The William O’Neil CAN SLIM Approach in Brief

Philosophy and Style

Investment in companies whose stock prices are poised to rise due to favorable fundamental factors within the firm and industry, such as increased earnings due to new products and services, as well as favorable technical factors regarding price trends and the supply and demand for the stock.

Universe of Stocks

No restrictions—the entire universe of stocks. However, stocks of smaller firms are favored, since most innovations and new products come from small- and medium-sized companies.

Criteria for Initial Consideration

• Current quarterly earnings per share that are at least 18% or above earnings per share for the same quarter one year prior.
• Quarterly earnings per share growth that is accelerating. Conversely, decelerating growth in quarterly earnings per share is a negative sign.
• Sales growth of at least 25% quarter over quarter or an accelerating rate of quarterly sales growth over last three quarters.
• Meaningful growth in annual earnings per share over the last three years (at least 25% annually).
• Annual earnings per share has increased in each of the last three years.
• High return on equity (ROE). O’Neil looks for ROE of 17% or greater.
• Positive cash flow.
• Search for companies with important new products or services, new management offering innovation or materially improved industry conditions, and buy when share prices are reaching new highs on increased volume off of properly formed bases.
• Small or reasonable number of shares outstanding helps to create buying pressure; there should be volume increases when a stock begins to move up.
• Look for companies buying back their own shares on the open market, provided net income is growing.
• High price strength relative to other stocks.
• Institutional owners with good performance records.
• Buy from among the best two or three stocks in the industry. The best companies are not the largest, but rather those that lead innovation and tend to have the highest ROE, widest profit margins, strongest sales growth and most dynamic price action.

Secondary Characteristics

• To be safer, insist that both of the last two quarters of earnings per share show significant earnings gains.
• Omit one-time extraordinary gains.
• Check consensus estimates to make sure that company is on positive projected path. Also look for increases in analyst estimates and record of earnings surprises.
• Consistency and stability in annual earnings per share, with few deviations from the long-term average trend. Long-term stability and growth separates growth stocks from cyclical stocks.
• Check two or three other top stocks within the same industry to serve as confirmation of growth.
• Low amount of long-term debt to equity.
• A large percentage of stock held by top management.
• Look for entrepreneurial management rather than caretakers.
• Excessive stock splits may hurt performance, especially late in a bull market.
• Avoid stocks with big price drops, even if they look cheap.
• Avoid companies that are “over-owned” by institutions.
• Avoid companies with no institutional ownership and with low capitalization because of a lack of liquidity.

Stock Monitoring and When to Sell

Monitor stocks quarterly by examining the percentage price increase over the prior quarter, focusing on relative price performance among stocks. When selling, sell worst-performing stocks and let the better-performing stocks ‘run.’ What goes up, eventually goes down.

To limit losses, sell if a stock’s price drops 7% to 8% below the purchase price. Take profits when a stock has a 20% gain unless the outlook is particularly favorable for further growth, both for the stock itself and the overall stock market.