Remembering William O’Neil - and 10 shares that suit his strategy

This timeless growth-at-any-price approach to investing shows how a set of bullish rules can help to pick out strong performers even in lacklustre markets. Stock screen expert Ben Hobson explains.

William O’Neil, the highly respected American investor and publisher, sadly passed away in May, at the age of 90. But the stock market strategies he devised will live on for those who thrive on the pursuit of fast-moving growth stocks.

O’Neil was an elder statesman for a style of investing and trading that blends fundamental and technical measures to find surging shares. He designed his approach to hunt down companies with accelerating earnings, where something new or interesting is happening that the market is starting to notice.

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In 1984 he started the journal (and later website) Investor’s Business Daily and followed up 10 years later with the best-selling book How to Make Money in Stocks. Both IBD and the book focused on O’Neil’s so-called CAN SLIM strategy, which turned him into a legend. These days IBD is run by News Corp’s Dow Jones division.

CAN SLIM is an acronym for the seven rules O’Neil used to find appealing growth shares, which cover:

• Current earnings growth
• Annual earnings growth
• New product innovation, service or management
• Supply and demand for shares
• Leader in a specific sector
• Institutional support for the stock
• Market direction

Importantly, the strategy paid very little attention to value. O’Neil’s research found that it was actually stocks that looked very expensive based on valuation measures such as the price/earnings (PE) ratio, that went on to be some of the greatest winners. With strict ‘sell’ rules for shares that didn’t perform (an 8% stop loss), he was at ease trading richly priced shares on strong trends.

This approach went on to inspire the growth and momentum strategies of well-known modern day traders such as Mark Minervini:

Brighter prospects for growth strategies

In the years since the financial crisis in 2008-09, growth investing strategies have been a dominant force in equities. Bullish conditions in economies and markets naturally delivered rip-roaring performance from fast-growing firms.

Last year, the combination of rising inflation, higher interest rates and economic stress caused a big shift in strategy performance.

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Fast earnings growth - and forecasts for more of the same - became harder to find. Companies were forced to think twice about where and how much capital they were investing to grow. This meant that growth styles fell out of favour as investors gravitated to ‘value’ shares with predictable current earnings.

For growth strategies like CAN SLIM, this created headwinds. But for stock pickers, it will always be a useful framework for finding shares that are outpacing the market in any conditions.

This screen looks for recent and forecast earnings growth in profitable companies with shares trading within close range of their 52-week highs (and trading above their 50-day moving averages). The table is sorted by relative price strength over the past 12 months:

Data: SharePad

A standout observation of using these rules is that the stocks passing them are largely small-caps (with one or two exceptions). They all saw strong growth last year and are forecast to continue that trend in the coming year. In most cases, high double-digit PE ratios suggest that the shares could be expensive on conventional value measures - but remember that O’Neil was relaxed about that, as long as the price strength continued.

Based on one-year price strength, ME Group International (LSE:MEGP), the vending machine business, leads the list with a near 100% gain. Like many here, ME is trading close to its 52-week high, showing that the market likes what it is seeing. In conditions where indices have been flat for most of 2023, it shows that a growth strategy like this can put you on the trail of exceptional performers.

For small-cap investors, an interesting clue is that all the firms have solid profitability in terms of Return on Equity. That suggests quality is an important factor at the moment in this part of the market. Strong recent results from stocks like Ramsdens Holdings (LSE:RFX) and Cerillion (LSE:CER) certainly hint at that.

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Keeping in mind the CAN SLIM spirit of this strategy, asthma treatment company NIOX Group (LSE:NIOX) has strong institutional backing, with Harwood Capital and industry giant AstraZeneca both holding large stakes. And the largest stock here Sage Group (The) (LSE:SGE) certainly has the kind of sector leadership traits that O’Neil’s strategy looks for.

Strong growth trends

While current market conditions are not playing to the classic strengths of many growth strategies, William O’Neil’s timeless growth-at-any-price approach shows how a set of bullish rules can help to pick out strong performers even in lacklustre markets.

This is a strategy that goes looking for shares with strong trends in both fundamentals and price - but they need to be watched carefully. With many investors watching from the sidelines, research is needed.

With his recent passing, O’Neil leaves behind a legacy of a proven and very popular approach to finding the fastest-moving shares in the market and riding their wave. It’s likely to remain a favourite strategy long into the future.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.