CAN SLIM methodology: the key to high-growth stock selection
Hey there! In this article, I’m excited to share a cool long-term investment strategy with you – The CAN SLIM methodology. This strategy is all about blending technical and fundamental analysis, stuff I’ve been geeking out on lately. Why? Well, I got my hands on this awesome book over the Christmas holidays, and it’s been a game-changer
It’s titled: How to make money with stocks.
And I must confess that when I was told the title, I was not very excited.
So before starting to read the book, I simply decided to investigate a little more about the author, William J. O´Neil. Was he another guru who would promise to make us rich so cheerfully, or was there some background behind him?
Who is William J. O´Neil?
William J. O’Neil is an American investor, entrepreneur, and author born in 1933. He studied at Southern Methodist University in Dallas, Texas, where he graduated in economics.
In 1963, O’Neil founded the investment publication “Investor’s Daily” which would later become “Investor’s Business Daily”. Over time, it became one of the most popular financial publications in the United States and won numerous awards, including the Pulitzer Prize in 2016.
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However, O’Neil is particularly known for his CAN SLIM investment methodology, which combines technical and fundamental analysis to identify stocks with high growth potential.
And pay attention, because he is recognized for having achieved a 2,500% return on a personal investment account in the 1960s.
All these teachings are summarized in the book, which we will discuss in detail and in a simple way in the upcoming publications.
As an additional note, I would like to highlight that William O´Neill is part of the investor club that was part of the famous book Market Wizards, published in the late 80s, as one of the most profitable investors of the mid-20th century, and that to this day, he is still on target.
Well, having clarified his trajectory, it remains to be seen what this CAN SLIM methodology means.
What is the CAN SLIM methodology?
As we have mentioned, the CAN-SLIM methodology is an investment strategy that combines technical analysis and fundamental analysis to select high-growth potential stocks.
In this way, the acronym CAN SLIM represents each of the seven criteria that O’Neil identified as important for selecting winning stocks:
- C: Annual earnings growth
- A: Price action
- N: New products, services, or company direction
- S: Limited supply
- L: Market leaders
- I: Institutions and large investors
- M: Market momentum
If you want to see it in a more summarized way, I leave you this video where Mario Dez and Albert Bretxa, explain it masterfully
And well, now that we have put ourselves in context, we start from the beginning. Let’s go for the C.
Step 1: Annual earnings growth ( C )
What differentiates very good stocks, from stable behavior stocks, also called “boring”, and bad stocks?
If only it were as easy as saying one thing. But what the author does affirm, is that of the whole method, the most important point is in the growth of the earnings per share of the last year.
Earnings Per Share (EPS) is a financial metric that indicates the profit generated by a company for each outstanding share.
It is calculated by dividing the Net Profit, that is, the difference between income and expenses, including interest and taxes, of the company by the total number of shares in circulation.
Well, now that we know what it is. It’s time to establish the first step.
The shares in which we invest should have experienced a growth of BPA or EPS of at least 25% in the last quarter compared to the results of the previous year.
More clearly:
The BPA of any share in December 2022, should have been higher, at least by 25%, than the BPA of that same share in December 2021. Be very careful here, not from the previous quarter, that is, from September 2022, but from the same quarter of the previous year. Understanding this point is really important.
In this sense, we should not be fooled by shares with a timid growth of their BPA from one year to another of 5% or 15%.
The author is clear, only 1% or 2% of the market shares, meet this rule. Our mission is to find them, the rest is easy.
BPA value traps
But of course, companies will always tend to show the best possible results when trying to inflate this ratio. To avoid being deceived by an astonishingly high BPA (but that was only a flower of a quarter), we must pay attention to the following considerations:
- The increase in profits cannot come from extraordinary income (sale of a property, patent…)
- To be sure that it does not come from an extraordinary activity, we can go to its sales growth. If sales have not grown at the same rate (or similar), as income, they may be fooling us somewhere.
- Third, to ensure that the BPA maintains healthy growth, it must have a growing history of the last two or three quarters.
At this point the author is quite clear, only the actions that had growing earnings per share from one year to another with advances between 40% and 400%, were the ones that in the following months, saw a truly spectacular increase in their prices, surpassing some of them, the concept of teabaggers.
There’s an aspect of trading that has to do with technical indicators. It is important to familiarise yourself with these indicators in order to analyze price movements. We’ve compiled a guide on these technical indicators and we’re happy to share it with you.
To finish, I would like to leave some of the examples of companies that after a very high growth of their EPS from one year to another, and sustained over time, experienced exponential growth in price during the following months. And to demonstrate that this strategy works for both bad and good times, I will give examples from all eras, even from before World War I.
| Year | Company | Δ EPS (from one year to another) | Δ Price |
| Decade of the ’10s (20th century) | Studebaker | 300% | 400% |
| Decade of the ’10s (20th century) | Cuban American Sugar | 1.175% | 500% |
| Decade of the 90s | Dell Computer | 74% and 108% | 1.780% |
| Decade of the 90s | Priceline.com | 34% | 350% |
| 90’s decade | Cisco System | 150% and 155% | 1.467% |
| 2000’s decade | 112% and 123% | 820% | |
| 2000’s decade | Apple | 350% and 300% | 1.700% |
How do I discover companies with the best EPS?
Okay, if the strategy is so good, this is the big question, right? At this point, the author refers us to his report Investor´s Business Daily.
However, times have changed, and to make this task easier for you, I am going to direct you to an in-depth article that I am sure will interest you: Best Stock Screeners to select listed companies.
In these free screeners, you will be able to find and explore all kinds of companies that meet this characteristic.
FAQs
What does CAN SLIM stand for?
CAN SLIM is an acronym representing seven criteria: C (Annual earnings growth), A (Price action), N (New products, services, or company direction), S (Limited supply), L (Market leaders), I (Institutions and large investors), and M (Market momentum).
Why is annual earnings growth (C) considered the most crucial criterion in CAN SLIM
Annual earnings growth is a vital factor because it indicates a company’s profit generation per outstanding share.
Investors can use stock screeners to find companies with impressive EPS growth. These screeners are available online and can help identify stocks that meet the CAN SLIM criteria.
