CAN SLIM Analysis Using Online Tools
William O’Neil’s CAN SLIM approach to stock selection has been a popular topic of AAII publications over the years. In addition, the strategy has been a superior long-term performer among the stock screening methodologies tracked by AAII. AAII members have access to the current list of companies passing the CAN SLIM filters, which is updated on a monthly basis in the AAII.com Stock Screens area; Stock Investor Pro (AAII’s fundamental stock screening and research database) subscribers can run the screen on a monthly or weekly basis; and subscribers to Investor’s Business Daily can use O’Neil’s newspaper to identify CAN SLIM stocks. However, there are other resources, available online and for free, that can also be used to find stocks à la CAN SLIM. This article will walk you through the CAN SLIM steps using popular investment websites.
William O’Neil developed the CAN SLIM approach after studying the greatest stock market winners going back to 1953. What he found were a set of qualities that these stocks exhibited before they made their big price moves. Briefly, the acronym CAN SLIM stands for:
C: Current earnings
A: Annual earnings
N: New product or service; also, new price highs
S: Supply and demand: shares outstanding plus big volume demand
L: Leader or laggard
I: Institutional sponsorship
M: Market direction
The CAN SLIM approach is unique in that it is made up of both fundamental and technical factors. Since most screening services tend to be purely fundamental or technical in nature, it is difficult to capture all the elements with a single analysis tool. However, the Internet puts a wealth of excellent analysis tools right at our fingertips.
Just as there is more than one way to skin a cat, so too is there more than one way to approach your CAN SLIM analysis. The method we will implement here is more of a “top-down” approach, starting with broad market factors and then focusing on individual stock factors. The basis for this idea is Sharon Yamanaka’s article in the December 2005 issue of Technical Analysis of Stock & Commodities, “CAN SLIM II: The Gold at the End of the Rainbow.”
M = Market Direction
The CAN SLIM approach isn’t just about trying to identify stocks poised for a large run-up in price. The “M” element, which stands for market direction, shows that the CAN SLIM methodology also requires an analysis of the overall market. No doubt in your investing experience you have identified a “perfect” stock—strong balance sheet, growing earnings, and excellent competitive position—only to buy it and watch the price subsequently fall. The reality is that most stocks move in tandem with market averages and the trend of the overall market will have a tremendous impact on the performance of your portfolio. In other words, you shouldn’t be too surprised if the stocks you own are down when the overall market is down, and vice versa. Therefore, the CAN SLIM approach requires you to have an understanding of the overall market direction, and make your investment decisions accordingly.
It is important to follow, interpret, and understand what the market—as measured by broad market indexes—is doing every day. In bear markets, stocks usually open strong and close weak while in bull markets, they tend to open weak and close strong.
Recognizing the overall market trend is relatively easy when the market is in a pronounced trend (up or down). However, when the market is moving sideways, decision making becomes more difficult. When the market is flat, as has been the case over the last couple of years with the S&P 500 trading within an approximately 250-point range, Ms. Yamanaka suggests that investment profits lay with sector trading.
L = Leaders & Laggards
While most stocks move in the same general direction given the prevailing market environment, not all stocks move in the same direction, and stocks that do move in the same general direction do not all make moves of the same magnitude. This is the underlying premise of diversification—not all stocks move together at the same time. Taking a broader view, the same can be said for specific sectors or industries. There are times when individual sectors or industries perform better than other industries as well as the overall market.
The “L” element of the CAN SLIM methodology refers to leaders or laggards. O’Neil suggests looking for those industries that are strong and buying from the top stocks in those industries. The Industries area of the BigCharts website (www.bigcharts.com) allows you to track the best- and worst-performing industries over the last week; last one-, two, three-, six, and 12-month periods; year-to-date; and the last one, two, three, four, and five years. BigCharts provides industry classifications from Dow Jones & Company. Figure 1 shows the top-performing industry indexes over the last three months—a long enough period to represent a meaningful trend, yet (hopefully) not too long where the current trend is starting to fade. It is from the group of industries in Figure 1 (as well as those top-performing industries over the last two months, which are not shown) that we will look for stocks warranting additional analysis.
N = New Highs
The next step is to find stocks exhibiting strong upward price movement. O’Neil believes that stocks that seem too high-priced and risky most often go higher. Stocks making new highs while accompanied by large increases in volume might be prospects worth investigating. A stock making a new high after undergoing a period of price correction or consolidation is especially interesting (we will discuss this further later in this article).
You can find a list of stocks hitting new 52-week highs at a variety of sites. The Big Reports area of BigCharts.com and the Power Searches tool at the MSN Money website (www.investor.com) are two examples. Figure 2 shows a BigCharts.com list of NASDAQ stocks hitting new highs on June 5, 2006. The stocks are ranked based on their percentage increase in volume relative to their 50-day average trading levels.
Armed with this list, we now need to see if any of these stocks are in the top-performing industries over the last three months. Unfortunately, you cannot cross-check this information at the BigCharts website. Therefore, you need to go to its sister site, MarketWatch.com (www.marketwatch.com). Here you can enter a stock ticker symbol and then select the company’s Profile. Figure 3 shows the company profile for FirstBank Northwest, the first stock on the new highs list in Figure 2. The circled portion indicates that First Bank is in the banks industry, per Dow Jones’ classification. Furthermore, banks are not among the top-performing industries over the last three months. Therefore, we move on down the list. Eventually, we find four stocks hitting new highs that are also in top-performing industries:
- Global Industries Ltd. (GLBL); oil equipment & services
- Crosstex Energy Inc. (XTXI); pipelines
- Comcast Corp. New (CMCSK); broadcasting & entertainment (top-performing industry over the last two months, not shown in Figure 1)
- Matrix Service Co. (MTRX); oil equipment & services
The BigCharts 52-week high lists, such as the one in Figure 2, are created after the close of the market each day, and are not updated during the trading day. Figure 4 is a partial example of the 52-week high list generated by the MSN Money website. This list, from the morning of June 7, is updated throughout the trading day. Cross-checking this list against the top-performing industries over the last three months, we find Interstate Hotels & Resorts (IHR; not pictured), which MarketWatch/Dow Jones assigns to the hotels industry.
The five companies we found at the BigCharts and MSN Money websites will be the focus of our analysis for the rest of this article.
S = Supply & Demand: Shares Outstanding
In his original research, O’Neil emphasized smaller-capitalization stocks, as smaller stocks tend to be more volatile and offer greater pop to the upside (or downside). This has to do with the basic tenet of supply and demand. If there is little supply, in this case shares outstanding, an increase in demand will boost the price of those shares. However, he never formally outlined how few shares outstanding a company should have. AAII’s original CAN SLIM screen, which is based on the second edition of O’Neil’s “How to Make Money in Stocks” and is tracked at the Stock Screens area of AAII.com, caps the “float” at 20 million shares. The float of a company is the number of shares outstanding and available for trading by the public. It is typically calculated by starting with shares outstanding and deducting the number of shares held by insiders as well the number of shares held by institutions that is more than 5% of the total shares outstanding.
The next step is to now identify the number of shares outstanding for each of the companies on our watchlist. Figure 5 shows the key statistics for Global Industries from Yahoo! Finance (finance.yahoo.com). The company has 115.09 million shares outstanding and a float of 84.37 million shares. In addition, the company has a market capitalization of $2.02 billion, which places it at the lower end of the mid-cap size category. The shares outstanding (float) and market capitalization of the other stocks on our watchlist are as follows:
- Crosstex Energy Inc.: 12.76M shares (7.49M shares), $1.16B
- Comcast Corp. New: no share data available
- Matrix Service Co., 20.85M shares (20.78M shares ), $247.72M
- Interstate Hotels & Resorts, 30.82M shares (29.77M shares), $238.89M
The Comcast shares (CMCSK) that showed up on the new-highs list at BigCharts.com are Special Class A shares with no voting rights. This causes us concern. It is probably as a result of being a special class of shares that Yahoo! does not provide share statistics for CMCSK. With these two strikes against it, we drop Comcast Corp. New from our watchlist.
Besides Comcast, the only other company that gives us pause is Global Industries, with a float of over 84 million shares. The greater the float, the more volume it takes to create large “pops” in the share price. However, Global’s market capitalization is low enough to keep it on our watchlist.
I = Institutional Sponsorship
O’Neil feels that a stock needs a few institutional sponsors in order for it to outperform the market. The key, however, is to find the delicate balance between too little and too much. Ten institutional owners is suggested as a reasonable minimum number. This number refers to actual institutional owners of the common stock, not institutional analysts. However, O’Neil never touched upon the subject of a maximum number of institutional shareholders.
The MSN Money website provides a good collection of institutional ownership data, as Figure 6 shows for Global Industries. According to this report, Global Industries has 168 total institutional owners that hold 63.2% of the company’s outstanding shares. The number of institutional shareholders as well as institutional ownership as a percentage of shares outstanding for the other watchlist companies is as follows:
- Crosstex Energy: 75, 35.5%
- Matrix Service Co.: 74, 93.4%
- Interstate Hotels & Resorts: 58, 56.2%
Matrix Service Co. has a very high percentage of its shares outstanding held by institutions. This usually means that there are fewer shares available for purchase by individual investors. Interestingly, however, the float is a very high percentage of shares outstanding (99.27%). This would indicate that almost all of the shares outstanding are still tradeable by the public.
Beyond looking at the number of institutional owners, O’Neil suggests that investors study the recent record of the institutions. The analysis of the holdings of successful mutual funds represents a good resource for the individual investor because of the widely distributed information on mutual funds. Websites such as Morningstar (www.morningstar.com) and MSN Money disclose the top mutual funds that own a given stock. Morningstar also provides free ratings for funds that they track.
C = Current Quarterly Earnings
The final element of the CAN SLIM approach we will investigate involves earnings growth. O’Neil’s study of winning stocks revealed that these securities generally had strong quarterly earnings per share performance prior to their significant price run-ups (as well as a steady and significant record of annual earnings).
O’Neil recommends looking for stocks with a minimum increase in quarterly earnings of 18% to 20% over the same quarterly period one year ago. When examining quarterly earnings increases, it is important to compare a quarter to the equivalent quarter last year. This is to avoid any seasonal earnings patterns companies may exhibit.
The Yahoo! Finance Web allows users to compare a company’s growth rates to those of its industry peers. Keep in mind, industry classifications are not standardized across data providers. Most providers have proprietary designations, which means a company could be placed in differing industries on different websites depending on the data provider. However, we can use the “Locate Industry By Company” search at the Yahoo! Finance Industry Center (biz.yahoo.com/ic) to avoid this potential conflict. Entering Global Industries’ ticker symbol, we find that Hemscott Americas (the provider of industry data to Yahoo!) places GLBL in the heavy construction industry.
Having identified Global’s industry, we go to the industry Leaders & Laggards area and select Quarterly Earnings Growth (YoY) from the pulldown menu in the middle of the page. Figure 7 shows the best and worst companies in the industry based on same-quarter earnings growth. The top company in the industry for quarterly earnings growth is Goldfield CP, with an astounding 747.8% increase in earnings in the most recent quarter as compared to the same quarter a year ago. Further down the list, we find Global Industries with a still-impressive growth rate of 147.9%.
Crosstex Energy was the only other company that appeared on its industry leaders list, with a quarterly earnings growth rate of 721.7%. We found that Yahoo! Finance will not calculate growth rates when one of the components is negative (in this case, either the latest quarterly earnings per share or earnings per share for the same quarter a year ago). Ideally we want to avoid turnaround situations like this, which tend to carry higher risk. Therefore, we drop Matrix Supply and Interstate Hotels & Resorts from our watchlist, leaving us with two remaining candidates.
Both Global Industries and Crosstex Energy easily exceeded the minimum 18% to 20% quarterly earnings growth prescribed by O’Neil, so they remain on our watchlist.
A = Annual Earnings Increases
O’Neil’s analysis not only showed that companies exhibited strong quarterly growth prior to their big price run-ups, they also had significant records of annual growth as well. O’Neil looks for companies with annual growth of at least 25% over the last five years. We are again able to use Yahoo! Finance’s Industry Center to identify the leaders in long-term growth. This time, however, we select Long-Term Growth Rate (5yr) from the pulldown menu.
We find that Global Industries’ long-term growth rate is 17%, which does not meet O’Neil’s parameters. Actually, none of the companies in the industry has a long-term growth rate greater than O’Neil’s hurdle of 25%. However, Global Industries ranks second only to Empresas ICA’s 21.8%. The other company on our watchlist, Crosstex, has a long-term growth rate of 27.0%.
While Global’s long-term growth rate does not meet O’Neil’s requirement of 25%, we are willing to keep it as a candidate, since it ranks second overall within its industry. Crosstex does pass this test, so we still have two companies on our watchlist.
Having covered the key, quantifiable elements of the CAN SLIM approach, we have two surviving stocks: Global Industries and Crosstex Energy. However, our journey is not quite yet over.
As mentioned at the beginning of this article, the CAN SLIM approach combines both fundamental and technical analysis. As stated, to this point, we have been examining the quantifiable fundamental and technical elements of the stocks on our watchlist. However, O’Neil is also an advocate of chart analysis—looking for “basing” patterns that may indicate that institutional accumulation is taking place. Identifying such patterns can help investors judge the best time to buy or sell.
Figure 8 is from the Chart School area of the StockCharts website, which is an excellent, free resource for those new to the field of chart analysis, as well as for those looking for high-quality online charts. This is an example of the price/volume pattern that is indicative of one of O’Neil’s favorite chart patterns—the “cup-with-handle.” It is so named because it resembles the outline of a cup with a handle on the upper half of the cup. For more information on the cup-with-handle pattern, you may wish to visit the StockCharts website (www.stockcharts.com).
The optimal buy point for a stock is usually at the end of a sound basing area when the stock price “breaks out” into new high ground (as illustrated in Figure 8). This is the point of least resistance, when the stock has its greatest chance of moving even higher based on its current and historical price and volume activity.
Even if a stock you are looking at does not exhibit this classic cup-with-handle pattern, you are ideally looking for a stock reaching new highs after some type of “break out” on higher volume.
Neither of the two stocks remaining on our watchlist was exhibiting a cup-with-handle pattern. However, both were reaching new highs after surpassing levels of previous resistance. The top of Figure 9 shows a one-year price chart for Global Industries through the close on June 5, 2006. We see that the price has moved above the previous high reached in mid-May. However, it is troubling that this upward move is being made on declining volume, as indicated at the bottom-right of the chart. In addition, GLBL shares fell 4.9% that day from the previous close, definitely not what we want to see. Ideally we would like to see breakouts such as this accompanied by a spike in volume, which oftentimes offers confirmation of the long-term viability of the breakout. As is turned out, we were seeing Global at another intermediate high, as the downward momentum continued to pick up steam. The bottom of Figure 9 shows a one-year chart for Global Industries on the afternoon of June 8. On this date, the price took yet another hit following the announcement that the U.S. military had killed the top terrorist in Iraq in an air raid. The market sentiment was that this would stabilize or lower oil prices, which would ultimately have a negative impact on Global’s performance. This highlights the importance of being aware of events that can affect the overall market when making stock investment decisions.
Figure 10 shows that Crosstex Energy closely mirrors the trading behavior of Global Industries, which you would expect since they are in such closely related areas of operations. Based on our analysis, neither stock represents a strong buy candidate based on O’Neil’s CAN SLIM principles. However, it would be a good idea to keep them on a watchlist to see if their future financial performance continues and whether they are able to achieve and maintain price breakouts—on higher volume—that would make them more attractive prospects.
While this method is perhaps not as clean as running a screen for the CAN SLIM criteria with an online service such as MSN Money or a software-based application such as AAII’s Stock Investor Pro, the approach does offer some advantages. For one, you are constantly watching the market to find stocks that may have only just started their move.
Whatever approach you decide to take to identify possible CAN SLIM stocks, be aware that this a volatile strategy that requires significant time to monitor your holdings on a daily, if not intraday basis, as well as the intestinal fortitude to handle the volatility many of these stocks exhibit. If you do take up the challenge, you could be in for an exhilarating ride. As this article proves, it is vital to see the analysis process through to the end. Otherwise, you could be buying a stock based on incomplete information, which could be detrimental to your portfolio’s performance.