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STOCK SCREENING
HOW TO USE THE CAN SLIM APPROACH
TO SCREEN FOR GROWTH STOCKS
By John Bajkowski
Take an attention-grabbing book title, toss in an easy-to-remember acro-
AAII has been testing nym, and top it off with a daily business newspaper that supplies information
the performance of a required for preliminary analysis: You’ve got the recipe for a popular invest-
wide range of ment strategy. The CAN SLIM approach is presented by William O’Neil,
screening systems for publisher of Investor’s Business Daily, in his book titled “How to Make
Money in Stocks: A Winning System in Good Times or Bad.”
over five years, and The second edition of “How to Make Money in Stocks” presented a stock
our interpretation of selection approach developed by studying 500 of the biggest stock market
the CAN SLIM winners from 1953 to 1993. The CAN SLIM approach presented in the book
approach has been was based upon the characteristics that these winning stocks possessed prior
one of the most to their big price run-ups. Recently, O’Neil extended his analysis of past
market winners to 600 companies that performed strongly from 1953 to 2001
consistent and and revised a number of CAN SLIM criteria. The third edition of “How to
strongest-performing Make Money in Stocks” was published last year and presents the revised
screens during both CAN SLIM rules (see Table 1). This article presents the CAN SLIM approach
bull and bear markets. with an eye toward the recent changes and its application using AAII’s stock
screening system—Stock Investor Pro. Additionally, the March/April 2003
issue of Computerized Investing presents how to apply the CAN SLIM stock
screen using Internet stock screening systems.
CAN SLIM OVERVIEW
The CAN SLIM approach seeks companies with a proven record of quar-
terly and annual earnings and sales growth showing strong relative price
strength and support from leading institutions. O’Neil does not mind paying
rich premiums for stocks with good prospects. He feels that most strategies
seeking stocks with low price-earnings are flawed because they ignore the
price trend determining the price-earnings ratio, as well as the quality of the
“The American Association underlying earnings within the ratio. O’Neil believes that stocks generally
of Individual Investors sell for what they are worth and most stocks with low price-earnings ratios
is an independent are probably priced correctly by the market. O’Neil also asserts that it is
not-for-profit corporation
formed in 1978 for the important to follow the market closely and try to lighten up your stock
purpose of assisting exposure when going into a bear market.
individuals in becoming
effective managers of C = CURRENT QUARTERLY EARNINGS
their own assets through
programs of education,
information, and research.” The CAN SLIM approach focuses on companies with proven records of
earnings growth that are still in a stage of earnings acceleration. O’Neil’s
AAII study of winning stocks revealed that these securities generally had strong
625 N. Michigan Ave.
Chicago, IL 60611 quarterly earnings per share performance prior to their significant price run
800-428-2244 ups.
www.aaii.com O’Neil recommends looking for stocks with a minimum increase in quar-
terly earnings of 18% to 20% over the same quarterly period one year ago.
When screening for quarterly earnings increases, it is important to compare a
quarter to the equivalent quarter last year—in other words, this year’s second
quarter compared to last year’s second quarter. Many firms have seasonal
John Bajkowski is AAII’s financial analysis vice president and editor of Computerized
Investing.
12 AAII Journal/April 2003 Reprinted by Investor's Business Daily with Permission (c)AAII 2003
STOCK SCREENING
patterns to their TABLE 1. REVISED CAN SLIM RULES
earnings, and compar-
ing similar quarters
Third Edition Comparison to Second Edition
helps to take this into C = Current Quarterly Earnings Per Share: The Higher, the Better
account. Primary Should show a major percentage increase (18% or 20% Same as in Second Edition
Factors minimum) in the current quarterly EPS when compared to the
Another item to prior year's same quarter.
watch for when screen- Omit a company's one-time extraordinary gains. Same as in Second Edition
Look for accelerating quarterly earnings growth. Same as in Second Edition
ing for percentage Secondary Look for quarterly sales growth of 25% or at least an New to Third Edition
acceleration in rate of sales percentage improvements over
changes is a meaning- Factors
the last three quarters.
less figure created by Find at least one other stock in the same group showing Same as in Second Edition
strong quarterly earnings growth.
having a very small A = Annual Earnings Increases: Look for Significant Growth
base number. For Primary The annual compounded growth rate for EPS should be at The EPS annual compounded growth rate should be at least
Factors least 25%. 25% over the last four or five years.
example, an increase Significant growth in EPS for each of the last three years. Each year's annual EPS for the last five years should show an
from one penny to 10 increase over the prior year's earnings.
Secondary The consensus earnings estimate for the next year should be Same as in Second Edition
cents translates into a Factors higher than the current year.
900% earnings in- Return on equity of 17% or more. New to Third Edition
Look for annual cash flow per share greater than actual New to Third Edition
crease. It is always earnings per share by at least 20%.
advisable to look at the Earnings should be stable and consistent from year to year Earnings should be stable and consistent from year to year
over the last three years. over the last five years.
raw numbers of the N = New Products, New Management, New Highs: Buying at the Right Time
company passing the Primary Look for companies with a major new product or service, new Same as in Second Edition
Factors management, or a positive change for the industry.
screen. This allows you Secondary Look for stocks close to or making new highs in price after a Same as in Second Edition
to gauge the overall Factors period of consolidation.
Strong volume on price move up.
trend and stability in S = Supply and Demand: Shares Outstanding Plus Big Volume Demand
earnings and other Primary Any size stock can be purchased under the CAN SLIM system. Stocks with a small or reasonable number of shares
The market will shift its emphasis between small- and large- outstanding will, other things being equal, usually outperform
Factors
items such as sales and cap stocks over time. older, large-capitalization stocks.
When choosing between two stocks, the stock with the lower Greater emphasis on stocks with limited float in Second
cash flow. number of shares should perform better to the upside, but can Edition.
Whenever you are come down just as fast.
Secondary Stocks with a large percentage of ownership by top Same as in Second Edition
working with earnings, Factors management are generally good prospects.
the issue of how to Look for companies buying their own stock in the open market. Same as in Second Edition
Look for companies with a lower debt-to-equity ratio and Same as in Second Edition
handle extraordinary companies reducing their debt-to-equity ratios over the last few
earnings comes into years.
L = Leader or Laggard: Which Is Your Stock?
play. One-time events Primary Buy among the top two or three stocks in a strong industry Same as in Second Edition
can distort the actual Factors group.
Use relative price strength to separate the leaders from the Same as in Second Edition
trend in earnings and laggards—a stock with a relative strength rank below 70% is
make the company lagging and should be avoided.
Secondary Look for companies with a relative strength rank of 80% or Same as in Second Edition, but greater emphasis on limiting
performance look better Factors higher that are in a chart base pattern. buys to stocks with a relative strength rank of 80% or greater
in Third Edition.
or worse than a Don't buy stocks with weaker than average performance Same as in Second Edition
comparison against a during a market correction.
I = Institutional Sponsorship: Follow the Leaders
firm without special Primary Look for a stock to have several institutional owners. 10 might Same as in Second Edition
charges. O’Neil Factors be a reasonable minimum.
Look at quality of owners—seek out stocks held by at least Same as in Second Edition
recommends excluding one or two savvy portfolio managers.
these non-recurring Look for stocks with an increasing, not decreasing, number of Same as in Second Edition
sponsors.
items from the analysis. Secondary Avoid stocks that are over-owned—excessive institutional Same as in Second Edition
The first two screens Factors ownership.
M = Market Direction
require quarterly Primary It is difficult to fight the trend, so try to determine if you are in a Same as in Second Edition
earnings growth greater Factors bull or bear market.
Follow and understand what the general market averages are Same as in Second Edition
than or equal to 20% doing every day.
and positive earnings Try to go 25% into cash when the market peaks and begins a Same as in Second Edition
major reversal.
per share from continu- Heavy volume without significant price progress may signal a Same as in Second Edition
top, but initial market decline may be on lower volume.
ing operations for the Follow market leaders for clues on strength of market. Same as in Second Edition
current quarter. We Secondary Look for divergence of key averages and indexes at major Same as in Second Edition
Factors turns—divergence points to weaker and narrow market
used Stock Investor movement.
Pro, with data as of Sentiment indicators may help highlight extreme psychological Same as in Second Edition
reversal points.
March 14, 2003, for The change in the discount rate is a valuable indicator to Same as in Second Edition
the screen. Only 2,343 watch as a confirmation of market moves.
stocks out of an initial
universe of 8,428 met
Reprinted by Investor's Business Daily with Permission. (c)AAII 2003 AAII Journal/April 2003 13
STOCK SCREENING
these two criteria. Investor Pro, we specified that revealed that this requirement often
Beyond looking for strong quar- earnings per share from continuing led to a very small number of
terly growth, O’Neil likes to see an operations be higher for each year passing stocks and hurt performance
increasing rate of growth. An when compared against the previous since 2001. The revised screen does
increasing rate of growth in quar- year. To help guard against any not make use of the return on equity
terly earnings per share is so recent reversal in trend, a criterion filter.
important in the CAN SLIM system was included requiring that earnings
that O’Neil warns shareholders to over the last 12 months be greater N = NEW PRODUCTS, NEW
consider selling holdings of compa- than or equal to earnings from the MANAGEMENT, NEW HIGHS
nies that show a slowing rate of latest fiscal year. When screened by
growth for two quarters in row. The itself, 795 companies passed this O’Neil feels that a stock needs a
next screen specified that the earn- filter compared to the 469 compa- catalyst to start a strong price
ings growth rate from the quarter nies that passed the second edition’s advance. In his study of winning
one year ago compared to the latest tighter filter. Adding the filter stocks, he found that 95% of the
quarter be higher than a similar requiring a year-by-year earnings winning stocks had some sort of
quarter one year earlier. This increase for each of the last three fundamental spark to push the
reduced the number of passing years to the current growth filters company ahead of the pack. This
companies to 1,556. reduced the passing number of catalyst can be a new product or
As a confirmation of the quarterly companies to just 60 stocks. This is service, a new management team
earnings screen, O’Neil likes to see not surprising given the economic employed after a period of lackluster
same-quarter growth in sales greater environment over the last few years. performance, or even a structural
than 25% or at least accelerating O’Neil also recommends screening change in a company’s industry—
over the last three quarters. This for companies showing a strong such as a new technology.
new screening requirement was annual growth rate of 25% over the These are very qualitative factors
added to the third edition of last three years. This filter only cut that do not lend themselves easily to
O’Neil’s book and seeks to help an additional six stocks, which is to screening. A second consideration
confirm the quality of a firm’s be expected given the strict consis- that O’Neil emphasizes is that
earnings. Independently, 3,647 tent year-by-year growth require- investors should pursue stocks
stocks have a current quarterly sales ment. showing strong upward price
growth greater than or equal to Optimally, the consensus earnings movement. O’Neil says that stocks
25%, but combined with the other estimate for the next year should be that seem too high-priced and risky
filters the number of passing compa- higher than the latest reported year. most often go even higher, while
nies was reduced to 393. Adding this filter reduced the stocks that seem cheap often go even
The CAN SLIM system is not number of passing companies to 39. lower. Stocks that are making the
purely mechanical and O’Neil also When working with consensus new high list while accompanied by
likes to find at least one other stock earnings estimates it is important to a big increase in volume might be
in the same industry group that remember that only the larger and prospects worth checking. A stock
shows strong quarterly earnings more active firms will have analysts making a new high after undergoing
growth as confirmation that the tracking them and providing esti- a period of price correction and
industry is strong. mates. About half of the stocks in consolidation is especially interest-
Stock Investor Pro have consensus ing.
A = ANNUAL EARNINGS earnings estimates, so this filter will O’Neil’s newspaper, Investor’s
INCREASES also tend to screen out micro-cap Business Daily, highlights stocks
stocks. within 10% of their 52-week high
Winning stocks in O’Neil’s study Another potential addition to the and this was the criterion established
had a steady and significant record CAN SLIM screen is a requirement for the screen. One would expect
of annual earnings in addition to a for high return on equity (ROE: net many companies to pass during a
strong record of current earnings. income divided by shareholder’s strong market expansion, while a
O’Neil’s primary screen for annual equity). O’Neil’s studies showed that smaller number of companies would
earning increases requires that the greatest winning stocks had pass during a declining market.
earnings per share show an increase ROEs of at least 17%. O’Neil uses Given the weak market during the
in each of the last three years. This this measure to separate well- first few months of 2003, it is not
filter has been loosened slightly from managed companies from poorly surprising that adding this filter
the prior edition, which required managed ones. Adding this filter reduced the number of passing
earnings increases over each of the would have reduced the number of companies from 39 to four. As of
last five years. passing companies to 19 from 39. March 14, 2003, a total of 1,037
In applying this screen in Stock Our testing over the last five years stocks out of a universe of 8,428
Reprinted by Investor's Business Daily with Permission. (c)AAII 2003
14 AAII Journal/April 2003
STOCK SCREENING
were trading within 10% of their that you will be compensated for 52-week high proved to be a more
52-week high. any premium you pay for these stringent price strength screen.
leaders with significantly higher
S = SUPPLY AND DEMAND rates of return. I = INSTITUTIONAL
O’Neil suggests using relative SPONSORSHIP
O’Neil emphasized smaller- strength to identify market leaders.
capitalization stocks more strongly Relative strength compares the O’Neil feels that a stock needs a
in his earlier editions. The third performance of a stock relative to few institutional sponsors for it to
edition states that any size stock can the market as a whole. Relative show above-market performance.
be purchased using the CAN SLIM strength is reported in many ways Ten institutional owners is suggested
approach, but smaller companies and you must be careful to under- as a reasonable minimum number.
will be more volatile with greater stand how the relative strength This number refers to actual institu-
pop to the upside and downside. figure is used in a given screening tional owners of the common stock,
Companies buying back their stock system. not institutional analysts tracking
on the open market are preferred, as Companies are often ranked by and providing earnings estimates on
well as companies with management their price performance for a given stocks.
stock ownership. No definitive period of time and their percentage Beyond looking for a minimum
screens now come out of the S ranking among all stocks is calcu- number of institutional owners,
element of the CAN SLIM system, lated to show the relative position O’Neil suggests that investors study
but Table 1 identifies a number of against other stocks. Investor’s the recent record of the institutions.
factors to consider when analyzing Business Daily presents the percent- The analysis of the holdings of
passing companies. age ranking of stocks and O’Neil successful mutual funds represents a
recommends avoiding any stock good resource for the individual
L = LEADER OR LAGGARD with relative strength rank below investor because of the widely
70% and only seeking out stocks distributed information on mutual
O’Neil is not a patient value with a percentage rank of 80% or funds. Web sites such as
investor looking for out-of-favor better—stocks that have performed Morningstar.com
companies and willing to wait for better than 80% of all stocks. While (www.morningstar.com) and CNBC
the market to come around to his only about 1,680 firms (8,428 × on MSN Money
viewpoint. Rather, he prefers to 20%) have a 52-week relative (moneycentral.msn.com/investor)
identify rapidly growing companies strength rank of 80% or greater, this disclose the top mutual funds that
that are market leaders in rapidly filter did not further reduce the own a given stock.
expanding industries. O’Neil advo- number of passing companies. In the The next filter required a mini-
cates buying among the best two or market environment at the time of mum of 10 institutional sharehold-
three stocks in a group. He feels the screen, the price as a percent of ers. About 5,500 stocks pass this
TABLE 2. STOCKS THAT PASSED THE CAN SLIM SCREEN
EPS EPS Sales Annual Long- Price
Grth Grth Grth EPS T e r m as % 52-Wk Net
Last Prior Last Grth EPS of Rel Inst’l Inst’l
Qtr Vs Qtr Vs Qtr Vs Rate Grth 5 2 - W k S t r g t h Share- S h a r e s
Yr Ago Yr Ago Yr Ago (3-Yr) E s t High R a n k holders Purch
Company (Exchange: Ticker) (%) (%) (%) (%) (%) (%) (%) (No.) ( 1 , 0 0 0 s ) Description
Third Edition CAN SLIM Screen
Apollo Group, Inc (M: APOL) 72.2 50.0 35.4 37.8 24.3 99 93 1,142 6,126 adult higher ed
FTI Consulting, Inc (N: FCN) 192.3 53.3 91.4 36.7 21.0 95 94 384 2,005 consulting firm
International Game Tech (N: IGT) 42.3 10.8 76.4 70.5 17.3 97 88 980 2,102 casino gaming prods
Teva Pharmaceutical Indus (M: TEVA) 73.3 20.0 35.8 49.9 23.8 95 91 942 11,210 major theraputic drugs
Second Edition CAN SLIM Screen
Commercial Bankshares (M: CLBK) 30.0 28.2 –3.2 16.0 8.0 96 94 27 21 bank holding co
Oshkosh Truck Corporation (N: OSK) 28.8 –3.8 17.9 13.1 15.9 90 76 383 –121 specialty trucks
Statistics are based on figures as of March 14, 2003. Exchange Key: N = New York Stock Exchange
Data Source: AAII’s Stock Investor Pro/Market Guide, Inc. and I/B/E/S. M = Nasdaq National or Small-Cap Markets
Reprinted by Investor's Business Daily with Permission. (c)AAII 2003
AAII Journal/April 2003 15
STOCK SCREENING
FIGURE 1. CAN SLIM PERFORMANCE 1997 through March 2003. As many
as 32 stocks have passed the second
edition screen, while the greatest
number of stocks passing the third
edition screen was 15 over this time
period. On three occasions, no
stocks passed the third edition
screen, while as little as one stock
has passed the second edition screen.
Although it is difficult to draw
conclusions with such a small
sample, the stocks passing the third
edition screen tend to be larger
companies held by more institutional
owners, with stronger quarterly
earnings and sales growth as well as
stronger historical and expected
annual earnings growth.
We have been testing the perfor-
mance of a wide range of screening
Source: AAII’s Stock Investor Pro. systems for over five years now and
our interpretation of the CAN SLIM
filter independently. Adding it to the measures when determining the approach has proven to be one of
CAN SLIM filter in Stock Investor overall direction of the marketplace. the most consistent and strongest-
Pro did not cut any additional Any good technical program or Web performing screens during both bull
stocks. site, or even Investor’s Business and bear markets. Figure 1 provides
O’Neil also likes to see the Daily, should provide you with the a quick view of the initial testing of
number of institutional shareholders necessary tools to study market the revised CAN SLIM approach.
increasing for a given stock in the movement. The revised approach has proven to
most recent quarters. Stock Investor O’Neil finds it difficult to fight the be a bit more volatile—rising higher
Pro does not report the number of trend, so it is important to determine and faster in the bull market of the
institutional shareholders over time, if you are in a bull or bear market. late 1990s but then giving up its
but it does report on number of Table 1 summarizes the type of lead in the recent bear market. Both
shares sold and purchased by factors that O’Neil considers when strategies will be tracked and
institutions over the last quarter. trying to gauge market strength. reported on the in the Stock Screens
Our last filter specified that the area of AAII.com as well as the
number of shares purchased should SCREENING RESULTS semiannual review of strategies in
be greater than or equal to the the AAII Journal.
number of shares sold by institutions Table 2 displays the companies
over the last quarter. This filter did passing the CAN SLIM screen based CONCLUSION
not further reduce the number of upon our interpretation of the rules
passing stocks, which are shown in presented in both the third and the The CAN SLIM system has great
Table 2. second editions of O’Neil’s book. appeal to the active investor looking
Four stocks passed the third for growth stocks. While the ap-
M = MARKET DIRECTION edition screen compared to the two proach is specific, it also stresses the
passing the second edition screen. art of investing when interpreting
The final aspect of the CAN SLIM This is actually a reversal of the the direction of the market. Here we
system looks at the overall market normal pattern. We have backtested have touched upon CAN SLIM rules
direction. While it does not impact the revised third edition screen and helpful in identifying promising
the selection of specific stocks, the have found that, on average, five stocks. It is important to keep in
trend of the overall market will stocks passed this screen every mind that ideas from a computer
have a tremendous impact on the month compared to 12 stocks screen merely represent a starting
performance of your portfolio. passing the second edition screen on point that requires further analysis
O’Neil tends to focus on technical a monthly basis from December before action. ✦
Reprinted by Investor's Business Daily with Permission. (c)AAII 2003
16 AAII Journal/April 2003
