CAN SLIM: Bill O’Neil’s lessons to pick growth stocks

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: Capturing growth can be tricky. There are just so many variables and then there is the euphoria associated with the market, though it is presently missing from the market. However, growth investing will still continue to remain in vogue in India, as the real economy is on an upward track and is expected to continue to be there. So how does an investor get the growth perspective? William J O'Neil, the author of several best sellers on investing, could have an answer.

Bill O'Neil, who began his career as a stockbroker in his early twenties, through studies of the greatest stock market winners, uncovered their common characteristics, he articulated them in an abbreviated form, which today is known as CAN SLIM. It is also used as an investment research tool by many. In January 2004, the American Association of Individual Investors' (AAII) studies of over 50 well known strategies found that CAN SLIM outperformed with a 704.9% six-year compounded result (1998 through 2003).

Bill O'Neil has articulated the strategy for identifying growth stocks based on fundamental and technical parameters. He marries strong fundamentals with the potency of timing. Here is a gist of his tenets. When the market is on an upmove, O'Neil stocks have a tendency to move swifter than the market.

CAN SLIM:

C - Investors should locate companies whose current quarterly earnings per share (CEPS) has increased sharply over the previous year's performance. Here, investors need to sift out earnings emanating from non-operational income or one-time profits or losses. Essentially, to weed out earnings distortions. Current earnings per share should be up 25% or more and in many cases accelerating in recent quarters. Quarterly sales should also be up 25% or more or accelerating over prior quarters.

A - Annual earnings increases over the last five years. Annual earnings should be up 25% or more in each of the last three years. Annual return on equity (RoE) should be 17% or more. This can be depicted only by companies, which are fundamentally strong.

N - New products, management, and other new events. In addition, the company's stock has reached new highs. A company should have a new product or service that's fuelling earnings growth. Watch the charts (they are available on many websites) and here look out for the companies emerging from proper chart patterns, and are ready to make new highs. This step captures momentum.