finding undervalued stocks but rather finding companies with fast-growing earnings in growing markets with a competitive advantage. So CANSLIM is more like a stock market growth strategy.
The CANSLIM Method of Investing
Now we will dive deeper into the meaning of each of the elements of the CANSLIM method.
C – Current Earnings
Has the company made a strong recent earnings announcement which is considerably more than the earnings one year previously?
From his research, O’Neill discovered that the majority of companies that experienced strong stock price growth had quarterly earnings growth in excess of 70% before the price growth started.
However, that might be the case for a small handful of hugely successful companies but to build a portfolio of stocks, or at least have a choice of more companies, he recommends a most recent quarterly (MRQ) earnings per share (EPS) increase of at least 18-20%. He also suggests an accompanying sales growth of at least 25%.
The sales growth check is important because without consistent sales growth it is impossible to maintain earnings growth.
Has the company made a strong recent earnings announcement which is considerably more than the earnings one year previously?
A – Annual Earnings.
Does the company show good earnings growth for previous years? O’Neill suggests again an annual growth rate in earnings of at least 25%. He also suggests that a return on equity (ROE) of over 17% should also be checked for as it implies the company is investing its capital efficiently.
Most stock screeners will allow you to filter on 1,3 & 5 year annual earnings growth. If you select a 5-year annual earnings growth rate this will help you to filter out those companies who are simply experiencing short term growth or manipulating accounts to show higher earnings for a particular quarter. You can play with the timescale you use, but this seems like a reasonable criterion.
N – New Products, Management or Price Highs.
Has the company innovated its product base or injected new management to seek higher performance? Here we essentially move to a business question.
If a company has a history of innovation or developing products that are superior to the competition in price, quality or both, this is a very good signal for future stock price growth.
Additionally, management or board changes according to O’Neill were also a positive indicator. Injecting new blood into an organization’s leadership structure is a way to drive growth, New People = New Ideas.
Here I tend to disagree, continually injecting or hiring externally to try to find that magic growth formula very rarely works out positively.
Look at the history of Hewlett Packard (Ticker: HPQ) since the founders left the company has been constantly injecting new management, merging and spinning off, to the dismay of their shareholders and employees.
Finally, the suggestion is that new stock price highs might encourage further demand for the stock and push prices even higher.
S – Supply and Demand.
Does the stock have an increasing demand in the marketplace, is trading volume increasing with price?
Here we get to a core principle; in fact, it is the only reason why stock prices go up or down. If the sellers (supply) outnumber the buyers (demand), stock prices go down. If demand outstrips supply, prices go up.
Now on any single day, a stock price may go up or down and it is largely irrelevant. However, if you are seeing over weeks and months volume growth and stock price going up, you know demand is higher than supply.
O’Neill recommends that the daily trading volume needs to be higher than the average volume for the stock in the previous 3 months.
L – Leaders
Is the company a leader in its marketplace? This is another key business question about competitive advantage.
A company that is a leader in its industry must have some key competitive advantages, either in product, service quality or pricing. However, finding these companies by sifting through every firm’s product listing and doing competitive market analysis is impossible. So, O’Neill kindly suggests looking for companies with stock price strength higher than their competitors, higher even than 80% of the stock market.
Essentially any company near, at or breaking through their stock price 52 week high is a candidate. Add to this any company that is outperforming the major market indices in terms of price growth. So, essentially to beat the market, you need to select companies that are already beating the market. Seem reasonable?
I – Institutional Ownership.
Does the stock have a solid level of institutional ownership? More than 70% of all stocks are owned by institutions, mostly on behalf of their investors. If you have a pension or own ETF’s, you will not actually own the stocks, you own part of the company that hold those stocks for you.
The point here is that you would want to see at least 30% institutional ownership so that you know that the company is at least on the radar for institutional buyers.
As investment companies have the most buying power, they are in the position to make the biggest impact on stock prices. If the company is not interesting to the investment firms then the chances of the stock price moving significantly higher or negligible.
Finally, if institutional ownership is over 90% for example, how much room is there for the stock price to move higher? Not much.
M – Market Direction.
Understanding the overall market direction is important to be able to time your purchase of the stock effectively.
The market moves in three directions, uptrend, downtrend or consolidation (sideways). If you are buying stocks during a multi-year bear market, then the chances of you making any money are small. During periods of market fear most company stock prices drop.
In fact, 3 out of 4 stocks move in the same direction as the market according to O’Neill.
The actual reality is that it takes 3 out of 4 stocks in the market to move upwards to move the market upwards as the market is only a reflection of all the stock prices. The key takeaway here is that if you buy stocks in a Bull market, you have a much greater chance of making a profit, and that is a fact.
The CANSLIM strategy is essentially a flexible investing style that relies on the positive stock price momentum generated by fast growing, profitable companies with solid growth in quarterly and annual earnings. The companies must also have innovative leading products and services in a growing bull market.
Now let’s take a step back to understand the overall CANSLIM strategy.
Flexibility: With CANSLIM there is no defined holding period for a stock. You may hold the stock for 2 days or for 2 years. It could be seen as a swing trading strategy or a medium-term buy and hold strategy. One thing it is not is a value investing strategy.
The entry point into a stock is suggested to be when the stock price breaks into a new 52 week high. Also, the strategy suggests that is the stock falls 20% you should cut your losses and sell. For any given stock this could happen within a week, or over a period of years, therefore a flexible timeframe.
Momentum: CANSLIM is a momentum strategy, as the rules are buy when the stock is at a new 52 week high, when the stock is experiencing increased trading volume and when the overall market is in an uptrend. This is the definition of momentum trading and market timing.
Profitable Growth: The CANSLIM strategy also requires at its core a company to be growing earnings strongly. Current quarterly earnings and annual earnings must be increasing aggressively along with sales. So, you are looking for profitable fast-growing companies.
Great Products: Of course, the L in CANSLIM refers to companies that are leading their industry in terms of product and services, innovation, or at least in stock price growth. This makes sense, would you want to buy shares in a company that is falling behind its competitors.
Growing Markets: Finally, the M in CANSLIM refers to growing markets. The market that the company operates in needs to be growing, for example:
- Google’s explosive growth was fueled by the widespread rapid adoption of the internet
- Nvidia’s growth has over the last 8 years been fueled by the cryptocurrency craze, their graphics cards chips are using in Crypto mining operations.
The CANSLIM strategy is to:
Buy stocks in profitable companies, with great products, in growing markets at the right time.
CANSLIM Historical Results
So, how has the CANSLIM strategy performed in the past? There are various professionally back-tested studies and a mutual fund ETF based on the methodology, let’s take a close look.
CANSLIM Historical Results – OBPM II Academic Paper
In a 2013 academic paper entitled “OPBM II: An Interpretation of the CAN SLIM Investment Strategy”, found the following results:
“The simplified CANSLIM trading strategy outperformed the NASDAQ 100 Index by .94% per month for the period 2010 through 2013 and achieved a greater reward per unit of risk when compared to the NASDAQ 100.”
Source & Copyright: Matthew Lutey (University of New Orleans) and Michael Crum and David Rayome (Northern Michigan University)
CANSLIM Historical Results – AAII Portfolio
The American Association of Individual Investors (AAII) also maintains a portfolio of CANSLIM stocks which they suggest has returned 19.9% per year on average for the last 15 years. Source.
CANSLIM Historical Results – CANGX ETF
The CAN SLIM Select Growth Fund (Ticker: CANGX) was established in 2005 to implement the CANSLIM Select strategy into an ETF so that investors can simply by the ETF rather than implement the strategy themselves. This is a great idea, except for the fact that the CANGX fund, does not exhibit the expected 0.94% return per month higher than the underlying index. In fact, from my calculations, it has trailed the S&P 500 by 0.79% per year.
This does not necessarily invalidate the strategy; it simply implies that the strategy relies on good portfolio management and the process of rotating the stocks in and out of the portfolio needs to be improved. Also, the cash allocation is important, if you only allocate75% of the cash and the rest is in bonds, you may miss out on price moved. Additionally, during stock market downtrends you need to move to cash as the M in CANSLIM (Market Direction) suggests. If you do not do this on time you may suffer additional losses.
To summarize, there is plenty of positive testing to prove the system is beneficial to investor’s performance, but how you manage the buying and selling of stocks will be the big differentiator in profits.
CANSLIM Stock Screener
A CAN SLIM stock screener needs to scan for Current Earnings and Annual Earnings with a 5-year history. Next, the CANSLIM screener needs to filter on 52-week stock price highs, Number of Shares Available and the share price Relative Strength vs. Competitors. Also, the Institutional Ownership criteria is critical.
To implement a CANSLIM strategy you will need to use a stock screener to automatically scan the entire stock market to find stocks that meet the right criteria.
The best stock screener on the market today is Stock Rover for U.S.A. and Canada exchanges and TradingView for international exchanges. If you intend to implement this system on US and Canadian stocks, we strongly recommend Stock Rover, it won our Top 10 Best Stock Screener Review and is also great value for money.
The rest of this article will show you how to implement CANSLIM for yourself using Stock Rover.
The Stock Rover CANSLIM Screener
The results of the CANSLIM strategy using the Stock Rover screener are impressive, beating the S&P 500 on all timescales from5 days to 10 years, look at the screenshot below.
You can see that the CANSLIM scan in Stock Rover has beaten the S&P 500 solidly over the past years.
|Return vs S&P 500||Percent Beat|
I would not rely on the 10-year figure as you will need to constantly run the scan at least monthly and add stocks to the portfolio or remove those that no longer qualify.
5 Steps to Implement CANSLIM with a Stock Screener
Here are the 5 Steps to implement the Stock Rover CANSLIM stock screening strategy.
1 – Register with Stock Rover
You will need a Premium Plus Membership which gives you access to all the criteria and the database with a unique 10-year history. It will also allow you to implement all our Warren Buffett screeners and our full list of stock screening strategies and our Dividend growth and dividend yield strategies.
2 – Browse Screener Library
See the image to the right.
Launch Stock Rover and select:
Screeners (Down Arrow)
Browse Screener Library
This takes you to the following screen.
3 – Import CANSLIM Screeners
Stock Rover has a built-in screen for CANSLIM called “CAN SLIM – Less Restrictive” which has a very good performance record.
This is the screener we will be using.
- In the Screeners search box type “CAN SLIM”
- Select the two CANSLIM Screeners
- Click Button – Import (2 Items Selected)
4 – View the Portfolio Performance
Now that you have imported the screener, here is how to set up the excellent comparison view vs the S&P 500
- Select Screeners
- Select the CAN SLIM – Less Restrictive Screener
- In the Chart Below Select “Compare To”
- Select Benchmarks
- Select S&P 500 or NASDAQ
- Select Return Vs. S&P 500 Column Views
5 – Selecting Your CANSLIM Stocks
The scan produces a list of 32 stocks from the entire stock exchange listing of over 12,000 companies. Even though this list is small 32 may still be too many to hold at any one time. So, you will need to carefully select the right companies to invest in.
I would suggest that you can combine the CANSLIM strategy with Warren Buffett’s margin of safety concept in value investing. The margin of safety is a way of measuring how undervalued a stock is compared to its intrinsic value. The more undervalued a stock is, the safer the investment.
So, you could simply narrow down your stock selection using, for example, the top 10 stocks with the highest margin of safety. See the image below.
The criteria in the CANSLIM strategy we are using is as follows:
- Current Earnings – EPS (MRQ) >= 1.18* EPS [Q4]
- Annual Earning – EPS 5-Year Average (%) > 24.9
- New Price High – Price vs 52-week high (%) >84
- Supply – Shares Available (Millions) > 9
- Leader – Relative Strength Index > 69
- Institutional Ownership % > 35
- Market Direction – Is the Market Trend Up?
As you can see all the factors in CANSLIM are covered, except for the overall market direction, this you can decide for your self by looking at a stock chart of the S&P500, read this article for further information on stock market direction.
CANSLIM Stock Trading System
Now we have all the foundations in place for the CANSLIM system. The last piece of the puzzle is when to buy and sell the stocks.
One example of how you could do it comes from the backtested CANSLIM results in the previously mentioned OPBMII paper
This paper suggests rebalancing the portfolio on a weekly basis:
Rebalancing – It should be noted that the system rebalances (re-runs the screen and possibly select new holdings) every week.
Of course, a weekly portfolio rebalance may be time-consuming, so you might want to lengthen it to bi-monthly or monthly. But the rebalance does not need to be expensive, as now there are brokerage accounts like our partner Firstrade that offer $0 commissions. This means a regular rebalance will not cost you anything.
The backtesting used cash allocation by holding a maximum of 10 stocks each with 10% of the invested portfolio capital.
Weighting Ideally, the system will select 10% weighting to each position with a maximum of 10 positions.
This to me sounds reasonable if you are investing at least $10,000 which would be $1,000 per stock.
Exiting & Selling the Stocks
The tests also sold stocks if they lost 7%, O’Neill suggested 20% but I find 20% too much to risk on any one trade.
Exits/Closing Positions if a stock drops 7% after purchase, it will be removed but considered at the rebalance the next week (if it still passes criteria).
Current CANSLIM Stocks
Here you will find a selection of the 32 CANSLIM stocks discovered as part of our CANSLIM scan using Stock Rover on 11 November 2019.
CANSLIM Investing Strategy Summary
I hope you found this guide useful, not just for learning about CANSLIM but also for practically understanding the strategy and even implementing it into a cohesive methodology using a stock screener. We explored the system’s historical performance and found that it has merit and could be a solid solution to stock selection and portfolio management.
Screening With Stock Rover Video