Legend Profile - William O'Neil
We return to the series on investor legends this week. Today’s post is on William O’Neil who founded the Investor’s Daily in 1984. The Investor’s Daily, a competitor publication to the Wall Street Journal, essentially started as a compilation of the research from O’Neil’s own personal database of stocks. The name was changed to the Investor’s Business Daily in 1991. The publication now has a large circulation (113,000) and a popular website.
William O’Neil’s investing strategy has been coined CAN SLIM. It is a strategy primarily aimed at picking growth stocks. The letters in CAN SLIM refer to the following characteristics which stocks often exhibit before making large gains in price:
C – Current quarterly earnings. Current earnings should be up at least 25% from the same quarter the previous year. Accelerating earnings is also a positive indicator.
A – Annual earnings growth. Annual earnings for the past 5 years should be growing at least by 25% although 50% or 100% is even better.
N – New product or service. The company should be continuing to come up with new products, services and innovations. Something needs to be pushing the stock forward to a new high. What is the company doing to come up with new things for new growth?
S – Supply and Demand. Supply of shares should be low and demand for them should be high. A stock in higher demand with less shares will perform better.
L – Leader or laggard. You want to buy leaders in a leading industry. Look for relative price strengths of 90 or better (this metric was talked about in Creating an Investment Worksheet – Part Two).
I- Institutional sponsorship. While it is a good thing for a stock to have some institutional ownership (mutual funds, pension funds, etc.), too much is not necessarily a good thing. If they all sold at once, the price could take a steep dive.
M – Market direction. William O’Neil likes to invest when the stock market is in an uptrend as judged by the S&P 500 and the Nasdaq.
William O’Neil is primarily focused on earnings (the first two letters in this strategy “C” and “A” are key) and how the earnings are accelerating and growing. He is not a proponent of concerning oneself with valuations such as the P/E ratio. This sets him apart from many other investor legends (in particular value investor legends) that are quite interested in this metric. He is also a contrarian on the issue of buying when the stock is going up and selling when it is going down. By this I mean he advocates buying a stock when it looks high to the mainstream and selling when it starts to attract the interest of the mainstream or conventional investor. He does not subscribe to the conventional wisdom of buy low and sell high. To him, what looks like a high price and a risky investment to the mainstream usually will continue to rise in price and vice versa. William O’Neil also looks for companies where management own a significant share of the stock and are also working on debt reduction within the company. In terms of when to sell a stock, he advocate selling when the stock has lost 7-8% of its purchase price. Remove the emotion from the decision and sell anyway.
I searched to see if there were any recent examples of CAN SLIM stocks. Unfortunately, most of this research is contained on Investor's Business Daily for a fee. I did find an article from Investor's Business Daily from 2016 which listed the following stocks as making the CAN SLIM criteria:
LXFT Luxoft Holding
MTSI M/A-COM Technology Solutions
STOR Store Capita
ADBE Adobe Systems
AVOL Avolon Holding
While I am not familiar with most of these (other than Adobe and Salesforce.com), I include them as an example of what met the IBD criteria back in 2016.
William O’Neil’s approach is primarily growth focused. The main point of the CAN SLIM philosophy is to capitalize on a stock before it makes a large upward move. It is about getting the timing right, so you can take advantage of a stock on the upswing. In this respect, his approach is somewhat different than the past two investor legends profiled – Benjamin Graham and Peter Lynch. Those investors took a much more “story” approach to finding companies. Their approach was primarily about finding good quality companies. Graham and Lynch have an approach that is more subjective and qualitative whereas William O’Neil definitely brings a more technical focus to stock picking.
*** Top photo courtesy of Art by Lonfeldt on Unsplash