William O'Neil, known as one of the best stock pickers of all
time, is credited with pioneering the use of computers for
O'Neil became famous as the publisher of the newspaper
Investor's Business Daily and author of the
How to MakeMoney in Stocks: A Winning System in Good Times and
," which identified seven factors all top-performing companies
Created after an exhaustive study of eight differentmarket
cycles during 40 years of data, O'Neil named his newinvesting
tactic CANSLIM, an anagram for the seven traits stocks tend to have
before their biggest gains.
CANSLIM has stood the test of time: the American Association of
Individual Investors (AAII) has even ranked it as one of the best
portfolio strategies, with a 10-year average return of 13.2% and a
nice 28.7% year-to-date return.
This strategy is not a one-trick pony relying on a single niche
stock-picking technique. CANSLIM combines technical and fundamental
factors when choosing companies forinvestment . It basically covers
all the bases for what creates a winning stock.
Here are the seven fundamentals of the CANSLIM method:
C = Currentearnings
Search for companies with strong increasing quarterly earnings.
Minimum increases of 18 to 20% during the same year-over-year
quarterly period are a must.
A= Annual earnings increases
Earnings also need to be increasing from year to year. A good
minimum average earning rate to look for is 21%.
N= New products, new management, new highs
New products and management can be fundamental triggers that
push stocks to new highs. It can be difficult for non-insiders to
find out when these changes are happening within a company, so
screening for stocks making new highs can often serve as aproxy for
the fundamental information.
S= Supply and demand
O'Neil discovered that 95% of winning stocks had fewer than 25
millionshares outstanding . This is because of the law of supply
and demand: Stocks with a smaller number ofshares increase quicker
than firms with large numbers of shares.
L= Leader orlaggard ?
This is a function of therelative strength of the stock compared
to others in its sector. Invest in stocks with a high relative
strength ranking -- if you buy stocks ranked 80% or better, then
you can be certain that you're buying the leading stocks in the
I =Institutional ownership
A good stock needs to be owned by three institutions at a
minimum to support its price, according to O'Neil. If there is no
institutional ownership, then avoid the stock.
Finally, O'Neil advises using the CANSLIM strategy only when the
overall market is rising. You can determine this condition by
watching the indexes for overall market direction.
There are many CANSLIM stock screeners on the Internet that can
help you find companies meeting the criteria. My favorite one is
William O'Neils CANSLIM Select at the Investor's Business Daily
Here are two stocks of the top-ranked CANSLIM stocks right now,
according to the William O'Neils CANSLIM Select tool:
1. CVR Energy Inc. (
This fuel-refining and transportation company has seen its stock
price soar more than 150% during the past 52 weeks. In early
December, the company posted ultra-strong third-quarter results
with adjusted earnings up more than 90% to $2.95 per share from
same time last year. Here are the stock's CANSLIM traits:
Earnings have been increasing quarter to quarter. In the
third quarter, earnings totaled $2.95 per share, a 90% increase
from the year-ago period.
Annual earnings are trending higher compared with the last three
years, from a little more than $3 billion in 2009 to more than $5
billion in 2011
Shares have been continually hitting new highs, as you can see in
the chart below
The company misses this metric, since it has more than 85 million
The relative strength is greater than 90, making the company
a leader in its market
At nearly 22% institutional ownership this metric is met
The market is trending higher overall
2. Lithia Motors (
This small-cap, Oregon-based new and used car dealer is also a
highly-ranked CANSLIM stock. Here are the stock's CANSLIM
Earnings have jumped to nearly $900 million last quarter, or 90
cents per share, a 34% growth from the the same quarter last
Annual earnings have trended higher since 2009, hitting $1.97 a
share in 2011 from 49 cents a share in 2009. This year, earnings
are expected to reach $2.92 a share.
Shares recently hit new highs of nearly $37 in early December, as
you can see in the chart below.
The company barely misses this requirement, with 25.5 million
Boasting relative strength of more than 90 makes the company a
leader in its field.
About 93% of shares are held by institutions.
The overall market is trending higher.
It's important to note , however, that Lithia has run
into legal troubles in the past for overcharging customers and
workplace discrimination. Investors may want to keep these factors
in mind when deciding to invest.
Risks to Consider:
While CANSLIM is a time-proven tool for choosing the right
stocks to invest in, nothing is fool-proof in today's market.
Exiting losing stocks is a critical part of the CANSLIM method.
Anytime your position is down 8-10% from the entry point, dump the
stock. This proactive stance will allow you to redeploy that
capital into new stocks while mitigating losses.
Action to Take -->
Use CANSLIM as a stock screener to stack the odds of success in
your favor. Building a portfolio of highly-rated CANSLIM stocks is
a powerful investing technique worth considering, especially if
you're looking for growth stocks with price momentum. The two
stocks mentioned above are a good place to start.