Learn From Past Winners

William J. O’Neil opened his investment firm, William O’Neil + Co., in 1963. He built his system by studying the biggest market winners, from 1880 to 2009 in this edition, and what they shared beforehand.

A Book Of Charts

The fourth edition opens with 100 charts of past leaders, including Apple and Yahoo. They show what each stock looked like before its big run. O’Neil wants readers to study them until they can spot the same setup today.

Seven Letters, One Checklist

Each letter of CAN SLIM names one trait. They are Current quarterly earnings, Annual earnings growth, something New, Supply and demand, Leader or laggard, Institutional sponsorship and Market direction. Chapters 3 to 9 cover one letter each.

Growth Over Bargains

CAN SLIM hunts for companies with fast rising profits whose shares are already strong, never for cheap stocks. That puts O’Neil in the growth and momentum camp, the opposite of value investors who look for beaten down prices.

Limit: Chosen With Hindsight

Every chart here shows a stock that became a big winner. Stocks that had the same look and then failed are missing, so the charts cannot show how often the pattern works. Treat them as illustrations rather than proof.

Price And Volume Together

O’Neil reads charts to see how buyers and sellers are behaving. A daily or weekly chart shows price and trading volume together. He uses it to judge whether big investors are quietly accumulating a stock or unloading it.

The Cup With Handle

His best known setup is the cup with handle: a rounded decline and recovery, followed by a short, shallow dip on light volume. The handle shakes out nervous holders before the stock tries to push through to new highs.

Other Sound Bases

He also teaches the saucer with handle, double bottom, flat base, ascending base and the rare high tight flag. Each is a base: a stretch of sideways trading that a strong stock builds before its next advance.

The Pivot Point

The buy point, which O’Neil calls the pivot, is where a stock clears the top of its base. He wants volume on that day to jump well above normal, a sign that institutions as well as individuals are buying.

Limit: Patterns Need Judgment

Two readers can draw the same base differently, and many breakouts fail. Chart patterns are rules of thumb rather than measured odds, so practice spotting bases on old charts before trusting your eye with real money.

Compare The Same Quarter

The C compares the latest quarterly EPS with the comparable quarter a year earlier, which reduces seasonal distortions but does not remove every difference. Check reporting periods, split adjustments, currency and unusual items. Percentage growth from a tiny or negative starting EPS can mislead; identify the actual numbers before applying the author’s threshold.

A High Bar For Growth

In this edition O’Neil sets a floor of about 18% to 20% growth in quarterly earnings, while his closing checklist asks for 25% or more; the book gives both figures, the lower as a minimum to consider and the higher as the target. He also wants sales rising strongly, ideally by 25% or more, so profits reflect real demand.

Big Jumps Before Big Runs

By the author’s figures, Cisco’s quarterly earnings rose 150% and 155% before its major advance, and Google’s rose 112% and 123%. His point is that the biggest winners usually showed explosive profit growth before their prices took off.

Acceleration Counts

O’Neil favors earnings growth that speeds up from one quarter to the next. A company whose growth is slowing, even from a high level, gets less credit in his system than one still gathering pace.

Evidence: Earnings Drift

Research supports the idea that earnings news keeps moving prices. In a 1996 Journal of Finance study, Chan, Jegadeesh and Lakonishok found that past earnings surprises predicted large drifts in later returns. Their results suggest markets respond to news only gradually.

Three Strong Years

A checks that a hot quarter is backed by a record. O’Neil looks for annual earnings per share growth of 25% to 50% or more in each of the last three years. One lucky quarter cannot pass that test.

Return On Equity

He adds a quality test: return on equity of at least 17%, with the strongest companies at 25% to 50%. Return on equity measures the profit earned on shareholders’ money, a rough gauge of how well management uses capital.

Steady Beats Erratic

O’Neil prefers earnings that climb steadily year after year over profits that lurch up and down. The book scores this with an earnings stability figure, and he wants a low reading, under 25, as a sign of dependable growth.

P/E Is Not The Test

He argues that a low price to earnings ratio alone is a poor reason to buy, and ranks earnings growth well above valuation. Stocks that already look expensive can keep rising, in his view, if profits grow fast enough.

Limit: Growth Gets Priced In

Fast growers often trade at high valuations, so even a small slowdown can hit the price hard. Three strong years describe the past rather than the next year, which is why each new earnings report matters so much in this system.

Something New

N stands for something new: a product, service, management team or change in industry conditions. By the author’s count, more than 95% of the big winners he studied had something new driving their advance.

The iPod Example

The book points to Apple’s iPod as a new product that powered a huge stock advance. Innovation changed the company’s earnings path, the kind of change N asks you to find. O’Neil argues that newer companies with fresh ideas often grow fastest.

Buy Near New Highs

O’Neil’s rule is to buy stocks as they climb out of a sound base into new price highs rather than stocks near their lows. He argues that stocks which look too pricey to most buyers often keep climbing, while bargain looking stocks keep sliding.

Properly Formed Bases

Not every new high qualifies. The high should come out of a proper base, such as a cup with handle, after weeks of sideways trading. A stock already stretched far above its base, which he calls extended, carries more risk.

Evidence: The 52 Week High

George and Hwang (2004) studied US stocks from July 1963 to December 2001. Stocks trading near their 52 week highs tended to beat those far below them, and the gains did not reverse later. That supports O’Neil’s instinct to buy strength.

Price Follows Demand

S applies supply and demand to shares. When big buyers want more stock than sellers will supply, the price rises. O’Neil watches volume, the number of shares traded, to see when that demand shows up at key points on the chart.

Small Floats Move Faster

Companies with fewer shares available to trade can rise faster when demand arrives. A common summary of his system cites fewer than 25 million shares outstanding. This edition’s chapter puts its emphasis on heavy volume at key points.

Splits And Buybacks

A stock split changes the number of shares and the per-share unit; it does not by itself dilute existing ownership or create wealth. In a simplified two-for-one example, 100 shares at $50 become 200 at $25, with the same $5,000 total value. Compare split-adjusted prices and EPS. A buyback reduces share count, but does not guarantee better business performance or stock returns. See Investor.gov’s stock-split explanation.

Low Debt Preferred

He favors companies with little debt compared with shareholders’ equity. Low debt usually means less financial risk, in his view. Heavy borrowing can magnify trouble when business slows, just when a growing company needs room to invest.

Limit: Small Stocks Swing

The same thin supply that lifts a small stock quickly can sink it quickly. Lightly traded shares can gap sharply on news. They also cost more to trade, because buyers’ and sellers’ prices sit further apart, so position size matters more.

Own The Leader

L asks whether a stock leads its industry or trails it. O’Neil’s rule is to own the leading stocks in strong industry groups and drop the laggards. He would rather pay up for the best than settle for a cheaper rival.

Relative Price Strength

He measures leadership with a relative price strength rating, which ranks how a stock’s price has performed compared with the rest of the market. A higher rating means the stock has outpaced more of its peers.

The 80 Rule

O’Neil avoids stocks rated below 70 and prefers ratings of 80 or higher. By his count, the biggest winners showed ratings of about 87 just before their major advances began, so price strength came first.

Laggards Lag For A Reason

Buying a weaker stock in a hot group because it looks cheaper is, in his view, a common error. A laggard usually trails for a reason, such as slower earnings growth, and tends to trail again when the group advances.

Evidence: Momentum

Jegadeesh and Titman (1993) tested buying the past six months’ best performers and selling the worst, from 1965 to 1989. The strategy earned a compounded excess return of 12.01% a year on average. Relative strength is among the book’s best supported ideas.

Big Buyers Move Prices

I stands for institutional sponsorship: ownership by mutual funds, pension funds, banks and insurers. These large buyers can move a stock’s price, so O’Neil wants stocks that several of them already own and are adding to.

Several Sponsors

O’Neil’s rule is to look for several institutional owners rather than one or two. Broad sponsorship means more big buyers who can keep adding to their positions, which helps support a stock as it moves higher.

Rising Ownership Counts

The direction of ownership matters as much as its level. He wants the number of institutional owners to be rising in recent quarters. His aim is to own a stock before or while professionals build their positions.

Too Popular Is Risky

He also warns against overowned stocks. When nearly every fund already holds a stock, few new buyers are left. If many decide to sell at once, the drop can be steep and fast.

Limit: Seen After The Fact

Institutional holdings and insider transactions are different evidence. Form 13F reports covered holdings of qualifying institutional managers, generally filed within 45 days after quarter-end. It is delayed and does not show every position or the exact purchase date. Form 4 concerns reportable insider transactions. Neither is a live signal that a stock will rise.

Three Of Four Follow

M is about the general market. O’Neil argues that three out of four stocks move with the market’s trend, so even great companies tend to fall in a bear market. Reading the market’s direction comes before picking stocks.

Watch, Don’t Forecast

Rather than predict, he studies the major indexes daily, such as the S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average. The goal is to see what the market is actually doing now, whatever experts expect.

Distribution Days

A key warning in his system is the distribution day. On such a day an index falls on heavier volume than the day before, a sign that big investors are selling. A cluster of these, in his reading, can warn that a top is forming.

Cash In Downtrends

When the market turns down, the method moves toward cash. Holding through a bear market like 1973 to 1974 can erase years of gains. New buying waits until the indexes confirm a fresh uptrend.

Evidence: Momentum Crashes

Daniel and Moskowitz (2016) found that momentum strategies suffer rare losing streaks, which they call crashes. These strike in panic markets after declines, just as the market rebounds. That is when a system built on recent leaders can lag badly.

The 7% To 8% Rule

O’Neil’s rule is to cut any loss when a stock falls 7% to 8% below the purchase price, without exception. He treats these small losses as the normal cost of the system rather than a failure to hide from.

The Math Of Big Losses

A 50% fall requires a 100% gain to recover the starting value. Limiting individual losses is the author’s aim, but it cannot guarantee that one trade or several correlated holdings will not damage an account. The percentage movement of a stock is also different from its contribution to a whole portfolio’s loss.

Being Wrong Is Normal

Drawing on Bernard Baruch, O’Neil notes that an investor can be right only half the time and still do well. The key is cutting losses quickly. The rule assumes you will often be wrong and plans for it in advance.

No Averaging Down

He rejects buying more of a falling stock to lower the average cost. In his method, new money goes only to positions that are working. A stock below the purchase price is a mistake to correct rather than a bargain, the opposite of the disposition effect.

Limit: Whipsaws And Gaps

O’Neil’s 7% to 8% threshold is an intended exit rule, not a guaranteed loss cap. Gaps, trading halts and limited liquidity can produce worse outcomes. A stop-market order may execute below its trigger; a stop-limit order may fail to execute. FINRA explains these execution risks. Position size and simultaneous portfolio losses also matter.

Take Gains At 20% To 25%

O’Neil’s general rule is to take most profits when a stock is up 20% to 25% from its proper buy point. Selling into strength locks in gains before a normal pullback can erase them and turn a winner into a loser.

A Lopsided Payoff

For three hypothetical positions initially worth

A Lopsided Payoff

Pyramiding Up

O’Neil adds to winners, never to losers. In his pyramiding approach, an investor buys an initial position at the breakout and adds smaller amounts only if the stock rises. Most of the money then goes into what is already working.

Jack Dreyfus’s Lesson

O’Neil has written about studying the Dreyfus Fund, run by Jack Dreyfus, which bought stocks as they reached new highs after strong chart patterns. The lesson he draws is that skilled professionals buy strength rather than weakness, even when that feels like paying too much.

Limit: Frequent Taxable Sales

Selling winners after weeks or months means frequent sales, and in a regular brokerage account each profitable sale can create a tax bill. Check how gains are taxed in our investment tax guide before judging this style by its headline returns.

Concentrate And Watch

O’Neil prefers a few well chosen stocks, watched closely, over broad diversification. His guideline is four or five stocks for most individual portfolios and two or three for smaller accounts, so each holding gets real attention.

Margin Is For The Experienced

Borrowing on margin magnifies gains and losses alike. He suggests it only for experienced investors with a proven record. A margin call in a falling market can force sales at the worst possible moment.

Options And Short Selling

He calls options speculative and advises staying away until you have a solid record with stocks. Short selling, a bet on a decline, he limits to seasoned investors, a small part of the portfolio and mainly bear markets.

New Issues And Income Stocks

New issues are risky until they trade long enough to form a proper base, so he suggests waiting. He also doubts that high dividend stocks are truly safe, since their prices can still fall hard in a weak market.

Limit: Concentration Cuts Both Ways

With four or five stocks, one bad earnings report can sink a large share of the portfolio. Broad diversification gives most beginners steadier results; read our diversification cheat sheet before deciding how concentrated to be.

A List Of 21 Errors

O’Neil gathers the habits he sees hurting investors into 21 mistakes. Many restate earlier rules in reverse, so the chapter works as a checklist of what not to do when using the CAN SLIM method.

Holding On To Losers

Letting small losses grow is on the list. He sees stubborn hope, waiting for a losing stock to come back, as a costly habit. He repeats his rule to cut losses at 7% to 8% below the purchase price.

Cheap Stocks Are A Trap

Buying low priced shares because you can own more of them is another error, in his view. Cheap stocks usually belong to weaker companies, he argues, while market leaders tend to trade at higher prices.

Dividends Over Growth

He also warns against choosing stocks for their dividends instead of their earnings growth. In his system a big dividend does not protect a weak stock, and the largest gains come from companies whose profits are accelerating.

Limit: Mistakes For One Style

Several of these mistakes, such as buying low priced stocks or buying for dividends, are normal practice for value and income investors. They are errors within O’Neil’s system rather than universal rules for every style of investing.

More Case Studies

This chapter returns to case studies of past leaders and of investors who used the method. O’Neil’s lesson is that the same patterns keep repeating across markets and decades because human nature changes little.

A Young Investor’s Record

He cites Lee Freestone, who by the book’s account gained 279% and then 120% in consecutive years of the U.S. Investing Championship. O’Neil offers the record as proof that the rules can be learned. These are the author’s figures rather than audited returns.

Winners Across Decades

The models run from the 1950s to the 2000s. They aim to show CAN SLIM traits in winners across very different economies and industries. The point is that the pattern is not tied to one bubble.

The Model Book Habit

O’Neil published eight editions of a model book of great stock market winners. This chapter works the same way. The habit it teaches is to compare today’s candidates with proven examples until the patterns become familiar.

Limit: Stories Are Not Audits

Success stories are chosen because they worked; people who tried the rules and lost rarely become examples. Treat each story as an illustration of the method rather than evidence of what a typical reader should expect, a survivorship bias in plain sight.

Groups Move Together

O’Neil argues that about half of a stock’s price move comes from its industry group and sector, 49% by his estimate. Owning a strong company in a weak group means swimming against the current, however good its earnings look.

Ranking 197 Groups

Investor’s Business Daily ranks 197 industry groups by price performance over the past six months, he explains. He looks for leaders in the top ranked groups, since big winners tend to arrive in clusters within the same themes.

Leaders Rarely Repeat

Leadership rotates. By his account, few of the leaders of one bull market lead again in the next. Investors need to look for new themes each cycle instead of waiting for old favorites to return.

Group Ratings

He grades each group’s strength on a scale from A+ to E and prefers groups near the top. A leading group that begins to slip can be an early warning for the stocks inside it.

Limit: Proprietary Data

The group rankings and ratings come from Investor’s Business Daily, the paper O’Neil founded. Without a subscription, readers have to approximate them, for example by comparing sector funds or industry charts, and results will differ.

The Paper He Founded

O’Neil launched Investor’s Daily in 1984, now Investor’s Business Daily, a paper packed with charts and data. This chapter shows how he uses its tables, lists and ratings to find stocks that fit CAN SLIM.

Ratings That Mirror CAN SLIM

IBD scores stocks on measures that echo the letters. They include an EPS rating for earnings growth, a relative strength rating, an SMR rating and an accumulation and distribution rating. Each compresses one idea into a single grade.

Accumulation Grades

The accumulation and distribution rating estimates whether institutions have been buying or selling a stock. In a bull market, O’Neil focuses on stocks with the top grades, a sign that big investors are adding shares.

Free Alternatives

Readers without IBD can approximate the first pass with free tools. Earnings growth, trading volume and recent price strength are common screener filters. A chart can then be checked for a sound base.

Limit: A Product Chapter

O’Neil built the products this chapter recommends, so it doubles as a guide to his company’s service. The ideas stand on their own, but weigh that commercial link, and remember that every rating summarizes the past.

Reactions Over Headlines

O’Neil’s approach to news is to watch how prices respond rather than guess what the news means. In his reading, a stock that holds firm after bad news is showing strength, and one that falls on good news is showing weakness.

Weekly Charts For Perspective

He uses weekly charts to see the bigger picture: whether a stock is still building a base or has already run far above it. Daily noise matters less than where a stock sits in its longer pattern.

Psychology Repeats

Market psychology repeats in every cycle he studied, he argues, with greed near tops, fear near bottoms and similar chart shapes each time. That repetition is why he trusts market history more than forecasts.

Keep A News Log

For a beginner, the practical takeaway is to record a piece of news, then the price reaction, for a few stocks each week. Over time the pattern of reactions teaches more about a stock than the headlines do.

Evidence: Faster Markets

Research on earnings-announcement drift concerns specific samples, signals and periods. A historical finding does not establish that a delayed-price opportunity exists for a particular stock today. Distinguish the book’s trading rules from evidence about individual market effects, and consider costs, news speed and the risk of a changing relationship.

A Different Rulebook

For mutual funds, O’Neil sets aside the quick selling rules he uses for stocks. He suggests picking a good fund and holding it for the long haul, 10 to 25 years or more. That gives compounding time to do the work.

A Few Funds Are Enough

He suggests owning a limited number of funds rather than many. Each fund already holds dozens of stocks, so a handful of funds can spread risk widely without the portfolio becoming hard to track.

Sit Through Declines

A holding period that long will include several bear markets. The real test of his fund plan is staying invested when fund values fall. Selling in a panic breaks the compounding the plan depends on.

Global Funds And Fund Types

He suggests keeping international and global funds to a small share, about 10% of the portfolio. He also explains the two fund types: open end funds issue and redeem shares at net asset value, while closed end funds trade on an exchange at whatever price buyers will pay.

Limit: Picking The Manager

This shifts the task from picking stocks to picking fund managers, which is also hard, and fund fees compound every year. Compare any active fund’s costs and record with a low cost index fund before choosing.

Written For Big Money

This chapter speaks to people who oversee pension funds and other large portfolios. For a beginner, it shows how the big buyers behind the I in CAN SLIM make decisions. It also shows where O’Neil thinks they go wrong.

Several Managers, Several Styles

He recommends that large funds use several managers with different styles rather than relying on one. That way no single approach, or one manager’s bad stretch, dominates the fund’s results over a full market cycle.

Recognize Leaders Early

He recounts cases from his own career where spotting a leading stock early, before the crowd noticed it, led to large gains. Acting on evidence before it becomes the consensus view is, in his telling, how big money is made.

Bold Calls In Gloomy Times

He also points to advertisements from 1978 and 1982 that made bold bullish calls while most investors were gloomy. His lesson is to trust what prices and volume show over the prevailing mood.

Limit: Size Changes The Game

A method built on fast moving growth stocks gets harder at scale. A giant fund buying a smaller company can push its price up. It may also be unable to sell quickly without moving the price against itself.

The Earnings Rules Restated

The closing checklist restates the core earnings screens at their stricter setting. O’Neil wants quarterly earnings per share up 25% or more (Chapter 3 gives 18% to 20% as the floor) and annual earnings rising in each of the last three years, with the growth still accelerating.

No Cheap Stocks

It repeats his warning against low priced shares and against buying a stock simply because it looks inexpensive. Leaders, in his experience, usually trade at higher prices, and cheap shares tend to be cheap for a reason.

The Loss Rule Again

The author repeats a planned exit at 7% to 8% below the purchase price. Treat this as his decision threshold rather than a promise that an order will fill there. The worked example below shows how a price gap changes the loss on a position and its effect on a portfolio.

Market Direction First

The checklist also restates M: new buying belongs in confirmed market uptrends, and the method moves toward cash when the general market weakens. Even strong stocks, he reminds readers, usually fall with the market.

Limit: Who It Does Not Suit

This is an active style with frequent trades, fast decisions and taxable gains. It does not suit investors who cannot check markets often, struggle to sell at a loss, or prefer holding an index fund.

Stocks with fast rising earnings and strong price leadership, trading near new highs, tend to keep outperforming (the C, A, N and L letters).

Jegadeesh and Titman (1993) reported a 12.01% annual compounded excess return for one specified historical six-month-winner/six-month-loser strategy. That sample result is not a return estimate for this book or a typical investor. Research on proximity to 52-week highs and earnings announcements tests particular effects, with results that depend on the sample and method. Momentum can also suffer sharp losses, including during market rebounds after panic. These studies do not validate the complete CAN SLIM system.

Verdict: Partly holds up. Jegadeesh and Titman (1993): Returns to Buying Winners and Selling Losers

The complete CAN SLIM system beats the market.

A historical paper-screen result is not the same as an independently verified investor outcome. A fair comparison needs the eligible stock universe, point-in-time data, selection and exit rules, dividends, transaction costs, liquidity and treatment of failed stocks. Research on momentum alone does not validate every CAN SLIM rule. The book’s selected winning charts and the previously cited screen results do not establish what a typical reader will earn.

Verdict: Complete-system outperformance is not established here. The Globe and Mail: Forget buy low and sell high, says William O’Neil

US Stock Screener

Worked example: earnings growth and an exit rule are different checks

Use a hypothetical company whose split-adjusted EPS was $1.00 in the comparable quarter last year and is $1.30 now. Growth is ($1.30 − $1.00) ÷ $1.00 = 30%. This is arithmetic from a positive starting value, not evidence that the stock is a good investment. A trailing-12-month EPS column does not establish this quarterly growth rate.

For a separate hypothetical price example, 100 shares at $50 cost $5,000. An 8% threshold is $46: an exit there loses $400 before costs, or 2% of an illustrative $20,000 portfolio. If a price gap instead produces a $42 exit, the loss is $800: 16% of the position and 4% of that portfolio. The quantity and portfolio amounts are examples, not position-size recommendations; the rule does not guarantee either exit price.

Open the US Stock Screener. Inspect the price, market-cap and EPS columns actually available, and note which EPS period they show. If comparing earnings growth, use comparable dated company reports rather than assuming a displayed annual or trailing EPS figure is quarterly growth. Use only the sorting or filtering controls present. If the screener is unavailable, complete the hypothetical calculations in your notes.

List what this first screen cannot establish: a new product’s prospects, a proper chart base, the book’s proprietary relative-strength rating, current institutional buying and future market direction. The AI helper does not build or control the screen, and no AI request is needed for this activity. Candidates are research questions, not buy signals.

Open the US Stock Screener

Question 1

In CAN SLIM, what does the M stand for?

1. Management quality
2. Market direction
3. Margin of safety
4. Monthly dividends

Question 2

What is O’Neil’s rule when a stock falls below the price paid?

1. Buy more to lower the average cost
2. Hold until it returns to the purchase price
3. Cut the loss at 7% to 8% below the purchase price
4. Wait for a dividend to offset the loss

Question 3

Why are the book’s charts of past big winners weak evidence on their own?

1. They cover only one industry
2. They were chosen with hindsight, so stocks with the same setup that failed are missing
3. They show only bear markets
4. They leave out trading volume

A Random Walk Down Wall Street

Burton Malkiel’s classic makes the case for efficient markets and low cost index funds, the opposite of O’Neil’s active system. Reading both helps you decide which approach fits your time, temperament and taxes.