Breakoutwatch as a Tool for the CAN SLIM® Investor
Breakoutwatch was initially conceived to fill a gap in the offerings of Investors Business Daily (IBD). That journal frequently shows how cup and handle breakouts can make strong gains, but they always do so with hindsight, whereas it would be more useful to show them before breakout. Our goal was to provide the individual investor with advance warning of stocks that were in the cup and handle pattern, and others often referenced by IBD. We also aimed to quantify, as much as possible, the 7 CAN SLIM rules and apply them to an objective assessment of each stock. This was achieved with what we call our CANTATA Evaluator (CE), standing for Strong Current earnings,sustained Annual growth, New highs, Technical Analysis and Timing Assistance. CANTATA adds to CAN SLIM by adding the dimension of timing assistance - which stocks are in chart patterns like the cup and handle and providing alerts as breakouts take off.
This article aims to show how we evaluate a stock according to CAN SLIM rules. If you are a CAN SLIM investor, it will assist you to recognize good CAN SLIM candidates. I will use AAPL as of 9/19/2014 as an example.
The following definitions of the CAN SLIM mnemonic are taken from Wikipedia.
CAN SLIM Criteria
C stands for Current earnings.
Per share, current earnings should be up to 25%. Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign
How we Evaluate Each Criterion
We assess both current earnings and their growth acceleration over the last 4 quarters for which there is published data. We assign a score according to these criteria:
- Quarter over Quarter (QoQ) Earnings Growth Rates
If the QoQ earnings per share (EPS) growth rates in the latest two quarters are greater than or equal to 18%, 1 point. If EPS growth rates in the latest two quarters are negative, 0 points. Points are prorated for growth rates between 0 and 18%. Slightly more weight is placed on the most recent quarter than on the previous quarter in order to derive a combined score for both quarters. - Positive Quarterly Earnings
If the earnings per share (EPS) in the latest two quarters is positive, 1 point. If the EPS in the latest two quarters is negative, 0 points. Slightly more weight is placed on the most recent quarter than on the previous quarter in order to derive a combined score for both quarters. - Quarterly Earnings Growth Rate Acceleration
QoQ EPS growth rates over the last four quarters are used to determine if the QoQ EPS growth rate in one quarter is greater than the QoQ EPS growth rate in the previous quarter. If the growth rate in the recent quarter is positive and greater than the previous quarter, 1 point. If the growth rate in the recent quarter is greater or equal to 25% but less than the previous quarter, 0.5 points. (This allows for deceleration down to a still very high level of growth.) If the growth rate in the recent quarter is less than 25% and less than the previous quarter, 0 points. Recent quarters are weighted slightly more than older quarters in order to derive a combined score for all four quarters.
which should be up 25% or more in each of the last three years. Annual returns on equity should be 17% or more
We evaluate the year on year earnings for the last 4 years and also the 12 month return on equity.
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Year over Year (YoY) Earnings Growth Rates
If the YoY EPS growth rates in the latest four completed fiscal years are greater than or equal to 25%, 1 point. If the YoY EPS growth rates are negative, 0 points. Points are prorated for growth rates between 0 and 25%. Recent fiscal years are weighted slightly more than older fiscal years in order to derive a combined score for all four fiscal years.
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Return on Equity (ROE)
If the ROE for the trailing twelve months (TTM) is greater than or equal to 17%, 1 point. If the ROE is negative, 0 points. Points are prorated for ROE values between 0 and 17%.
N stands for New product or service,
which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic.
As there is not an easy way to automate this criterion, we leave it to the due diligence of the reader to evaluate. To avoid wasting time, we suggest this only be done if quarterly and annual criteria are satisfied.
S stands for Supply and demand. An measure of a stock's demand can be seen by the trading volume of the stock, particularly during price increases.
Daily trading volume is shown on our Technical Analysis charts. This criterion is best determined on a daily or weekly basis.
L stands for Leader or laggard?
O'Neil suggests buying "the leading stock in a leading industry".
We determine if a stock is a leader or laggard by by looking at its 12 month price performance against all other stocks using Relative Strength Rank (RS Rank)
Relative Strength Rank compares the 1 year price performance against all other stocks 0n a scale of 1 to 99. If the RS Rank equals 99, 1 point. If the RS Rank equals 1, 0 points. Points are prorated for RS Rank values between 1 and 99.
I stands for Institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters.
We measure Institutional Ownership.
Points are equally weighted between two components of institutional ownership as reported in the most recent available quarter. First, if the number of institutional owners is greater than or equal to 5, 1 point. If the number of institutional owners is less than 1, 0 points. Points are prorated for the number of institutional owners between 1 and 5. Second, if the number of net shares purchased by institutional owners is zero or positive, 1 point. If the number of net shares purchased by institutional owners is negative, 0 points.
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, as three out of four stocks tend to follow the general market pattern.
Our market trend analysis for each major index is published each day on our Market Analysis page.
CAN SLIM (CANSLIM) is a registered trademark of Data Analysis, Inc.
BreakoutWatch is not affiliated with Investor's Business Daily or with Mr. William O'Neil. Our site, research and analysis is supported entirely by subscription and is free from advertising.
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