Share Related Components

CANSLIM, a growth stock investing strategy, considers not only the price action of the stock but share ownership and availability as well. Although the published requirements have changed over time, we are identifying screening requirements based on the 2ⁿᵈ edition of How to Make Money in Stocks. Here we address the N, S, L, and I screening components of the strategy.

N – New

The N in CANSLIM represents new products, new management and new high prices for the stock. While evaluating the companies that had experienced rapid growth, O’Neil noted that changes in products and management were common denominators. His study also found that new products and/or management led to new high prices. Since new products and new management are qualitative, they cannot really be identified using screening and must be examined in other ways. One source of this information is Investors Business Daily – IBD – the newspaper O’Neil founded.

Fortunately, the proximity of the current price to the 52 week high price is something we can screen for since it is quantitative.  O’Neil suggests the current price should be within 10% of the 52-week high price and that specific price patterns should be present.

In a later book, The Successful Investor, a significant number of stock charts are provided to illustrate the chart patterns that support the new price movement.

S – Supply and Demand

The core idea is that companies with limited numbers of shares available will have rapid rise in share price as the demand for the shares increases - a classic supply and demand scenario where limited supply drives price. The downside of limited supply is that if there is a rush to sell, the price will drop rapidly.

Shares outstanding should not exceed 25 million. This has the effect of limiting the universe of available companies to smaller capitalization stocks. A quick check (October 2009) revealed that all but 6 stocks with limited share availability were small cap stocks. It may be worthwhile considering float (shares outstanding less restricted shares) rather than shares outstanding if available in the screener.

Note that O’Neil favors companies where insiders own stock in the company. However, he did not make this a requirement.

An interesting development in later CANSLIM publications is the repurchase of stock by the company. This is in line with the idea of limiting the number of shares available. At present, only the SmartMoney stock screener provides the necessary information.

L – Leaders

Use price action to identify industry leaders by considering the relative strength of the stock price compared to all other companies.  Normally relative strength is based on a price comparison to a benchmark like the S&P 500. The actual benchmark is not an issue since we will look at relative strength rank and will expect a stock ranked in the top 20%.

While not specified as criteria, the 2ⁿᵈ edition of the book indicates that improving relative strength is superior to relative strength that is falling. The IBD site (and perhaps others) displays relative strength rank along with the price on a single chart so that rising or falling relative strength rank can be examined visually.

Finally, not as a screen but as a note, O’Neil indicates that you are looking for the top 2 or 3 stocks in the strongest 10 to 15 IBD groups. Do the math to see that the strategy expects to hold 20 to 45 stocks.

I – Institutional support

CANSLIM takes advantage of increasing institutional support. How to identify this varies from edition to edition of the book so we will simply use what others have suggested to identify the base requirement.

AAII chooses to screen for the number of institutional owners and sets the threshold at five. The Domash article suggest that institutional ownership be at least 5% of the available stock but less than 35%. This supports the concept of not selecting stocks over owned by institutions.

Recognizing increasing institutional ownership (either in number of owners or in number of shares owned) would be useful. If screeners can provide this, we will note it.

The quality of the funds owning the company might be available from Morningstar, but not elsewhere. IBD also offers a grade for the quality of funds owning the stock.

CANSLIM Share requirements summary

In summary, the primary screening requirements related to share information are:

  • Current price >= 90% of 52 week high
  • Outstanding shares <= 25 million
  • 52 week relative strength rank >= 80%
  • Number of institutional owners >= 3
  • Institutional ownership <= 35%

The secondary screening requirements are:

  • Net institutional shares owned increasing
  • Net institutional owners increasing

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Bajkowski, John. How to Use the CANSLIM Approach to Screen for Growth Stocks. April 2003.  AAII Journal.

Domash, Harry. 7 Signs a Stock is Ready to Soar, January 2004, MSN Money.

O’Neil, William J., How to Make Money in Stocks: A Winning System in Good TImes and Bad. McGraw-Hill, Inc. 1995.

O’Neil, William J., The Successful Investor: What 80 Million People Need to Know to Invest Profitably – and – Avoid Big Losses. McGraw-Hill, 2004

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