William J. O’Neil is the Founder of Investor’s Business Daily and the creator of the C.A.N.S.L.I.M. system for selecting growth stocks that move 100s – 1000s % in a Bull Market. He has studied the characteristics of stocks that were big winners since 1953 and came up with his now very popular CAN SLIM system. These growth stocks have two key components in their selection; fundamental indicated in the CAN SLIM approach outlined below, and Technicals in the cup-and-handle as well as the 7 week base then breakout approach to time entry into these stocks. There are other key factors on the technical front that identifies entry and exit points into such stocks and warning signs to look for according to his method. The TA aspects of O’Neil’s method are simple and will likely be the topic of a future blog.
Below are the highlights of the CAN SLIM system taken from O’Neils book The Successful Investor.
C = Current quarterly earnings per share: the higher, the better.
Primary factors :
· Should show a major percentage increase (18%-20% minimum) in the current quarterly EPS when compared to the prior year’s same quarter.
· Omit a company’s one-time extraordinary gains.
· Look for accelerating quarterly earnings growth.
· Look for quarterly sales growth of 25% or at least an acceleration in rate of sales percentage improvements over the last three quarters.
· Find at least one other stock in the same group showing string quarterly earnings growth.
A = Annual earnings increases: look for significant growth
· The annual compounded growth rate for EPS should be at least 25%
· Significant growth in EPS for each of the last three years.
· The consensus earnings estimate for the next year should be higher than the current year.
· Return on equity of 17% or more.
· Look for annual cash flow per share greater than actual earnings per share by at least 20%
· Earnings should be stable and consistent from year to year over the last three years.
N = New products, new management, new highs: buying at the right time.
· Look for companies with a major new product or service, new management, or a positive change for the industry.
· Look for stocks close to or making new highs in price after a period of consolidation.
· Strong volume on price move up.
S = Supply and demand: shares outstanding plus big volume demand.
· Any size stock can be purchased under the CAN SLIM system.
· The market will shift its emphasis between small- and large-cap stocks over time.
· When choosing between two stocks, the stock with the lower number of shares should perform better to the upside, but can come down just as fast.
· Stocks with a large percentage of ownership buy top management are generally good prospects.
· Look for companies buying their own stock in the open market.
· Look for companies with a lower debt-to-equity ratio and companies reducing their debt-to-equity ratio and companies reducing their debt-to-equity ratios over the last few years.
L = Leader or laggard: which is your stock?
· Buy among the top two or three stocks in a strong industry group.
· Use relative price strength to separate the leaders from the laggards –a stock with a relative strength rand below 70% is lagging and should be avoided.
· Look for companies with a relative strength rank of 80% or higher that are in a chart base pattern.
· Don’t buy stocks with weaker than average performance during a market correction.
I = Institutional sponsorship: follow the leaders.
· Look for a stock to have several institutional owners. 10 might be a reasonable minimum.
· Look at quality of owners—seek out stocks held by at least one or two savvy portfolio managers.
· Look for stocks with an increasing, not decreasing number of sponsors.
· Avoid stocks that are over-owned—excessive institutional ownership.
M = Market direction
· It is difficult to fight the trend, so try to determine if you are in a bull or bear market.
· Follow and understand what the general market averages are doing every day.
· Try to go 25% into cash when the market peaks and begins a major reversal.
· Heavy volume without significant price progress may signal a top, but initial market decline may be on lower volume.
· Follow market leaders for clues on strength of market.
· Look for divergences of key averages and indexes at major turns—divergence points to weaker and narrow market movement.
· Sentiment indicators may help highlight extreme psychological reversal points.
· The change in the discount rate is a valuable indicator to watch as a confirmation of market moves.
Peace and Profits to all