How can we quantify William O’Neil’s CAN SLIM investment strategy?

Each and every factor of CAN SLIM can be quantified.

For the benefit of all users, let’s understand the history of CAN SLIM and what does it stand for.

CAN SLIM is a growth investing strategy formulated by ace investor William O’Neil. Early on in his career, O’Neil did an extensive research on U.S. stock market winners to find the common characteristics between them.

William O’Neil observed that most of the multi-baggers shared seven common characteristics. He then started investing in stocks that had these seven traits and went on to become one of the all time investing legends.

CAN SLIM[1] is an acronym where each letter stands for an important factor one must consider before investing in a stock.

C – Current Earnings

Earnings Growth is an important factor to look at when buying stocks. Look for stocks with increases in current quarterly earnings of at least 25%.

A – Annual Earnings

In addition to quarterly earnings you want to make sure companies are showing strong long term growth. Look for companies that have grown their earnings at least 25% or more for the past 3 years.

N – New Product/Service, Management or Price High

Studies of the great stock market winners of the past all had something NEW. Always look for companies with new, game-changing products and services.

S – Supply and Demand

S is for Supply and Demand of the stock. As more investors demand a limited supply of shares, a stock’s price goes up. Look for heavy-volume accumulation by institutional investors, particularly at key moments like when the stock is breaking above prior resistance levels.

L – Leader or Laggard

True leaders are those companies showing the best earnings growth, strongest sales, superior price performance and are in LEADING industry groups. Every bull market has a new leader and there is no point in getting stuck with stocks that belong to the lagging industry groups. Look for the best of the best – the leaders in strong industries that are showing superior earnings growth and sales.

I – Institutional Sponsorship

Mutual funds, banks, and other professional investors are the big players that drive the market. For a stock to be a top performer, it must have institutional support to fuel its price moves. Look for stocks that are showing signs of heavy accumulation and consistent increase in the number of funds holding the stock.

M – Market Direction

Our study shows 3 out of 4 stocks follow the market’s trend, so you always want to trade in sync with the market. You should only be buying stocks in a confirmed uptrend and protect your capital in a correction.

In order to quantify the above strategy, I suggest you to use the MarketSmith India application, a stock investing tool that helps in finding CAN SLIM quality stocks using proprietary ratings.

C and A – Use EPS Rank. Big winners in the stock market will have superior earnings growth. EPS Rank looks at both quarterly and annual earnings data to rank a particular stock relative to other stocks. An EPS Rank of 99 suggests that the company belongs in the top 1% of all the companies in terms of earnings growth.

N – Stocks that are either very close to all-time highs or are making new highs. Quality growth stocks tend to trade near their all-time highs are very rarely available at a substantial percentage below their highs. Use the off-high % filter on the app to find quality stocks that are close to their highs.

S – Buyer demand can be quantified using the Accumulation/Distribution rating on the app.

L – Use the Relative Price Strength Rating and Industry Group Rating to find the leading stocks in leading industry groups. Remember every bull market has a new leader (IT in late 1990s, infra in 2007, pharma in 2013). It is extremely important to invest in stocks that are leading the market.

I – Make sure that the number of funds owning the stock is on the rise.

M – Find the current market condition on the app’s home page. The chances of stocks going up are highest in a confirmed uptrend and lowest in a downtrend/correction.