CAN SLIM

From William O’Neil’s “How to Make

Money in Stocks”
Joe York, SFD
Tuesday, February 01, 2005
CAN SLIM? Is this a diet program?

• CAN SLIM was developed by William

O’Neil and is outlined extensively in his
book, “How to Make Money in Stocks”.
• It is: “A system that consists of buying and
selling rules from an extensive analysis of
all the greatest winning stocks each year
for the last half century.”
 C-A-N S-L-I-M
• C= Current earnings per share should be up 25% or more and in many cases
accelerating in recent quarters. Quarterly sales should also be up 25% or
more or accelerating over prior quarters.
• A= Annual earnings should be up 25% or more in each of the last three
years. Annual return on equity should be 17% or more.
• N= A company should have a new product or service that's fueling
earnings growth. The stock should be emerging from a proper chart pattern
and about to make a new high in price.
• S= Supply and demand. Shares outstanding can be large or small, but
trading volume should be big as the stock price increases.
• L= Leader or laggard? Buy the leading stock in a leading industry. A
stock's Relative Price Strength Rating should be 80 or higher.
• I= Institutional sponsorship should be increasing. Invest in stocks showing
increasing ownership by mutual funds in recent quarters.
• M= The market indexes, the Dow, S&P 500 and Nasdaq, should be in a
confirmed up trend since three out of four stocks follow the market's overall
trend.
 C – Current EPS
• “[Of the] 600 best performing stocks from ’52 to
’00, three out of 4 showed earnings increases of
70% on average in the last publicly traded
quarter BEFORE they began their major
advances.” – pg 8
• Stocks should show a major % increase in
earnings for the most recent quarter when
compare to the prior year’s same quarter.
• WATCH OUT FOR MISLEADING EARNINGS!
Look out for the company issuing addition share
or ‘diluting’ the stock and large, one-time gains.
 C - Continued
• Sales growth is also important: What will
propel further earnings growth?
• General rule: If a company has two
quarter of earnings deceleration (shrinking
earnings), it usually spells trouble
• ALWAYS check other stocks in the
industry to see how the overall market is
compare to your stock, but:
•Current earnings per share should be up 25% or more
and in many cases accelerating in recent quarters.
Quarterly sales should also be up 25% or more or
accelerating over prior quarters.
 A= Annual earnings
• Look for annual earnings that have increase for
the past 3 years.
• “From ’80 to ’00, the mean annual growth rate
for all outstanding stocks in the emerging stage
was 36%.” – pg 16
• You may accept one down year, AS LONG AS
THE STOCK RECOVERS.
• Also pay attention to ROE, this separates well-
managed firms from poorly managed ones.
• Consensus estimates for future earnings should
also be up.
 A - Continued
• Using a 3 year average will weed out 80%
of the potential losers.
• PE’s: “Are an end to an effect, not a
cause.” – pg 20
• Don’t use PE’s to value a company, if they
have a low PE, THERE’S PROBABLY A
REASON! Use PE’s in conjunction with
earnings growth and PE trend charts.
Annual earnings should be up 25% or more in each of
the last three years. Annual return on equity should
be 17% or more.
 N – New Products
• Syntex in 1963 marketed the oral contraceptive
pill. In six months, the stock soared from $100 to
$550.
• McDonald's, with low-priced fast-food
franchising, snowballed from 1967 to 1971 into a
1100% profit for stockholders.
• Thiokol in 1957-1959 came out with new rocket
fuels for missiles, propelling its shares from $48
to the equivalent of $355.
• Houston Oil & Gas, with a major new oil field,
ran up 968% in 61 weeks in 1972-1973 and
picked up another 367% in 1976.
 N – Continued
• Stocks on the “new-high” list tend to go even
higher in price. Why? Because these
companies generally have something ‘new’ to
offer it’s market.
• Look for stocks that are just coming out of their
bases [pivot or buy point] in the wake of
important developments or new products or
services.
N= A company should have a new product or
service that's fueling earnings growth. The stock
should be emerging from a proper chart pattern and
about to make a new high in price.
 S= Supply and demand
• Big companies vs. smaller ones: Big-caps are
more liquid, have less downside volatility, have
better quality products, and are generally less
risky. They also possess less imagination and
have a gap between management and
production. Employees generally don’t have a
personal interest in the company.
• Smaller companies, while riskier, possess more
imagination and have a greater personal stake
in their business.
 S - Continued
• Stock splits: Excessive splitting is bad.
“Oversize splits create larger supply and may
move the company to a lethargic, big-cap status
sooner.” – pg 34
• Look for companies buying back their own
shares [decreasing supply of their stock]. It can
imply improved sales and increased earnings in
the future.
• Lower Debt to Equity is generally better (look at
the industry), especially in times of increasing
interest rates.
S= Supply and demand. Shares outstanding can be
large or small, but trading volume should be big as
the stock price increases.
 L= Leader or laggard?
• “The number one market leader is not the largest
company or the one most recognized, it’s the one
with best quarterly and annual earnings, ROE,
profit margins, sales growth, and price action. It
will also be gaining market share from its
competitors.” – pg 38
• Use relative strength, which measures price
performance of a given stock against the rest of
the market for the past 52 weeks. Scaled 1 to 99,
a score of 70 can be considered lagging. Look for
companies with RS above 80. The RS can be
found at www.investors.com
 L – Continued
• Look for companies that are leaders in
their industry during a market correction.
“the first stocks that bounce back to new
price highs [after a correction], are almost
always your authentic leaders.” – pg 40

L= Leader or laggard? Buy the leading stock in a

leading industry. A stock's Relative Price Strength
Rating should be 80 or higher.
 I= Institutional Sponsorship
• Look for the # of institutions (what are
these?) who own a stake in the company
as well as the % of institutional ownership.
• Also look at trends; is the Inst. Ownership
increasing or decreasing? Use IBD’s
Sponsorship Rating.
• Be alert to stocks that are ‘overbought’. If
too many institutions get in, it will be
VERY hard for the price to move up.
I= Institutional sponsorship should be increasing.
Invest in stocks showing increasing ownership by
mutual funds in recent quarters.
 M= The market indexes
• “You can be right about every one of the
factors in the first 6 chapters, but if you’re
wrong about the general direction of the
market, 3 out of 4 of your stocks will
plummet…” – pg 48
• “Follow, interpret, and understand what
the market averages are doing EVERY
DAY!”
 M - Continued
• Bull Market:
• Top out and trend down BEFORE a
recession sets in.
• Stocks open weak, but end strong.
• Sign of the end when there is higher
and higher volume, with less and
less price increase in market.
• Initial downturn can be on lower
volume, then a feeble rally attempt,
then full fledged selling.
• You can ID a feeble rally by: 1) Index
advances in price on a 3rd, 4th, or 5th
rally day, but on lower volume than
day before. 2) Averages make little
net upward price progress compared
to day before. 3) The market
averages recover less than half of
the initial price drop from its former
intraday high.
• Another sign of an ending bull
market may be a climax top (stock
rush up to new highs for 1-2 weeks,
after slow increases for many
months).
• Also poor quality stocks will start to
dominate the market leader boards.
• Bear Market:
•
End while business is still in
downtrend.
• Stocks usually open strong and close
weak.
• Market may be at bottom when a rally
attempts begins when major averages
close higher after a decline the
previous session.
• Starting on the 4th day of a rally, look
for a follow through where you see a
2% gain on heavier volume than the
day before.
•
“No bull market has EVER started
without a prong price and volume
follow through”– pg 65
 M - Continued
• Additional things to consider:
• Look for divergence in major averages –
may signal a change in the type of market
• Put/call ratios, short-interest ratio (short
selling on NYSE)
• Fed changing rates quickly and sharply
• Pay attention to the ‘defensive’ stock
indices such as utilities, tobacco, foods,
etc.
M= The market indexes, the Dow, S&P 500 and Nasdaq,
should be in a confirmed up trend since three out of four stocks
follow the market's overall trend
 Overview
• CANSLIM is not a fool-proof system, but a
summary of observations made over 50-60
years. If you think that the market is truly
cyclical, you can apply this methodology
• Some items in the model are difficult to measure
– ‘new’ products and services and finding the
true market peak and bottom.
• Use fundamental and technical analysis to
gauge a company’s health, but when searching
for companies you may want to use some of the
following parameters derived from this model:
MSN Screener
 ???
• Questions?
• Comments?
• Insults?