What is CANSLIM? CAN SLIM Performance Tested

CANSLIM is a Stock Investing Strategy Formulated by William J. O’Neil in his Book “How to make money in stocks”. But Does it Beat The Market?

CAN SLIM is an active investing system using earnings, market leadership, product innovation, institutional ownership, and stock price trend as key criteria for stock selection.

This article will explain what CANSLIM (also known as CAN SLIM) is, the CANSLIM methodology, and test its performance track record.

What is the CANSLIM Investing Strategy?
What is the CANSLIM Investing Strategy?

What is CANSLIM?

CAN SLIM 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 important screening criteria in the CANSLIM system.

It combines fundamental analysis and technical analysis into a cohesive strategy.

What is the CANSLIM Methodology?

The CANSLIM methodology brings together business fundamentals like a company’s market leadership, product innovation, and management team effectiveness. CANSLIM combines business and stock market fundamentals like earnings and stock price growth, institutional ownership, and overall market direction.

The CANSLIM Criteria

  • C – Current Earnings
  • A – Annual Earnings
  • N – New Products or Management
  • S – Supply and Demand
  • L – Leaders
  • – Institutional Ownership
  • M – Market Direction

Below we will summarize the key elements of the strategy:

C – Current Earnings

In the CANSLIM abbreviation, the C represents Current Earnings. Has the company made a strong recent earnings announcement, 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 essential 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.

The A in the CANSLIM abbreviations refers to Annual Earnings. Does the company show good earnings growth for previous years? O’Neill suggests an annual growth rate in earnings of at least 25% again. 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. Select a 5-year annual earnings growth rate. This will help you filter out 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.

In CANSLIM, N refers to New, new production, new leadership, or new stock 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.

Suppose a company has a history of innovation or developing products that are superior to the competition in price, quality, or both. In that case, this is an excellent signal for future stock price growth.

Additionally, according to O’Neill, management or board changes 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 constantly been injecting new management, merging, and spinning off, to the dismay of its shareholders and employees.

Finally, the suggestion is that new stock price highs might encourage further demand for the stock and push prices even higher.

– Supply and Demand.

The S in CANSLIM is a technical criterion referring to increases in demand for the stock. Does the stock have increasing demand? Is trading volume increasing with the price?

Here we get to a core principle; it is the only reason why stock prices go up or down. If the sellers (supply) outnumber the buyers (demand), stock prices decrease. If demand outstrips supply, prices go up.

A stock price may go up or down on any single day, and it is mostly irrelevant. However, if you see 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 be higher than the average volume for the stock in the previous three months.

– Leaders

The L in CANSLIM  asks, “Is the company a leader in its market?” This is another crucial business question about competitive advantage.

A company that is a leader in its industry must have some critical competitive advantages, either in the product, service quality, or pricing. However, finding these companies by sifting through every firm’s product listing and doing a competitive market analysis is impossible. So, O’Neill 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 outperforming the major market indices in terms of price growth. So, to beat the market, you need to select companies that are already beating the market. Seem reasonable?

I – Institutional Ownership.

In CANSLIM, the I refers to Institutional ownership. Does the stock have a substantial level of institutional ownership? More than 70% of all shares are owned by institutions, mostly on behalf of their investors.

The point here is that you would want to see at least 30% institutional ownership to know that the company is at least on the radar of institutional buyers.

As investment companies have the most buying power, they are in the position to make the most significant impact on stock prices. If the company is not attractive to the investment firms, then the chances of the stock price moving significantly higher or negligible.

Finally, if institutional ownership is over 90%, how much room is there for the stock price to move higher? Not much.

M – Market Direction.

In CANSLIM, M refers to market direction. This criterion is designed to ensure an investor only invests with the market’s direction, thus increasing the chance of profitability. Understanding the overall market direction is essential 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 to move upwards to move the market upward, 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 higher chance of making a profit, and that is a fact.

CANSLIM Strategy

Now let’s take a step back to understand the overall CANSLIM strategy.

The CANSLIM model is essentially a flexible investing style that relies on the positive momentum generated by fast-growing, profitable companies with leading products and services in a growing market.

Flexibility: With CANSLIM, there is no defined holding period for a stock. You may hold the stock for two days or two 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 when the stock price breaks into a new 52 week high. The strategy also indicates that you should cut your losses and sell if the stock falls 7 or 8%. For any given stock, this could happen within a week or over a few years.

Momentum: CANSLIM is a momentum strategy, as the rules are to 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 a company to be growing earnings strongly at its core. 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 leading their industry in terms of product and services, innovation, or at least stock price growth. This makes sense. Would you want to buy shares in a company falling behind its competitors? Leading could also mean ethical leadership and good ESG policies.

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.
  • Over the last eight years, Nvidia’s growth has been driven by the cryptocurrency craze; their graphics card chips are used 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 Performance

Investors Business Daily claims good results for the CANSLIM system, but independent sources provide mixed results. We will examine one academic study, the history of two CANSLIM ETFs, and three AAII model portfolios.

Let us look at how the CANSLIM strategy performed in the past?

CANSLIM Performance – Academic Research

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 1999 through 2013 and achieved a greater reward per unit of risk when compared to the NASDAQ 100.”

Theoretical CANSLIM Historical Performance vs NASDAQ 100 Backtested
Theoretical CANSLIM Historical Performance vs. NASDAQ 100 Backtested. Courtesy of Lutey, Crum & Rayome, 2013

Source & Copyright: Matthew Lutey (University of New Orleans) and Michael Crum and David Rayome (Northern Michigan University)

In academic research, the CANSLIM methodology performed well.

CANSLIM ETF Performance Results – CANGX

The CAN SLIM Select Growth Fund (Ticker: CANGX) was established in 2005 to implement the CANSLIM Select strategy into an ETF. Investors can simply buy the ETF rather than implement the strategy themselves. This is a great idea, except for the fact that the CANGX fund did 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.

CANGX CANSLIM ETF Historical Performance - Lags the S&P 500
CANGX CANSLIM ETF Historical Performance – Lags the S&P 500 – Chart TC2000

CANSLIM Tactical Growth Fund ETF

The CANGX CANSLIM Tactical Growth Fund ETF stopped trading in July 2021 and was liquidated due to not enough investors buying into the fund, probably because of a lack of performance.

“NorthCoast Asset Management LLC, the Adviser to the CAN SLIM® Tactical Growth Fund (the “Fund”), has recommended, and the Board of Trustees (the “Board”) of Professionally Managed Portfolios has approved, the liquidation and termination of the Fund. The Adviser’s recommendation was primarily based on the fact that the Fund is not economically viable at its present size, and the Adviser did not anticipate that the Fund would experience meaningful growth in the foreseeable future. The liquidation is expected to occur after the close of business on August 31, 2021.” Source

Innovator IBD 50 ETF

The Innovator IDB 50 ETF (Ticker: FFTY) was established in April 2015 to maintain a portfolio of the Investor’s Business Daily Leaderboard Top 50 Stocks, essentially a CANSLIM Fund.

This CANSLIM ETF is still running, but the performance is poor. The stock chart below shows the CANSLIM ETF performance from April 2015 to 2022.

Does CANSLIM Still Work?
According to IBD, the CANSLIM strategy does still work, claiming a 20.7% average annual return. IBD provides no audited evidence to back up this assertion. The CANGX and Innovator IDB 50 ETF based on CANSLIM have underperformed the market. The academic research “OPBM II” is outdated and no longer valid.

The IBD 500 ETF returned 42% over seven years to 2022. The S&P 500 ETF returned 109%, and the Nasdaq 100 made 216%.

So again, we can see that professional fund managers cannot make the CANSLIM methodology and strategy successful. The chart shows that over the last seven years, the IDB 50 ETF was very rarely ahead of the S&P 500 in terms of performance.

CANSLIM Backtest

In terms of a CANSLIM backtest, the AAII maintains an audited track record of three interpretations of a CANSLIM portfolio starting from February 1999. The backtested performances range from 13.9% to 20.2% average returns for the period, which is ahead of the S&P 500.

These portfolios look promising until you look inside the holdings of each portfolio.

When drilling down into the AAII CAN SLIM portfolios, I discovered that the “O’Neil’s CAN SLIM Revised 3rd Edition Screen” has only one stock in the portfolio. The “O’Neil’s CAN SLIM No Float Screen” portfolio contains only six stocks. Finally, the “O’Neil’s CAN SLIM Screen” portfolio has only three stocks.

We cannot rely on the AAII CANSLIM portfolios for an accurate performance backtest of the investing system.

This means the CANSLIM methodology is too stringent for today’s stock market, and not enough stocks meet the CANSLIM criteria. Alternatively, it could mean that the AAII interpretation of CANSLIM is too restrictive.

Does CANSLIM Still Work?

According to IBD, the CANSLIM strategy does still work, claiming a 20.7% average annual return. IBD provides no audited evidence to back up this assertion. The CANGX and Innovator IDB 50 ETF based on CANSLIM have underperformed the market. The academic research “OPBM II” is outdated and no longer valid.

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How To Create a CANSLIM Stock Screener

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.

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, the Number of Shares Available, and the share price Relative Strength vs. Competitors. Also, the Institutional Ownership criteria are 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 USA 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 Stock Rover CANSLIM Screener

The CANSLIM strategy results using the Stock Rover screener are impressive, beating the S&P 500 on all timescales from 5 days to 10 years; look at the screenshot below.

The CANSLIM Stock Screener Beats the S&P 500
The CANSLIM Stock Rover Stock Screener Beats the S&P 500

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
5 Day 2.7%
1 Month 9.4%
3 Month 13.6%
6 Month 13.9%
1 Year 23.4%
10 Year 100.6%

I would not rely on the 10-year figure as you will need to continually 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

    Importing the CANSLIM Screener in Stock Rover
    Importing the CANSLIM Screener in Stock Rover

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 an outstanding performance record.

  1. In the Screeners search box, type “CAN SLIM.”
  2. Select the two CANSLIM Screeners
  3. Click Button – Import (2 Items Selected)
Searching for CANSLIM
Searching for CANSLIM

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

  1. Select Screeners
  2. Select the CAN SLIM – Less Restrictive Screener
  3. In the Chart Below, Select “Compare To”
  4. Select Benchmarks
  5. Select S&P 500 or NASDAQ
  6. Select Return Vs. S&P 500 Column Views
How To Setup Your CANSLIM Screener vs S&P 500 View
How To Setup Your CANSLIM Screener vs. S&P 500 View

5 – Select 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 select the right companies to invest in carefully.

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 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.

CANSLIM Strategy Combined With Buffett's Margin of Safety for Stock Selection
CANSLIM Strategy Combined With Buffett’s Margin of Safety for Stock Selection

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CANSLIM - Stocks, Screening, Criteria & Strategy
CANSLIM – Stocks, Screening, Criteria & Strategy

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