12 AAII J ournal/A p ril 2 0 0 3

STOCK SCREENING
B y J o h n B ajko wski
A A II has been testing
the perform ance of a
w ide range of
screening system s for
over five years, and
our interpretation of
the C A N SLIM
approach has been
one of the m ost
consistent and
strongest-perform ing
screens during both
bull and bear m arkets.
HOW TO USE THE CAN SLIM APPROACH
TO SCREEN FOR GROWTH STOCKS
J ohn Bajkowski is AAIIs financial analysis vice president and editor of Computerized
Investing.
Take an attention-grabbing book title, toss in an easy-to-remember acro-
nym, and top it off with a daily business newspaper that supplies information
required for preliminary analysis: Youve got the recipe for a popular invest-
ment strategy. The CAN SLIM approach is presented by William ONeil,
publisher of Investors Business Daily, in his book titled How to Make
Money in Stocks: A Winning System in Good Times or Bad.
The second edition of How to Make Money in Stocks presented a stock
selection approach developed by studying 500 of the biggest stock market
winners from 1953 to 1993. The CAN SLIM approach presented in the book
was based upon the characteristics that these winning stocks possessed prior
to their big price run-ups. Recently, ONeil 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. The third edition of How to
Make Money in Stocks was published last year and presents the revised
CAN SLIM rules (see Table 1). This article presents the CAN SLIM approach
with an eye toward the recent changes and its application using AAIIs stock
screening systemStock I nvestor Pro. Additionally, the March/April 2003
issue of Computerized I nvesting presents how to apply the CAN SLIM stock
screen using Internet stock screening systems.
CAN SLIM OVERVIEW
The CAN SLIM approach seeks companies with a proven record of quar-
terly and annual earnings and sales growth showing strong relative price
strength and support from leading institutions. ONeil does not mind paying
rich premiums for stocks with good prospects. He feels that most strategies
seeking stocks with low price-earnings are flawed because they ignore the
price trend determining the price-earnings ratio, as well as the quality of the
underlying earnings within the ratio. ONeil believes that stocks generally
sell for what they are worth and most stocks with low price-earnings ratios
are probably priced correctly by the market. ONeil also asserts that it is
important to follow the market closely and try to lighten up your stock
exposure when going into a bear market.
C = CURRENT QUARTERLY EARNINGS
The CAN SLIM approach focuses on companies with proven records of
earnings growth that are still in a stage of earnings acceleration. ONeils
study of winning stocks revealed that these securities generally had strong
quarterly earnings per share performance prior to their significant price run
ups.
ONeil recommends looking for stocks with a minimum increase in quar-
terly earnings of 18% to 20% over the same quarterly period one year ago.
When screening for quarterly earnings increases, it is important to compare a
quarter to the equivalent quarter last yearin other words, this years second
quarter compared to last years second quarter. Many firms have seasonal
AAII J ournal/A p ril 2 0 0 3 13
STOCK SCREENING
patterns to their
earnings, and compar-
ing similar quarters
helps to take this into
account.
Another item to
watch for when screen-
ing for percentage
changes is a meaning-
less figure created by
having a very small
base number. For
example, an increase
from one penny to 10
cents translates into a
900% earnings in-
crease. It is always
advisable to look at the
raw numbers of the
company passing the
screen. This allows you
to gauge the overall
trend and stability in
earnings and other
items such as sales and
cash flow.
Whenever you are
working with earnings,
the issue of how to
handle extraordinary
earnings comes into
play. One-time events
can distort the actual
trend in earnings and
make the company
performance look better
or worse than a
comparison against a
firm without special
charges. ONeil
recommends excluding
these non-recurring
items from the analysis.
The first two screens
require quarterly
earnings growth greater
than or equal to 20%
and positive earnings
per share from continu-
ing operations for the
current quarter. We
used Stock I nvestor
Pro, with data as of
March 14, 2003, for
the screen. Only 2,343
stocks out of an initial
universe of 8,428 met
Third Edition Comparison to Second Edition
C = Current Quarterly Earnings Per Share: The Higher, the Better
Primary
Factors
Should show a major percentage increase (18% or 20%
minimum) in the current quarterly EPS when compared to the
prior year's same quarter.
Same as in Second Edition
Omit a company's one-time extraordinary gains. Same as in Second Edition
Look for accelerating quarterly earnings growth. Same as in Second Edition
Secondary
Factors
Look for quarterly sales growth of 25% or at least an
acceleration in rate of sales percentage improvements over
the last three quarters.
New to Third Edition
Find at least one other stock in the same group showing
strong quarterly earnings growth.
Same as in Second Edition
A = Annual Earnings Increases: Look for Significant Growth
Primary
Factors
The annual compounded growth rate for EPS should be at
least 25%.
The EPS annual compounded growth rate should be at least
25% over the last four or five years.
Significant growth in EPS for each of the last three years. Each year's annual EPS for the last five years should show an
increase over the prior year's earnings.
Secondary
Factors
The consensus earnings estimate for the next year should be
higher than the current year.
Same as in Second Edition
Return on equity of 17% or more. New to Third Edition
Look for annual cash flow per share greater than actual
earnings per share by at least 20%.
New to Third Edition
Earnings should be stable and consistent from year to year
over the last three years.
Earnings should be stable and consistent from year to year
over the last five years.
N = New Products, New Management, New Highs: Buying at the Right Time
Primary
Factors
Look for companies with a major new product or service, new
management, or a positive change for the industry.
Same as in Second Edition
Secondary
Factors
Look for stocks close to or making new highs in price after a
period of consolidation.
Same as in Second Edition
Strong volume on price move up.
S = Supply and Demand: Shares Outstanding Plus Big Volume Demand
Primary
Factors
Any size stock can be purchased under the CAN SLIM system.
The market will shift its emphasis between small- and large-
cap stocks over time.
Stocks with a small or reasonable number of shares
outstanding will, other things being equal, usually outperform
older, large-capitalization stocks.
When choosing between two stocks, the stock with the lower
number of shares should perform better to the upside, but can
come down just as fast.
Greater emphasis on stocks with limited float in Second
Edition.
Secondary
Factors
Stocks with a large percentage of ownership by top
management are generally good prospects.
Same as in Second Edition
Look for companies buying their own stock in the open market. Same as in Second Edition
Look for companies with a lower debt-to-equity ratio and
companies reducing their debt-to-equity ratios over the last few
years.
Same as in Second Edition
L = Leader or Laggard: Which Is Your Stock?
Primary
Factors
Buy among the top two or three stocks in a strong industry
group.
Same as in Second Edition
Use relative price strength to separate the leaders from the
laggardsa stock with a relative strength rank below 70% is
lagging and should be avoided.
Same as in Second Edition
Secondary
Factors
Look for companies with a relative strength rank of 80% or
higher that are in a chart base pattern.
Same as in Second Edition, but greater emphasis on limiting
buys to stocks with a relative strength rank of 80% or greater
in Third Edition.
Don't buy stocks with weaker than average performance
during a market correction.
Same as in Second Edition
I = Institutional Sponsorship: Follow the Leaders
Primary
Factors
Look for a stock to have several institutional owners. 10 might
be a reasonable minimum.
Same as in Second Edition
Look at quality of ownersseek out stocks held by at least
one or two savvy portfolio managers.
Same as in Second Edition
Look for stocks with an increasing, not decreasing, number of
sponsors.
Same as in Second Edition
Secondary
Factors
Avoid stocks that are over-ownedexcessive institutional
ownership.
Same as in Second Edition
M = Market Direction
Primary
Factors
It is difficult to fight the trend, so try to determine if you are in a
bull or bear market.
Same as in Second Edition
Follow and understand what the general market averages are
doing every day.
Same as in Second Edition
Try to go 25% into cash when the market peaks and begins a
major reversal.
Same as in Second Edition
Heavy volume without significant price progress may signal a
top, but initial market decline may be on lower volume.
Same as in Second Edition
Follow market leaders for clues on strength of market. Same as in Second Edition
Look for divergence of key averages and indexes at major
turnsdivergence points to weaker and narrow market
movement.
Same as in Second Edition
Sentiment indicators may help highlight extreme psychological
reversal points.
Same as in Second Edition
The change in the discount rate is a valuable indicator to
watch as a confirmation of market moves.
Same as in Second Edition
Secondary
Factors
TABLE 1. REVISED CAN SLIM RULES
14 AAII J ournal/A p ril 2 0 0 3
STOCK SCREENING
these two criteria.
Beyond looking for strong quar-
terly growth, ONeil likes to see an
increasing rate of growth. An
increasing rate of growth in quar-
terly earnings per share is so
important in the CAN SLIM system
that ONeil warns shareholders to
consider selling holdings of compa-
nies that show a slowing rate of
growth for two quarters in row. The
next screen specified that the earn-
ings growth rate from the quarter
one year ago compared to the latest
quarter be higher than a similar
quarter one year earlier. This
reduced the number of passing
companies to 1,556.
As a confirmation of the quarterly
earnings screen, ONeil likes to see
same-quarter growth in sales greater
than 25% or at least accelerating
over the last three quarters. This
new screening requirement was
added to the third edition of
ONeils book and seeks to help
confirm the quality of a firms
earnings. Independently, 3,647
stocks have a current quarterly sales
growth greater than or equal to
25%, but combined with the other
filters the number of passing compa-
nies was reduced to 393.
The CAN SLIM system is not
purely mechanical and ONeil also
likes to find at least one other stock
in the same industry group that
shows strong quarterly earnings
growth as confirmation that the
industry is strong.
A = ANNUAL EARNINGS
INCREASES
Winning stocks in ONeils study
had a steady and significant record
of annual earnings in addition to a
strong record of current earnings.
ONeils primary screen for annual
earning increases requires that
earnings per share show an increase
in each of the last three years. This
filter has been loosened slightly from
the prior edition, which required
earnings increases over each of the
last five years.
In applying this screen in Stock
I nvestor Pro, we specified that
earnings per share from continuing
operations be higher for each year
when compared against the previous
year. To help guard against any
recent reversal in trend, a criterion
was included requiring that earnings
over the last 12 months be greater
than or equal to earnings from the
latest fiscal year. When screened by
itself, 795 companies passed this
filter compared to the 469 compa-
nies that passed the second editions
tighter filter. Adding the filter
requiring a year-by-year earnings
increase for each of the last three
years to the current growth filters
reduced the passing number of
companies to just 60 stocks. This is
not surprising given the economic
environment over the last few years.
ONeil also recommends screening
for companies showing a strong
annual growth rate of 25% over the
last three years. This filter only cut
an additional six stocks, which is to
be expected given the strict consis-
tent year-by-year growth require-
ment.
Optimally, the consensus earnings
estimate for the next year should be
higher than the latest reported year.
Adding this filter reduced the
number of passing companies to 39.
When working with consensus
earnings estimates it is important to
remember that only the larger and
more active firms will have analysts
tracking them and providing esti-
mates. About half of the stocks in
Stock I nvestor Pro have consensus
earnings estimates, so this filter will
also tend to screen out micro-cap
stocks.
Another potential addition to the
CAN SLIM screen is a requirement
for high return on equity (ROE: net
income divided by shareholders
equity). ONeils studies showed that
the greatest winning stocks had
ROEs of at least 17%. ONeil uses
this measure to separate well-
managed companies from poorly
managed ones. Adding this filter
would have reduced the number of
passing companies to 19 from 39.
Our testing over the last five years
revealed that this requirement often
led to a very small number of
passing stocks and hurt performance
since 2001. The revised screen does
not make use of the return on equity
filter.
N = NEW PRODUCTS, NEW
MANAGEMENT, NEW HIGHS
ONeil feels that a stock needs a
catalyst to start a strong price
advance. In his study of winning
stocks, he found that 95% of the
winning stocks had some sort of
fundamental spark to push the
company ahead of the pack. This
catalyst can be a new product or
service, a new management team
employed after a period of lackluster
performance, or even a structural
change in a companys industry
such as a new technology.
These are very qualitative factors
that do not lend themselves easily to
screening. A second consideration
that ONeil emphasizes is that
investors should pursue stocks
showing strong upward price
movement. ONeil says that stocks
that seem too high-priced and risky
most often go even higher, while
stocks that seem cheap often go even
lower. Stocks that are making the
new high list while accompanied by
a big increase in volume might be
prospects worth checking. A stock
making a new high after undergoing
a period of price correction and
consolidation is especially interest-
ing.
ONeils newspaper, Investors
Business Daily, highlights stocks
within 10% of their 52-week high
and this was the criterion established
for the screen. One would expect
many companies to pass during a
strong market expansion, while a
smaller number of companies would
pass during a declining market.
Given the weak market during the
first few months of 2003, it is not
surprising that adding this filter
reduced the number of passing
companies from 39 to four. As of
March 14, 2003, a total of 1,037
stocks out of a universe of 8,428
AAII J ournal/A p ril 2 0 0 3 15
STOCK SCREENING
were trading within 10% of their
52-week high.
S = SUPPLY AND DEMAND
ONeil emphasized smaller-
capitalization stocks more strongly
in his earlier editions. The third
edition states that any size stock can
be purchased using the CAN SLIM
approach, but smaller companies
will be more volatile with greater
pop to the upside and downside.
Companies buying back their stock
on the open market are preferred, as
well as companies with management
stock ownership. No definitive
screens now come out of the S
element of the CAN SLIM system,
but Table 1 identifies a number of
factors to consider when analyzing
passing companies.
L = LEADER OR LAGGARD
ONeil is not a patient value
investor looking for out-of-favor
companies and willing to wait for
the market to come around to his
viewpoint. Rather, he prefers to
identify rapidly growing companies
that are market leaders in rapidly
expanding industries. ONeil advo-
cates buying among the best two or
three stocks in a group. He feels
that you will be compensated for
any premium you pay for these
leaders with significantly higher
rates of return.
ONeil suggests using relative
strength to identify market leaders.
Relative strength compares the
performance of a stock relative to
the market as a whole. Relative
strength is reported in many ways
and you must be careful to under-
stand how the relative strength
figure is used in a given screening
system.
Companies are often ranked by
their price performance for a given
period of time and their percentage
ranking among all stocks is calcu-
lated to show the relative position
against other stocks. Investors
Business Daily presents the percent-
age ranking of stocks and ONeil
recommends avoiding any stock
with relative strength rank below
70% and only seeking out stocks
with a percentage rank of 80% or
betterstocks that have performed
better than 80% of all stocks. While
only about 1,680 firms (8,428
20%) have a 52-week relative
strength rank of 80% or greater, this
filter did not further reduce the
number of passing companies. In the
market environment at the time of
the screen, the price as a percent of
52-week high proved to be a more
stringent price strength screen.
I = INSTITUTIONAL
SPONSORSHIP
ONeil feels that a stock needs a
few institutional sponsors for it to
show above-market performance.
Ten institutional owners is suggested
as a reasonable minimum number.
This number refers to actual institu-
tional owners of the common stock,
not institutional analysts tracking
and providing earnings estimates on
stocks.
Beyond looking for a minimum
number of institutional owners,
ONeil 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. Web sites such as
Morningstar.com
(www.morningstar.com) and CNBC
on MSN Money
(moneycentral.msn.com/investor)
disclose the top mutual funds that
own a given stock.
The next filter required a mini-
mum of 10 institutional sharehold-
ers. About 5,500 stocks pass this
EPS EPS Sales Annual Lo ng- Pric e
Grth Grth Grth EPS Term as % 52-Wk Net
Last Prior Last Grth EPS of Rel Inst l Inst l
Qtr Vs Qtr Vs Qtr Vs Rate Grth 52-Wk Strgth Share- Shares
Yr Ago Yr Ago Yr Ago (3-Yr) Est High Rank holders Purc h
Company (Exchange: Ticker) (%) (%) (%) (%) (%) (%) (%) (No.) (1, 000s) Desc ription
Third Edition CAN SLIM Screen
Apollo Group, Inc (M: APOL) 72.2 50.0 35.4 37.8 24.3 99 93 1,142 6,126 adult higher ed
FTI Consulting, Inc (N: FCN) 192.3 53.3 91.4 36.7 21.0 95 94 384 2,005 consulting firm
International Game Tech (N: IGT) 42.3 10.8 76.4 70.5 17.3 97 88 980 2,102 casino gaming prods
Teva Pharmaceutical Indus (M: TEVA) 73.3 20.0 35.8 49.9 23.8 95 91 942 11,210 major theraputic drugs
Sec ond Edition CAN SLIM Sc reen
Commercial Bankshares (M: CLBK) 30.0 28.2 3.2 16.0 8.0 96 94 27 21 bank holding co
Oshkosh Truck Corporation (N: OSK) 28.8 3.8 17.9 13.1 15.9 90 76 383 121 specialty trucks
Statistics are based on figures as of March 14, 2003. Exchange Key: N =New York Stock Exchange
Data Source: AAIIs Stock Investor Pro/Market Guide, Inc. and I/B/E/S. M =Nasdaq National or Small-Cap Markets
TABLE 2. STOCKS THAT PASSED THE CAN SLIM SCREEN
16 AAII J ournal/A p ril 2 0 0 3
STOCK SCREENING
filter independently. Adding it to the
CAN SLIM filter in Stock I nvestor
Pro did not cut any additional
stocks.
ONeil also likes to see the
number of institutional shareholders
increasing for a given stock in the
most recent quarters. Stock I nvestor
Pro does not report the number of
institutional shareholders over time,
but it does report on number of
shares sold and purchased by
institutions over the last quarter.
Our last filter specified that the
number of shares purchased should
be greater than or equal to the
number of shares sold by institutions
over the last quarter. This filter did
not further reduce the number of
passing stocks, which are shown in
Table 2.
M = MARKET DIRECTION
The final aspect of the CAN SLIM
system looks at the overall market
direction. While it does not impact
the selection of specific stocks, the
trend of the overall market will
have a tremendous impact on the
performance of your portfolio.
ONeil tends to focus on technical
measures when determining the
overall direction of the marketplace.
Any good technical program or Web
site, or even Investors Business
Daily, should provide you with the
necessary tools to study market
movement.
ONeil finds it difficult to fight the
trend, so it is important to determine
if you are in a bull or bear market.
Table 1 summarizes the type of
factors that ONeil considers when
trying to gauge market strength.
SCREENING RESULTS
Table 2 displays the companies
passing the CAN SLIM screen based
upon our interpretation of the rules
presented in both the third and the
second editions of ONeils book.
Four stocks passed the third
edition screen compared to the two
passing the second edition screen.
This is actually a reversal of the
normal pattern. We have backtested
the revised third edition screen and
have found that, on average, five
stocks passed this screen every
month compared to 12 stocks
passing the second edition screen on
a monthly basis from December
1997 through March 2003. As many
as 32 stocks have passed the second
edition screen, while the greatest
number of stocks passing the third
edition screen was 15 over this time
period. On three occasions, no
stocks passed the third edition
screen, while as little as one stock
has passed the second edition screen.
Although it is difficult to draw
conclusions with such a small
sample, the stocks passing the third
edition screen tend to be larger
companies held by more institutional
owners, with stronger quarterly
earnings and sales growth as well as
stronger historical and expected
annual earnings growth.
We have been testing the perfor-
mance of a wide range of screening
systems for over five years now and
our interpretation of the CAN SLIM
approach has proven to be one of
the most consistent and strongest-
performing screens during both bull
and bear markets. Figure 1 provides
a quick view of the initial testing of
the revised CAN SLIM approach.
The revised approach has proven to
be a bit more volatilerising higher
and faster in the bull market of the
late 1990s but then giving up its
lead in the recent bear market. Both
strategies will be tracked and
reported on the in the Stock Screens
area of AAII.com as well as the
semiannual review of strategies in
the AAI I J ournal.
CONCLUSION
The CAN SLIM system has great
appeal to the active investor looking
for growth stocks. While the ap-
proach is specific, it also stresses the
art of investing when interpreting
the direction of the market. Here we
have touched upon CAN SLIM rules
helpful in identifying promising
stocks. It is important to keep in
mind that ideas from a computer
screen merely represent a starting
point that requires further analysis
before action.
FIGURE 1. CAN SLIM PERFORMANCE
Source: AAIIs Stock Investor Pro.