C: The 25% rule

This is Day 32, the second day of M2 W1. Yesterday established why earnings drive stocks. Today turns the principle into a specific filter you can apply to any stock today.

THE THRESHOLD AND WHERE IT COMES FROM

The canonical CAN SLIM benchmark for current earnings is 25% year-over-year EPS growth in the most recent reported quarter, with acceleration preferred over deceleration.

To unpack:

"Year-over-year" means you compare the most recent quarter's EPS to the same quarter one year ago. For a stock reporting Q3 2026 numbers, the comparison is Q3 2026 EPS vs Q3 2025 EPS. Year-over-year compares same-season-to-same-season, which controls for the seasonal effects most businesses have (a retailer's Q4 isn't comparable to its Q3, but a retailer's Q4 2026 is comparable to its Q4 2025).

"EPS" means earnings per share, net income divided by the diluted share count. EPS controls for changes in share count (buybacks shrink it, secondary offerings grow it). A company that grew net income 30% but issued 30% more shares would have flat EPS; the C rule treats that as no growth.

"25% growth" means the current-quarter EPS is at least 1.25× the year-ago EPS. A stock with $1.00 EPS in Q3 2025 needs at least $1.25 in Q3 2026 to clear the threshold.

"Acceleration preferred" means the C rule is even stronger when the most recent quarter's growth rate is higher than the prior quarter's growth rate. A stock that went from 18% growth two quarters ago to 22% last quarter to 28% this quarter is more attractive than a stock that has been growing 30% steadily. The rate of change of the rate of change matters.

The 25% number is not arbitrary. It comes from O'Neil's research into the great winning stocks of multiple market cycles. The historical record showed that stocks that produced sustained large advances almost universally had at least 25% quarterly EPS growth at the start of those advances, and often much higher (50%, 100%, 200%). Setting the bar at 25% captures most of the historical winners while excluding the long tail of slow-growth or no-growth stocks that, on the historical record, rarely produced the multi-quarter advances CAN SLIM is built around.

A note on the threshold's evolution: the standard has been refined across editions of How to Make Money in Stocks. The first edition (1988) used somewhat lower thresholds for some metrics; later editions tightened the standards as data accumulated and as the methodology was refined. The 25% figure is the consensus benchmark in the current canonical statement of CAN SLIM and in IBD's research operation.

WHAT COUNTS AS "EARNINGS" FOR THE RULE

The 25% rule applies to EPS, but companies report multiple versions of EPS in their quarterly reports. The two main flavors:

GAAP EPS, Generally Accepted Accounting Principles earnings per share. The official, audited number reported in the 10-Q (quarterly) and 10-K (annual) filings. Calculated according to standardized accounting rules. GAAP EPS includes one-time items, restructuring charges, stock-based compensation, and other non-recurring effects.

Adjusted EPS (sometimes called "non-GAAP EPS" or "operating EPS"), the company's own preferred measure, which strips out one-time items and other adjustments management considers non-recurring. Almost every company reports an adjusted EPS alongside GAAP. The adjustments are at management's discretion, within disclosure rules.

For applying the C rule, the IBD/CAN SLIM convention is to use GAAP EPS as the primary input, with adjusted EPS as a secondary check. This matters because adjusted EPS can be massaged: a company that strips out stock-based compensation, restructuring charges, and "one-time" items quarter after quarter can show much higher adjusted EPS growth than its GAAP figures support. A 40% adjusted-EPS growth on top of a 5% GAAP growth is a yellow flag, the methodology cares about the underlying business, not the framing.

In practice, the working compromise is: if GAAP EPS clears 25%, the C is satisfied. If adjusted EPS clears 25% but GAAP doesn't, dig deeper before relying on the print. Look at the adjustments. Are they genuinely one-time (a single restructuring, a divested business, a tax-rate change), or are they recurring items that management is calling "one-time" every quarter (stock-based compensation, in particular, often falls in this category)?

For most large, established growth companies, GAAP and adjusted EPS track each other reasonably closely and the question doesn't matter much. For smaller, faster-growth, or earlier-stage companies, the gap can be substantial, and that's where the discipline of using GAAP-first matters most.

FINDING THE DATA IN UNDER A MINUTE

For any stock you want to evaluate, the year-over-year EPS growth rate is one of the easiest data points to find. Three free options that work for nearly any U.S.-listed stock:

Yahoo Finance. Search the ticker, click "Financials" tab, then "Income Statement" → "Quarterly." The most recent quarter's diluted EPS is on a labeled row. Compare to the same row, one year prior. Calculate the growth rate.

Your broker's research tab. Schwab, Fidelity, IBKR, and Public all surface quarterly EPS in their research panels. The interface varies but the data is the same.

SEC EDGAR. The original-source 10-Q filing. Slower to read than the aggregated sites, but the authoritative version. Useful when you want to verify a specific number or read management's commentary.

For the most recent year of a stock you're considering, write down the four most recent quarterly EPS numbers and the four prior-year comparison numbers. Calculate the growth rate for each quarter. You should see the four growth rates side by side. If the most recent rate is above 25% AND it is higher than the prior quarter's rate, the C is clean. If the most recent is above 25% but lower than the prior, the rate is decelerating, yellow flag. If the most recent is below 25%, the C is not satisfied, move on.

This whole exercise takes about 60-90 seconds per stock once you've done it a dozen times. Make it a reflexive part of your screening before you spend any time on the chart.

FOUR COMMON VARIATIONS OF THE RULE

In practice, working CAN SLIM-style traders apply the rule with some flexibility depending on context. Four common variations:

The "tighter" version (35% or higher). Some traders use 35% as a higher bar, especially in environments where many stocks easily clear 25%. The premise: in a market full of fast-growing companies, the differentiator is which ones are growing fastest. A 50%-growth name should be preferred over a 28%-growth name when both exist.

The "lower in mature growth" version (15-20%). For very large established companies (mega-caps with multi-hundred-billion-dollar valuations), 25% is hard to sustain because of the size. Some applications drop the bar to 15-20% for mega-caps where the growth is steady and durable, on the premise that 18% growth from a half-trillion-dollar company is meaningful even though a smaller company would need to clear 25% to qualify.

The "two-quarter confirmation" version. Rather than relying on a single quarter, some traders require two consecutive quarters above the threshold (with the second higher than the first, acceleration). This filters out one-quarter pops driven by easy comparisons (the year-ago quarter was unusually weak, making the current quarter's growth look better than it really is).

The "trailing four quarters" version. Some traders also check that the trailing four quarters' total EPS is at least 25% higher than the prior trailing four quarters. This smooths out single-quarter noise and makes sure the growth is sustained, not a one-quarter spike.

These variations don't replace the 25% rule, they are flavors traders apply on top of it. For a beginner, the canonical 25% standard with the acceleration check is the right starting point. As your screening becomes more nuanced, the variations become tools to apply selectively.