CAN SLIM is a stock selection method developed by William O’Neil, the founder of Investor’s Business Daily, and set out in his book How to Make Money in Stocks. O’Neil studied the biggest winning stocks over several decades and listed what they had in common before their largest gains. Each letter of the name stands for one of seven traits. The method mixes fundamental tests (earnings and sales growth) with technical ones (new highs, volume, relative strength and the market trend).
The seven parts
- C, current quarterly earnings. Earnings per share for the latest quarter should be well above the same quarter a year earlier. O’Neil’s later editions look for growth of at least 25%, and accelerating growth is better.
- A, annual earnings growth. Annual earnings should have grown strongly over the past three to five years, around 25% a year in the later editions, without big setbacks.
- N, something new. A new product, new management or a change in the industry, and a price that is breaking out to a new high from a sound base. The idea is to buy strength, not to bottom-fish.
- S, supply and demand. Watch the volume. A breakout should come on volume well above average, which shows real demand for a limited supply of shares.
- L, leader or laggard. Buy the leading stocks in leading industries. O’Neil measured leadership with a relative strength rating and favored stocks that outperformed at least 80% of the market.
- I, institutional sponsorship. A rising number of good funds buying the stock. Some sponsorship is a vote of confidence; ownership that is already very heavy leaves fewer new buyers.
- M, market direction. The most important rule: three out of four stocks tend to follow the general market, so new buying makes sense only when the market itself is in an uptrend.
How traders use it
- As a filter. The C, A and L rules narrow thousands of stocks to a short watch list of fast-growing leaders.
- Buying the breakout. Stocks on the list are bought as they break out of a base, such as a cup with handle or a flat base, on heavy volume, and near the breakout point rather than well above it.
- Cutting losses quickly. The method comes with a strict sell rule: exit a stock that falls 7% to 8% below the purchase price. Without it, buying breakouts is much riskier.
- Watching the market first. Followers of the method cut back on new buying when the major indexes show heavy selling or break below key moving averages, and wait for a new uptrend before buying again.
Settings and common mistakes
- Ignoring the M. Most CAN SLIM failures come from buying good stocks in a falling market. Check the index trend before anything else.
- Using only the fundamentals. Strong earnings alone do not make a buy. The method waits for the price to confirm with a breakout on volume.
- Skipping the sell rule. Fast growers are volatile. A breakout that fails can fall a long way, and the 7% to 8% stop exists for that reason.
- Reading old thresholds as fixed. The numbers have changed between editions of the book and are guidelines. A stock that misses one test narrowly is not automatically out.
CAN SLIM is a trademark of Investor’s Business Daily. Our screens apply its published rules with our own data; they are not affiliated with IBD.
Live chart: SPY (S&P 500 ETF), daily, with the 50-day and 200-day simple moving averages, a simple way to check the M in CAN SLIM. The chart updates every trading day.
Screen for it on MarketInOut
Our formula language has the earnings and sales growth fields and a relative strength rank, rs(252), which ranks a stock’s one-year return against all stocks on its exchange from 0 to 100. It is similar in spirit to O’Neil’s rating but not the same calculation. Fast earnings growers near their 52-week high with strong relative strength, while the S&P 500 is above its 200-day average (otherwise the screen returns nothing):
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and eps_yoy > 25 and eps_5y_growth > 20 and price >= 0.85 * w52high
and rs(252) > 80 and (price > sma(200))@sp500
Stocks with two straight quarters of 25%+ earnings growth and 20%+ sales growth, breaking out to a 52-week high on above-average volume:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and eps_yoy > 25 and eps_yoy[1] > 25 and revenue_yoy > 20
and rs(252) > 80 and price new_high 252 and rvol(21) > 1.4
Related: Chart patterns, Moving averages, Dow Theory.
