These 2 Stocks Pass the Ultimate Investment Screening Strategy

William O'Neil, known as one of the best stock pickers of all time, is credited with pioneering the use of computers for analysing stocks.

O'Neil became famous as the publisher of the newspaper Investor's Business Daily and author of the book " How to MakeMoney in Stocks: A Winning System in Good Times and Bad ," which identified seven factors all top-performing companies possess.

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 group.

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.

M=Market direction

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.

Proven winners

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 website .

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. ( CVI )

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:

C: 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.

A: 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

N: Shares have been continually hitting new highs, as you can see in the chart below

S: The company misses this metric, since it has more than 85 million shares outstanding

L: The relative strength is greater than 90, making the company a leader in its market

I: At nearly 22% institutional ownership this metric is met

M: The market is trending higher overall

2. Lithia Motors ( LAD )

This small-cap, Oregon-based new and used car dealer is also a highly-ranked CANSLIM stock. Here are the stock's CANSLIM traits:

C: Earnings have jumped to nearly $900 million last quarter, or 90 cents per share, a 34% growth from the the same quarter last year.

A: 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.

N: Shares recently hit new highs of nearly $37 in early December, as you can see in the chart below.

S: The company barely misses this requirement, with 25.5 million shares outstanding.

L: Boasting relative strength of more than 90 makes the company a leader in its field.

I : About 93% of shares are held by institutions.

M: 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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