William O' Neil was a radical in his own way of thinking. He stated that a strategy, which focused on buying low priced stock or stocks with low PE was defective and unsound. He argued that it made more sense to buy stocks that were getting into new highs rather then buy stocks nearing their lows. To illustrate his pint he talked of an easy to remember acronym “CANSLIM”.

• The “C” stood for current earnings, which Neil expected to grow over 70% over the corresponding quarter of the previous year. There is no need for an investor to buy stocks of companies that were not growing their earnings by at least 20 to 50% year on year. The past five-year average earnings growth of a stock should out perform at least 95% of all listed companies.
• The “A” stands for Annual Earnings.The 5 year annual compounded growth arte of outstanding performing stocks was 24%. Buy companies that show consistent EPS growth.
• The “N” stands for new. Either the product has to be new or the service or the Industry. A new sector always draws attention. We have seen that happen in India. In the early 90’s when cement and steel were decontrolled stock prices ran upwards, so did the software companies in the late 90’s. Earlier in this decade the development of businesses like mobile telephony, retailing and Insurance sectors created several multibagger for investors.
• The “S” stands for outstanding shares. Neil argues that the better performing companies have lower number of outstanding shares. Another way of looking at this concept is to buy shares of companies that have a smaller market cap. O'Neil argues that 95% of the best winners were smaller market capitalized companies.
• The “L” stands for the leader and not the laggard. Neil adds that the best performing stocks generally outperform the other stocks in the market. Look for stocks having an RSI of more then 80
• The “I” stands for Institutional sponsorship. While it does make sense to buy companies having some Institutional ownership investors should avoid companies that are Institutional favorites. This is because any adverse news could spark off huge selling. Since these stocks are over researched they discount all the good news in the price.
• The “M” stands for the market. A fair proportion of stocks will emulate the market and go with it. This makes it important to interpret the general trend of the market.

Neil argues that when the indices move to a new high on poor volumes it indicates a general lack of demand. An increase in volumes unaccompanied by rising prices is also a good indication of a weakening market. If the stocks leading the market start losing out there is a fairly good indication that the market has topped off.

Investors who do not cut losses have a serious risk of losing more then 70% of their portfolio during bear markets. O'Neil suggests that it is easier to buy a multibagger then to sit on one as rising stock price is the best reason to sell a stock for a novice investor.

Stocks that pay high dividends are not the best bets on the bourses. The capital loss on a stock may well over take the dividend income from holding that stock. When stocks move out from a range the volumes should increase by more then 50%. Stocks that are consolidating should do so on little or meager volumes.

Lastly O'Neil has a piece of good advice for Wall Street experts. He says that more then 80% of the research reports are written on wrong companies. He adds further that these research reports seldom provide sell recommendations.

References :

• How to make money in Stocks? William O’Neil
• Market Wizards – Jack D Schwager

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