CANSLIM on Robinhood

Introduction

In 2009, in the wake of the financial crisis, William O'Neal published "How to Make Money in Stocks", a revolutionary guide that has sold 2 million copies to date. Contrary to popular belief, William O'Neal advocates market timing, trading and interpreting stock charts to improve your investment strategy.

Drawing on his research of the best-performing stocks from 1953 to 1985, O'Neil identified a set of similar features that each of these stocks had. The abbreviation CANSLIM represents the important features to focus on:

• C: Current quarterly earnings per share
• A: Annual earnings growth
• N: New products, New Management, New Highs
• S Supply and Demand
• L: Leader or Laggard
• I: Institutional sponsorship
• M: Market direction

Current quarterly earnings per share

The CAN SLIM approach emphasizes the importance of current quarterly earnings per share (EPS) in identifying promising stocks. William O'Neil's strategy focuses on companies with a proven track record of earnings growth, particularly during an acceleration phase. When reviewing quarterly earnings increases, comparisons are made with the equivalent quarter of the previous year to account for seasonal variations.

Rule C : Minimum quarterly earnings increase of 18% to 20% over the same period last year.

Annual earnings growth

In the CAN SLIM system, annual earnings growth is an essential element in identifying winning stocks, as William O'Neil's analysis underlines. Beyond current earnings, Mr. O'Neil emphasizes the importance of steady and substantial annual earnings growth for market leaders.

Mr. O'Neil's main selection method is to scrutinize earnings per share (EPS) over the past five years, applying a rigorous criterion that EPS from continuing operations must exceed the previous year's figures for each of the past five years. This guarantees a sustained upward trajectory, with an additional criterion that earnings over the last 12 months must equal or exceed earnings for the last fiscal year.

In addition, O'Neil recommends identifying companies whose earnings per share from continuing operations have grown at a minimum annual rate of 25% over the past five years. This essential criterion is in line with O'Neil's findings that high-performing stocks often show a median growth rate of 21%.

Rule A : Quarterly growth rate greater than or equal to 25%

Rule A : Positive EPS from Continuing Operations for the current quarter

New products, New Management, New Highs

According to William O'Neil, winning stocks often need a catalyst to trigger a sharp rise in share price. His analysis of winning stocks reveals that 95% were propelled forward by a fundamental spark: a new product, a revamped management team or a structural change in the sector. Although these qualitative factors are difficult to pin down, O'Neil suggests studying companies that pass the first checks to identify potential catalysts.

Rule N : Stocks within 10% of their 52-week high

Supply and Demand

Within the CAN SLIM framework, the 'S' stands for Supply and Demand, focusing on the impact of a company's stock float and outstanding shares on its price movement.

William O'Neil's research indicates that stocks with fewer than 25 million shares outstanding , in particular, tend to experience faster price rises. A study by Marc Reinganum follows suit, setting the threshold at 20 million shares outstanding. To refine the analysis, Mr. O'Neil suggests taking into account the "free float", i.e. shares held by the public. The selection criterion requires shares with less than 20 million available shares in the free float, which is a less restrictive filter.

Rule S : Less than 20 million available float shares

Leader or Laggard

Rather than waiting for the market to evolve, William O'Neil recommends seeking out the best-performing stocks in fast-growing sectors. He recommends investing in a group's top two or three stocks, and believes that the potential premium paid for these leaders is justified by the significantly higher returns they can offer.

O'Neil stresses the importance of relative strength in identifying market leaders, using it to compare a stock's performance with that of the market as a whole. He suggests taking into account only those stocks whose percentage is equal to or greater than 70%, indicating superior performance to that of 70% of all stocks. For a more rigorous approach, O'Neil recommends considering stocks with a relative strength of 80% or 90%, possibly combined with a base chart.

Rule L : Stocks with a relative strength of 80% or 90%

Institutional Sponsorship

The 'I' underscores the importance of Institutional Sponsorship, and William O'Neil advises against low-priced stocks with minimal institutional ownership due to potential liquidity issues and lower-grade ratings. O'Neil suggests a moderate threshold of 3 to 10 institutional owners as a minimum for a stock to exhibit above-market performance.

It's crucial to focus not just on the quantity but also on the track record of these institutional investors. Examining the holdings of successful mutual funds provides valuable insights, and Stock Investor's screening includes a criterion for stocks to have at least five institutional owners.

Rule I : 3 to 10 institutional owners as a minimum

Market Direction

While not directly influencing stock selection, the overall market trend significantly impacts your investment outcomes. William O'Neil underscores the importance of technical analysis for gauging market direction, emphasizing the need to understand whether you are in a bull or bear market.
O'Neil's advice includes closely monitoring market averages daily and swiftly moving a portion of the portfolio to cash during market peaks and major reversals

He highlights the importance of recognizing warning signs such as stocks failing to show a profit and heavy volume without substantial price progress.Additionally, O'Neil suggests keeping an eye on the actions of the Federal Reserve as a fundamental confirmation of market trends, particularly noting increases in the discount rate as potential precursors to economic and market declines.

Rule M : Fundamental confirmation of the market action : the discount rate is often a precursor to both an economic and market decline.