Understanding the CANSLIM criteria

CANSLIM is a stock-screening model created by William O’Neil, an American stock broker and investor known for blending technical & fundamental analysis. Regarded as one of the most successful stock investors, in 1963 O’Neil became the youngest person then to get a seat at the NYSE, and today has an estimated net-worth of $500 million.

While many market participants think of technical and fundamental analysis as mutually exclusive & use either one or the other, O’Neil employed both – the technicals indicate the entry and exit points for the stock while the fundamentals highlight the strength of the company and gives confidence to hold the stock. An academic paper studying the CANSLIM model & published in the prestigious International Journal of Accounting and Finance found that it outperforms in the short and the long run, generating 12% alpha (excess returns over benchmark) on average.

“It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.”

William O’Neil

After examining over 130 years of U.S. stock market history, O’Neil found that year after year, the top-performing stocks displayed seven common traits.

The CANSLIM Criteria

1. Current earnings: current quarter EPS must show growth above a certain level
2. Annual earnings: should’ve increased for 3 consecutive years & ROE above a level certain
3. New: any new developments around the stock (e.g. new products, new management, etc.)
4. Supply and demand: this ensures selection of stocks that are in high demand – shares outstanding below a certain level (e.g 25 million) or high trading volume in comparison to the 3-month average are often used
5. Leader or laggard: use the Relative Price Strength to identify the industry leading stocks that have outperformed at least 80% of its peers
6. Institutional sponsorship: a stock should have a minimum level of institutional ownership, and a recent increase in the number of institutional investors is considered a positive sign
7. Market direction: most stocks tend to follow the general market, and as such we should  invest during times of definite uptrends as measured by the 50-day moving average

In this book, O’Neil outlines the details of his winning CANSLIM strategy

The CANSLIM smallcase

Identifying stocks that meet all of the above criteria can be quite a challenging task that requires not only advanced tools & screens, but also domain expertise and regular monitoring. While many professional traders replicate this strategy on their own, the same can be quite difficult or time-consuming for retail investors – which is why we created the CANLSIM-esque smallcase. We even adapted it for the Indian markets since lack of data renders some of the above characteristics not meaningful in the Indian context. 

Aside, of the CANSLIM criteria, the research process employed in creating & maintaining this smallcase includes some common features like our proprietary liquidity filters are applied to remove illiquid stocks, a special check to remove stocks where a significant part of the promoter holdings are pledged, etc. One criteria that we don’t use is the “Current earnings” – the main reason for this is that most Indian companies only report consolidated earnings annually and not on a quarterly basis.

The CANLSIM-esque smallcase is the most transacted smallcase on our platform and for good reason – the screening criteria is quite stringent and the results speak for itself. In the last 4 years, the smallcase has returned a CAGR of 73.75% compared to benchmark Nifty Mid & Smallcap returns of -3.64%.

Note though, since this smallcase has a mix of smallcap & midcap stocks primarily, the risks involved are also higher – this means that an investment in this smallcase is likely to experience more volatility & larger drawdowns compared to smallcases that have a “low” or “moderate” risk label. A final word of caution though from William O’Neil himself – this strategy works best in uptrending markets and less so in bearish markets, so this isn’t an all-weather strategy. However, if and when you are positive on the markets, this would be a great strategy to ride the bull-run.

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If you’re interested in screening stocks using various criteria, check out tickertape.in, which has 130+ filters including liquidity, profitability, debt and market ratios that will help you create your own screen in seconds!

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Interested in learning other strategies on which we’ve built various smallcases? Check out this collection of blogposts that highlight the strategies & rationales behind various smallcases.