What is CANSLIM? How to use CAN SLIM to Beat the Market?

What is CANSLIM / CAN SLIM?

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.

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

The CANSLIM Criteria

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

Below we will summarize the key elements of the strategy:

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 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.

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 an excellent signal for future stock price growth.

Additionally, the 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 constantly been 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 the 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 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 needs to be higher than the average volume for the stock in the previous three months.

L – Leaders

Is the company a leader in its marketplace?  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 the 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 substantial level of institutional ownership?  More than 70% of all shares 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 holds 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 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%, 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 essential 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 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 to be when the stock price breaks into a new 52 week high.  Also, the strategy indicates that if 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. Leading could also mean ethical leadership and good ESG policies.

• Related Article: How to Build an Ethical Investment Portfolio

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 eight years, been driven 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 Performance & 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 buy 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 merely 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 essential; if you only allocate75% of the cash and the rest is in bonds, you may miss out on price moved.  Additionally, during the 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.

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, 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 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.

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.

• Next Step – Read Our in-depth CANSLIM Screener and Strategy Implementation Article

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.

• Read the Full Stock Rover Review

  

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 an outstanding performance record.

This is the screener we will be using.

1. In the Screeners search box type “CAN SLIM.”
2. Select the two CANSLIM Screeners
3. 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

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

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 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.