Willieam O'Neil is the founder of Invester Business Daily, which is a major competitor of the Wall STreet Journal. He also wrote a book called "How to make money in stocks," which represents his knowledge about growth investing. O'Neil has a sounding system/standard that he uses to screen out the stocks that meets his requirement. This system is known as
CAN SLIM. It is an acronym for the attributes of companies/stocks that he considers to be investable. O'Neil emphasizes that a company must have all seven attributes in order to be considered for investment.
C: Current quarterly earnings per share must be accelerating. When comparied to the same quarter from previous year, O'Neil wants to see increase in the current quarterly EPS. Bigger is always better. However, you must be careful not to be misled by a huge jump. For instance, a company's quarter EPS might have increased from $.01 to $.10, which is 900% increase but it is no better than increase from $.50 to $1 because the former is most likley to be distored and thus as not meaningful as the latter.
A: Annual EPS must be accerlating. Similar to "C", O'Neil wants to see each year's EPS increasing for the past five years. Preferably, the growth rate should be at least 25%.
N: New highs/something. O'Neil likes companies that have new products, services, management, or something that is postively contributing to the company. But more importantly, he likes stocks that are pushing to new highs. In here, we are talking about 52 weeks new high. Past 52 weeks, stock could've hit the low of $5 and high of $25. At the time when O'Neil buys the stock, the stock should be pushing to new high of $26.
S: Demand of stock should be greather than its supply. Supply and demand affect the price of everything including stocks. All other things being equal, stock with 50M shares oustanding is a better pick than a stock with 100M shares oustanding. You can compare to trading volume of stock and the number of shares outstanding to figure out the stock's supply and demand.
L: Leaders in an industry, AKA best relative price strength. Investor's Business Daily shows the relative price strength of stock, ranging from 1 to 99. Here if number is bigger, stock's performance is stronger so that means higher relarive price strength stock outperformed lower numbered stocks.
I: Institutional ownership must be moderate. As mentioned, demand is needed to drive stock price up. Institutional buying is one of the best source to measure stock's demand. Mutual funds, pention plan, banks and insurance companies are all institutional investors. O'Neil wants his stock to be owned by moderated number of institutions. If it's too small, that means demand is weak. That is not much of a problem. Perhaps, stock is undiscoverd yet and it has an opportunity to attract instituion and price will rocket soar. But on the other hand if stock is heavily owned by institutions then it may be over demanded. Moreover, if all the instituions reacts in the same way to negative news, they can dump a large number of shares and its price will plummet.
M: Market direction should be upward/positive. Even if you the greatest stock of all time, its price will probably decline if the market as a whore is doing poorly. Your stock might get back to its intrinsic value once market starts to recover but O'Neil is strictly a growth investor. In order to see the direction of market, O'Neil recommends watching the market average everyday. You can do so by following the daily price and volume of DJIA, SP500, NASDAQ and what not.
O'Neil believe in growth investing and completely ignores valuation models. He mentioned that cheap stocks are cheap for reasons and you get what you pay for. He basically does not care about P/E ratio. To him, relation between earning and price are irrelevant and should focus on earning acceleration itself. In addition, he believe in law of motion. This does not have anything to do with physics. N of CAN SLIM represents new highs of stock. He said, "What seems too high and risky usually goes higher and what seems low and cheaper usually goes lower." His firm's research back up his idea. According to it, stocks on the new high list tend to go higher while stocks on the new low list tend to go lower. Besides the stock price, O'Neil aggrees with Lynch that insider ownership and little debts are postive sign of stock.
Average down Vs. Retail Investment
O'Neil argues that investors should manage their portfolio as if they were managing retail store. On the shelf you have item A and B, if A sells better than B then what should you do? Obviously, put more As and get rid of Bs. This is retail investment: you buy more of what is working and sell off worse performers. In contrary, some investors do exactly opposite. They sell the better performers and add money to stocks that have fallen in price. This is not necessarily wrong. If you are very sure that your stock is undervalued and its price will drive back to the intrinsic value, you are buying the additional shares at a discount. But if your analysis is off by few dollars or so, you could be wasting substantial amount of money buying losers while your better performers are rocket soaring.
Automation of buying and selling
O'Neil likes to automate his transaction. By doing so, you are protected from emotional decisions. O'Neil places stop losses on his stocks, usually at 8%. Note that the stop losses should be applied to the new money invested in. For instance, if you initially bought 100 shares of stock at $10 then your total investment is $1000. It has risen 50% and then falls back to 40%. This necessarily may not be time to stop losses. Let us say that you add more money into it while the price is rising, O'Neil recommends stopping losses on
that money if the stock slides back while keeping your inial investment money in the stock. So your stop threshold for the initial investment would be $9.2 while new stop loss for additional investment would be $13.8. O'Neil is an advocate of averaing up, also known as pyramiding. The plan is to move more moreny into your winners. O'Neil said, "
Your objective in the market is not to be right but to make big money when you were right." This is simple but a powerful statement. When one of your stock picks declines and you sell it off because it hit the stop loss, you may not be valuing it correctly. The stock could be truly undervalued and its price may go up in the future. But what O'Neil is aruguing is that your job is to make profits based on your analysis as well as by responding/adapting quickly to the market. Here are some main points of O'Neil
1. Buy exactly at the pivot point where a stock is climbing up to new high after a flat area in an upward direction.
2. Put the stop losses at 8%.
3.If stock increase, put more capital into it up to 5% past the inital buy point. For instance you bought a share of stock at $100. It has risen to $102 then you would put more money into it but when it reaches $105 then you should stop putting more money.
4.Once stock has risen 20%, sell it.
5.If a stock rises 20% in less than 8 weeks, hold it at least another 8 weeks. After that time period, make a decision to buy more or sell based on analysis and current price.
6. Focused portfolio. Concentrate on few winners than to have many small profits.
7.Make grudual move into and out of a stock. Buy a parcel of stock when it starts to rise and buy additional shares when it even goes furter. Opposite is true also. When your stock starts to decline, sell a parcel of it and completely get rid of it when the loss hits 8%.
8. Once bought, ignore the price you paid for each stock and cocentrate on each stock's performance.
9. Do not base your sell decision on your cost and hold the stocks that are down in price. Accept the fact you have made an imprudent selection and lost money.
