2-15-19 Marias: AAII CAN SLIM
AAII Stock Ideas 2-14-19
O'Neil's CAN SLIM Revised 3rd Edition Approach
Dear Member, This month we feature AAII’s O’Neil’s CAN SLIM Revised 3rd Editionscreening methodology. William O’Neil is the founder of William O’Neil & Co., which publishes Investor’s Business Daily. He is also author of the book “How to Make Money in Stocks: A Winning System in Good Times and Bad.” Originally published in 1988, it is now in its fourth edition. O’Neil’s analysis looks at the top-performing stocks over a number of time frames and identifies the characteristics these winning stocks possessed prior to their big price run-ups. He then came up with the CAN SLIM approach to identify stocks exhibiting similar characteristics in the hopes of buying into them before they too saw a significant price increase. AAII tracks three different CAN SLIM screens, one based on the approach outlined in the second edition of “How to Make Money in Stocks” and another based on the third edition of the book. The third is a variation on the original AAII CAN SLIM screen that removes the “float” requirement (float is the number of shares readily available for open-market trading and is shares outstanding less those shares held by insiders). This month we discuss the CAN SLIM screen based on the third edition of O’Neil’s book. For that edition, O’Neil extended his analysis of past market winners to 600 companies that performed strongly from 1953 to 2001. For a comprehensive review of the differences between the original AAII CAN SLIM screen and the revised screen we are covering here, see this article from the AAII Journal. CAN SLIM Overview The CAN SLIM approach seeks companies with a proven record of quarterly and annual earnings and sales growth showing strong relative price strength and support from leading institutions. O’Neil does not mind paying rich premiums for stocks as long as they have good prospects. O’Neil also asserts that it is important to follow the market closely and to try to lighten up your stock exposure when going into a bear market. C = Current Quarterly Earnings The CAN SLIM approach focuses on companies with proven records of earnings growth that are still seeing earnings acceleration. O’Neil’s study of winning stocks revealed that these securities generally had strong quarterly earnings per share performance 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. As a result, AAII’s revised CAN SLIM screen requires at least a 20% increase in earnings from continuing operations for the latest fiscal quarter compared to the same quarter a year ago. When screening for quarterly earnings increases, it is important to compare a quarter to the equivalent quarter last year—in other words, this year’s first quarter compared to last year’s first quarter. Many firms have seasonal patterns to their earnings, and comparing similar quarters helps to take this into account. To help ensure that earnings growth is not slowing, the revised CAN SLIM screen also requires that the earnings growth rate from the quarter one year ago compared to the latest quarter be higher than the same-quarter growth two quarters ago. In addition, to cut down on the risk of identifying a riskier turnaround situation, the screen calls for positive earnings per share from continuing operations for the current quarter. As a confirmation of the quarterly earnings screen, O’Neil likes to see same-quarter growth in sales greater than 25% or at least accelerating over the last three quarters. The revised AAII CAN SLIM screen requires that revenue growth from one quarter ago compared to the latest quarter be greater than 25%. A = Annual Earnings Increase Winning stocks in O’Neil’s study had a steady and significant record of annual earnings in addition to a strong record of current earnings. O’Neil’s primary screen for annual earnings increases requires that earnings per share show an increase in each of the last three years. AAII’s revised CAN SLIM screen specifies that earnings per share from continuing operations be higher for each year when compared against the previous year. To help guard against any recent reversal in trend, a criterion was included requiring that earnings over the last 12 months be greater than or equal to earnings from the latest fiscal year. O’Neil also recommends screening for companies showing a strong annual growth rate of 25% over the last three years, which is also a criterion in O’Neil’s CAN SLIM Revised screen. Optimally, the consensus earnings estimate for the next year should also be higher than the latest reported year. Therefore, the screen requires that the consensus earnings estimate for the current fiscal year be greater than the reported fully diluted earnings from continuing operations for the last fiscal year. 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 employed after a period of lackluster performance or even a structural change in a company’s industry—such as a new technology. However, these are very qualitative factors that do not lend themselves easily to screening. A second consideration that O’Neil emphasizes is that investors should pursue stocks showing strong upward price movement. O’Neil says that stocks that seem too high-priced and risky most often go even higher, while stocks that seem cheap often go even lower. Stocks that are making the new high list while accompanied by a big increase in volume might be prospects worth checking. A stock making a new high after undergoing a period of price correction and consolidation is especially interesting. Therefore, O’Neil’s CAN SLIM Revised screen seeks out stocks that are trading within 10% of the 52-week high. S = Supply and Demand O’Neil emphasized smaller-capitalization stocks more strongly in the earlier editions of “How to Make Money in Stocks.” The third edition states that any size stock can be purchased using the CAN SLIM approach, but smaller companies will be more volatile with greater pop to the upside and downside. Companies buying back their stock on the open market are preferred, as well as companies with management stock ownership. No definitive screens come out of the S element of the CAN SLIM system. L = Leader or Laggard O’Neil is not a patient value investor looking for out-of-favor companies and willing to wait for the market to come around to his viewpoint. Rather, he prefers to identify 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. He feels that you will 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. Relative strength compares the performance of a stock relative to the market as a whole. Relative strength is reported in many ways and you must be careful to understand how the relative strength figure is used in a given screening system. Companies are often ranked by their price performance for a given period of time and their percentage ranking among all stocks is calculated to show the relative position against other stocks. O’Neil recommends avoiding any stock with relative strength rank below 70% and only seeking out stocks with a percentage rank of 80% or better—stocks that have performed better than 80% of all stocks. This is the filter used in the revised CAN SLIM screen. I = Institutional Sponsorship O’Neil feels that a stock needs a few institutional sponsors for it to show above-market performance. Ten institutional owners is suggested as a reasonable minimum number and is one of the criterion of AAII’s revised CAN SLIM screen. This number refers to actual institutional owners of the common stock, not institutional analysts tracking and providing earnings estimates on stocks. M = Market Decision The final aspect of the CAN SLIM system looks at the overall market direction. While it does not impact the selection of specific stocks, the trend of the overall market will have a tremendous impact on the performance of your portfolio. O’Neil tends to focus on technical measures when determining the overall direction of the marketplace. Any good technical analysis program or charting website should provide you with the necessary tools to study market movement. Passing Companies As of January 31, 2019, three companies passed O’Neil’s CAN SLIM Revised 3rd Edition screen. The link will provide you with more information about each of the metrics used in the screen, the criteria used in AAII’s Stock Investor Pro fundamental stock screening and research database program, which is used to generate the monthly passing company lists, and the actual monthly passing companies list. One of the companies passing AAII’s revised CAN SLIM screen at the end of January is Vertex Pharmaceuticals Inc. (VRTX). Vertex is engaged in discovering, developing, manufacturing and commercializing medicines for the treatment of cystic fibrosis (CF) and advancing its research and development programs in other indications. Here is an overview of Vertex Pharmaceuticals within the framework of AAII’s O’Neil CAN SLIM Revised 3rd Edition criteria:
Screen Performance AAII’s O’Neil’s CAN SLIM Revised 3rd Edition screen surged 19.7% in January as growth- and momentum-oriented approaches performed well. Over the last three years, the strategy has generated an average annual return of 33.6%, while gaining 31.0% a year, on average, over the last five years. The methodology’s average annual return over the last 10 years has been 22.1%. By means of comparison, the S&P 500 has generated an average annual price gain of 10.7% over the last 10 years. To learn more about the O’Neil’s CAN SLIM Revised 3rd Edition Screen and to see this month’s complete list of passing companies, visit AAII.com: https://www.aaii.com/stockideas/screens?table=canslimrev&sid=78. Kind regards, 
Wayne A. Thorp, CFA
Senior Financial Analyst, Vice President American Association of Individual Investors |
No comments:
Post a Comment