Fundamental and Momentum (O’Neil’s CANSLIM)

Although not published in an academic journal, the CANSLIM strategy is one of the first multi-anomaly strategies to be used by individual investors.  It was created by William O’Neil, the publisher of Investors Business Daily, and described in his book published in 1988.  CANSLIM is based on the Fundamental Anomaly [Chapter 6], the Momentum Anomaly [Chapter 7], the Institutional Ownership Anomaly [Chapter 8] as well as human judgment.

CANSLIM includes a number of rankings but it is not a totally automated strategy and requires the user to make some judgment calls as to the strength of the company product line versus other similar companies.

To help investors who want to use CANSLIM, we have included the CANSLIM ranking items in the database used with Research Wizard.  (Please click here to learn more about the screening and backtesting power of a stock research system built for the individual investor.)

Subjective judgments can be made based on the Zacks Equity Research report on the company which is available to subscribers to the Zacks Premium service.

CANSLIM is a trading philosophy rather than a specific ranking system and consists of the following seven elements:

Fundamental Anomaly:

  • C stands for current earnings per share; current earnings should be up 25%.  Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.
  • A stands for annual earnings, which should be up 25% or more in each of the last three years.  Annual returns on equity should also be 17% or more.

Judgment:

  • N stands for new product or service, which refers to the idea that a company should have a new idea that fuels the earnings growth seen in the first two parts of the mnemonic.  This product is what allows the stock price to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high price.  A notable example of this is Apple Computer‘s iPod.

Momentum Anomaly:

  • S stands for supply and demand.  An index of a stock’s demand can be seen by the trading volume of the stock, particularly during price increases.
  • L stands for leader or laggard? O’Neil suggests buying “the leading stock in a leading industry.”  This somewhat qualitative measurement can be more objectively measured by the Relative Price Strength Rating (RPSR), which is an index designed to measure the price of a stock over the past 12 months in comparison to the rest of the market based on the S&P 500 or the TSE 300 over a set period of time. [2]
  • I stands for institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters.  A quantitative measure here is the Accumulation/Distribution Rating, which is a gauge of mutual fund activity in a particular stock.
  • M stands for market indexes, particularly the Dow Jones, S&P 500 and NASDAQ.  O’Neil prefers investing during times of definite uptrends of these three indices since three out of four stocks tend to follow the general market pattern.

Using the CANSLIM philosophy, Investors Business Daily provides a number of ranks of stocks – Relative Strength, Accumulation, SMR, and then creates a Composite Rank.  The 100 stocks with the best composite ranks are listed in the Investors Business Daily.  In 2003, the Investors Business Daily began publishing an index of these stocks, the IBD 100, and later created another index, the IBD 85-85.

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