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Investing in Proven Growth Using CAN SLIM Revised

by Wayne A. Thorp, CFA

Investing In Proven Growth Using CAN SLIM Revised Splash image

The “original” CAN SLIM approach of William O’Neil is based on O’Neil’s analysis of 500 of the biggest stock market winners from 1953 to 1993. The CAN SLIM approach presented in O’Neil’s book, “How to Make Money in Stocks,” was based upon the characteristics that these winning stocks possessed prior to their big price run-ups.

However, O’Neil extended his analysis of past market winners to 600 companies that performed strongly from 1953 to 2001 and revised a number of CAN SLIM criteria. In 2002, O’Neil released his new findings in the third edition of “How to Make Money in Stocks” and this article focuses on our stock screen that is based on this revised approach.

CAN SLIM Overview

Both the original and revised CAN SLIM screens seek companies with proven records of quarterly and annual earnings and sales showing strong relative price strength and support from leading institutions.

O’Neil shies away from value-oriented stock selection methodologies, as he believes that stocks generally sell for what they are worth. Therefore, in O’Neil’s opinion, stocks with low price-earnings ratios are probably priced correctly by the market.

Using Stock Investor Pro, AAII’s fundamental stock screening and research database, we created a screen based on O’Neil’s revised CAN SLIM approach. You will find the exact criteria for the revised CAN SLIM screen in the box.

Screen Performance

On a monthly basis, AAII.com lists the companies passing the revised CAN SLIM screen and tracks the performance of these stocks in a hypothetical portfolio.

Figure 1 illustrates that the revised CAN SLIM screen has produced performance results that easily surpass that of both large- and small-capitalization companies over our study period, which started in January of 1998.

Between then and the end of 2007, the revised CAN SLIM approach generated a monthly cumulative return of 743.8%, for an average annual return of 23.8%. The revised CAN SLIM methodology had the second-best performance of 2007 among the approaches tracked at AAII.com, with a 31.4% return. This came after three straight years of losses. Meanwhile, the S&P 500 index generated a cumulative return of 51.3% over the same period and the S&P SmallCap 600 index gained 118.1%

Profile of Passing Companies

Table 1 highlights the characteristics of the companies currently passing the revised CAN SLIM screen, compared to the typical exchange-listed company.

Both the price-earnings ratios (current share price divided by earnings per share for the last 12 months) and price-to-book ratios point to a group priced more dearly than the overall market—a direct result of the stringent growth requirements of the screen and the market’s expectation that this growth will persist.

  O’Neil’s
CAN SLIM
Revised
Exchange-
Listed
Stocks
 
Portfolio Characteristics (Median)
Price-earnings ratio (X) 21.4 17.1
Price-to-book-value ratio (X) 4.6 1.8
EPS 5-yr. historical growth rate (%) 36.1 15.4
EPS 3-5 yr. estimated growth rate (%) 22.9 14.7
Market cap. ($ million) 2,862.6 396.7
Relative strength vs. S&P (S&P=0) (%) 69 –9.0
     
Monthly Observations
Average no. of passing stocks 10  
Highest no. of passing stocks 34  
Lowest no. of passing stocks 0  
Monthly turnover (%) 61.9  

The historical five-year annual growth rate indicates significantly higher growth levels than the market. Influencing this is the revised CAN SLIM screen’s requirement of average annual earnings growth of at least 25% over the last three years.

Looking forward, analysts expect earnings growth to continue to outpace that of the overall market. This also helps to confirm the high price-earnings ratios of the current group of passing companies.

The companies passing the revised CAN SLIM screen are significantly larger than typical exchange-listed stocks. A median market cap of almost $2.9 billion puts this group of passing companies into the large-cap segment.

The stocks currently passing the revised CAN SLIM screen have performed 69% better than the S&P 500 index over the last 52 weeks. One way in which O’Neil identifies industry leaders is with relative price strength. For the revised CAN SLIM methodology, he stresses buying stocks with a relative strength of at least 80%. A filter requiring that the current share price be within 10% of the 52-week high price reinforces the price strength requirement of the screen.

The six companies currently passing the revised CAN SLIM screen represent a smaller-than-average group; over the last 10 years, an average of 10 companies have passed the screen each month. Historically, the number of companies passing this screen tapers off toward the end of a bull market run, such as at the end of the 1990s. The early part of 2006 saw the greatest number of companies passing the revised CAN SLIM filters and the numbers have been steadily declining ever since.

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The monthly turnover rate of almost 62% is the second-highest among growth strategies tracked on AAII.com. In a typical month, only four in 10 stocks will pass all of the filters and remain on the list the following month.

Passing Companies

The current passing companies listed in Table 2 represent a diverse collection of industries. There is a home healthcare provider, a Peruvian bank holding company, a Chinese travel consolidator, an options trading firm, and an offshore drilling company.

  EPS
Grth
Last
Qtr Vs
Yr Ago
(%)
EPS
Grth
Prior
Qtr Vs
Yr Ago
(%)
Sales
Grth
Last
Qtr Vs
Yr Ago
(%)
Ann’l
EPS
Grth
Rate
(3Yr)
(%)
Long-
Term
EPS
Grth
Est
(%)
52-Wk
Rel
Strgth
Rank
(%)
Price
as %
of
52-Wk
High
(%)
Inst’l
Share-
holders
(No.)
Inst’l
Owner-
ship
(%)
 
   
   
   
   
Company Name (Exch: Ticker) Description
Credicorp Ltd. (N: BAP) 76.6 35.8 32.0 41.9 7 94 93 168 23.5 financial servs holding co
Transocean Inc. (N: RIG) 239.7 147.3 50.0 329.1 24.8 93 95 1,611 74.9 offshore oil & gas drilling
Ctrip.com Int’l, Ltd. (M: CTRP) 64.3 38.5 55.3 268.4 36.4 92 90 287 77.9 China travel servs
Bruker BioSciences (M: BRKR) 166.7 –16.7 25.5 41.3 26.7 92 90 281 49.3 life science & research tools
Amedisys, Inc. (M: AMED) 59.2 34.9 32 39.8 18 88 93 453 95 home health servs
optionsXpress Holdings (M: OXPS) 53.8 27.6 46.3 56.5 21 86 91 435 74.1 brokerage servs
                     

The current list of only six passing companies is small. No list of companies passing a filter makes for a complete, diversified portfolio. This is especially true when there are a small number of companies.

Stock screening is only a starting point in the investment process. Ultimately, you want to identify stocks that match your investing tolerances and constraints before adding them to your investment portfolio.

What It Takes: The CAN SLIM Revised Criteria

  • The growth rate in earnings per share from continuing operations between the last reported fiscal quarter and the same quarter one year prior is greater than or equal to 20%
  • The growth rate in earnings per share from continuing operations between the last reported fiscal quarter and the same quarter one year prior is greater than the growth rate in earnings per share from continuing operations between the reported fiscal period two quarters ago and the same quarter one year prior
  • The growth rate in sales between the last reported fiscal quarter and the same quarter one year prior is greater than 25%
  • Earnings per share from continuing operations for the last reported fiscal quarter is greater than zero (is positive)
  • Earnings per share from continuing operations for the last trailing 12 months (last four fiscal quarters) is greater than earnings per share from continuing operations for the last reported fiscal year
  • Earnings per share from continuing operations for the last fiscal year is greater than earnings per share from continuing operations from two fiscal years ago
  • Earnings per share from continuing operations from two fiscal years ago is greater than earnings per share from continuing operations from three fiscal years ago
  • Earnings per share from continuing operations from three fiscal years ago is greater than earnings per share from continuing operations from four fiscal years ago
  • The consensus earnings estimate for the current fiscal year is greater than fully diluted earnings per share from continuing operations for the last reported fiscal year
  • The compounded, annualized growth rate in earnings per share from continuing operations over the last three years is greater than or equal to 25%
  • The current stock price as a percentage of its 52-week high is greater than or equal to 90%
  • The percentage rank for relative strength over the last 52 weeks is greater than 80
  • There are at least 10 institutional shareholders
  • The number of shares purchased by institutions over the last quarter is greater than or equal to the number of shares sold by institutions over the last quarter
Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @WayneTAAII.


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