This is one of the most famous and successful investing strategies of the modern era. William O'Neil is a legendary American stockbroker, entrepreneur, and author. He pioneered the use of computerized analysis of historical stock performance to predict current market trends. He has also written several books on successful stock market strategies and runs and owns Investors Business Daily (IBD). He was born in Oklahoma in 1933 and raised in Texas. He attended Southern Methodist University, where he received a bachelor's degree in business. After serving in the United States Air Force, he began his career as a stockbroker at Hayden, Stone, & Company in 1953. You can find his full biography over here : http://www.william-oneill.com/
While working on Wall Street, O'Neil became fascinated with what make stocks successful. As he proceeded to research this topic, he studied eight different market cycles over 40 years, and eventually identified seven basic factors that all top-performing companies had in common. O'Neil then developed CAN SLIM, an investment strategy that took into account not just fundamental and technical analysis, but also the historical trends and patterns of stocks. He went on to computerize this form of market analysis technique.
CANSLIM has consistently been the top performing portfolio strategy tracked for the last 12 years at the American Association for Individual Investors (www.aaii.com) as shown on the left chart below. The right chart shows the 10-year performance published by a real fund that uses CANSLIM to manage private clients money.
His system can best be described as a growth stock approach that seeks companies whose stock prices are poised to rise due to favourable fundamental factors within the firm and industry, such as increased earnings due to new products and services, as well as favourable technical factors regarding price trends and the supply and demand for the stock. CANSLIM is an acronym for each of the 7 characteristics he looks for in a company:
C = CURRENT EARNINGS
The CAN SLIM approach focuses on companies with proven records of earnings growth while still in a stage of earnings acceleration. O'Neil's study of winning stocks highlights the strong quarterly earnings per share of the securities prior to their significant price run-ups. O'Neil recommends looking for stocks with a minimum increase in quarterly earnings of 18% to 20% over the same quarterly period one year ago. He also only looks at companies with positive earnings per share.
A = ANNUAL EARNINGS INCREASES
The approach then looks for companies that have strong and increasing (accelerating) earnings growth over the last year.The winning companies in O'Neil's study had a median growth rate of 21%.
N = NEW PRODUCTS, NEW MANAGEMENT, NEW HIGHS
O'Neil feels that a stock needs a catalyst to start a strong price advance. In his study of winning stocks, he found that 95% of the winning stocks had some sort of fundamental spark to push the company ahead of the pack. This catalyst can be a new product or service, a new management team after a period of lacklustre performance or even a structural change in a company's industry, such as a new technology. A lot of these factors are quite subjective and hard to mechanically screen for so the investor is encouraged to take the candidates from our screen and investigate these items for further evaluation. One easy way to detect this though is looking for stocks that are making new 52-week price highs.
S = SUPPLY AND DEMAND : SMALL CAPITALISATION PLUS VOLUME DEMAND
As the catalyst starts pushing the price of a company's stock up, those firms with a smaller number of shares outstanding should increase more quickly than those with a large number of outstanding shares. In his study of winning stocks, O'Neil found that 95% of the winning stocks had fewer than 25 million shares outstanding, while the median for the group was 4.6 million.
L = LEADER OR LAGGARD?
O'Neil prefers to scan for rapidly growing companies that are market leaders in rapidly expanding industries. O'Neil advocates buying among the best two or three stocks in a group. You should be compensated for any premium you pay for these leaders with significantly higher rates of return. O'Neil suggests using relative strength to identify market leaders. Companies are ranked by their percentage ranking among all stocks wrt share price growth over 52 weeks to show the relative position against other securities. O'Neil suggests only considering stocks that have relative strength rankings of 80% or 90% with a "cup and handle" chart base pattern.
I = INSTITUTIONAL SPONSORSHIP
O'Neil warns against selecting low-priced stocks with small capitalization and no institutional ownership, because these stocks have poor liquidity and often carry a lower-grade rating. O'Neil feels that a stock needs a few institutional sponsors for it to show above-market performance. Three to 10 institutional owners are suggested as a reasonable minimum number.
M = MARKET DIRECTION
As a final requirement O'Neil only uses his strategy to invest when conditions in the market are right. While this criterion does not impact the selection of specific stocks, the trend of the overall market has a tremendous impact on the performance of your portfolio. O'Neil focuses on technical measures when determining the overall direction of the marketplace. "Don't fight the trend."
THE POWERSTOCKS CAN-SLIM INTERPRETATION
This was one of the most challenging screens to implement due to restrictions we had with our database query engine with regards to comparing various corresponding reporting periods to determine EPS growth. When comparing EPS growth periods one has to compare corresponding periods to ensure seasonality of earnings does not skew your results. After many months we finally have something we can work with, as there has been huge demand for this screen from subscribers.
Firstly SA companies don't report quarters, they only report interims (6 month periods) and finals (12 month periods). So a special South African version of CANSLIM was going to have to be devised.
We couldn't compare EPS growth from a final to an interim or vice-versa as the seasonality and differing length of time covered by financial reports would have skewed the interpretation. So we had to go Final-to-final and Interim-to-interim.
To appropriately capture the essence of C and A together in the CANSLIM methodology we look at the last 6 sets of results published by each company on the JSE over the last 30 months, as shown in the below graphic. The graphic assumes the last financial posted by the company was a FINAL, but you can envisage a similar chart we use if it was an INTERIM.
1. EPS growth from the last FINAL to the previous corresponding FINAL > 20% (A)
2. EPS growth from the last INTERIM to the previous corresponding INTERIM > 20% (B)
3. EPS last two FINALS > 0 and EPS last two INTERIMS > 0
To capture O'Neil s requirement for ACCELERATING EPS growth we further ensure :
4. EPS growth from the last FINAL to the corresponding period 1 year ago must be greater
than EPS growth from the last FINAL to corresponding period 2 years ago (A>Grow(FIN1,FIN2))
5. EPS growth from the last INTERIM to the corresponding period 1 year ago must be greater
than EPS growth from the last INTERIM to corresponding period 2 years ago (B>Grow(INT1,INT2))
Items (1) through (5) are actually quite restrictive, quickly whittling the JSE down to less than 20 shares. Check 3 ensures we don't have ridiculous growths coming off low bases. Since we look at FINALS and INTERIMS (starting from whichever is the most recent) the screen is effectively scrutinizing robustness of EPS growth going back 30 months or 6 reporting periods.
To capture the essence of N, we look for item 6 below, and it will be up to subscribers to evaluate the more subjective criteria such as new product, new management, new paradigm etc. This is the way AAII do it. So here we go:
6. JSE shares trading within 80% of their high price within the last 52 weeks.
The essence of S we cannot capture directly, since the research O'Neil did for US markets as to appropriate number of outstanding shares has no bearing on our market. So our screen output provides for the subscriber, each shares' market capitalisation and liquidity (number of shares traded in the last month) to assist with interpretation on this factor.
To capture the essence of L we look for :
7. Twelve month share price growth > growth of 80% of the rest of the JSE over same period.
For I (institutional sponsorship) we could not directly interrogate our databases. If you are a ShareMagic PRO user, you can take your final list and check institutional ownership in there. By now you will be down to maybe 10 shares so this will be a quick exercise. You may also find this data with your on-line brokers fundamental data or through annual reports of the companies or by searching on the internet with Google.
Finally for M, this is very easy for PowerStocks Subscribers -
8. Look for when the SUPERModel Timing signal is showing greater than zero or even greater than 1 and you will know you are in the right time to invest! In fact the SUPERModel signal size is an indication of market strength so if you are seeing a +3 (turbo mode) you know the timing is just PERFECT!
CANSLIM JSE CANDIDATES
CANSLIM candidate shares are displayed on The JSE Share Watchlist (JSW) every day. Bear in mind changes to candidates only happen around reporting periods when new earnings per share figures are released. These are clustered around two periods each year as described in "Freshly Ground Fundamentals"