The stock market makes for a miserable mistress.
Up one day and down the next, it takes a certain type of makeup to be immune to its moody charms.
Yet every day, millions of traders wrestle with the real possibility of losses while hoping to turn their due diligence into money-making trades.
It’s this line where fear ends that greed begins. For anyone who has ever towed this line, it is really the only reason to play the game.
One guru who has played it well for some time now is William J. O’Neil, founder of Investor’s Business Daily.
Starting with a small $300 investment in Proctor & Gamble (NYSE: PG) while serving in the Air Force, Bill went on to launch what is considered one of the greatest investment careers of all time.
A Legendary Investor Is Born
With a beginning as a broker in 1958, O’Neil’s obsession with the stock market led him to develop his own computerized study of what made for successful stocks trading.
O’Neil used both a technical and fundamental perspective to identify seven key characteristics all leading stocks had in common before making major price breakthroughs.
They are known to investors today by the CAN SLIM acronym.
Applying CAN SLIM as a guide, O’Neil quickly became the top broker in his firm while growing his own personal portfolio by over 2,000% in just 26 months. By the age of 30, he was the youngest person ever to have a seat on the New York Stock Exchange.
Part growth investing and part momentum trading, the seven parts of the now-famous CAN SLIM acronym are as follows:
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C stands for Current earnings: The growth of earnings per share for the latest fiscal quarter over the same quarter one year prior must be greater than or equal to 20%.
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A stands for Annual earnings, which should be up 20% or more in each of the last three years; annual returns on equity should be 17% or more.
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N stands for New product or service. A company should have a new product or service that is causing earnings to accelerate. The stock should be emerging from a proper technical chart base and about to make a new high in price. The current stock price must be within 10% of its 52-week high.
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S stands for Supply and demand. An index of a stock’s demand can be seen by the trading volume of the stock, particularly during price increases. A stock’s price rise should be accompanied by large volume. Conversely, when a stock pulls back in price, volume should be light, indicating no significant selling pressure. Float size is also important. A small float creates a fast-moving, more volatile share price. If the share float — or the amount of outstanding shares readily available — is under 25 million, it could help provide additional lift when buying ensues.
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L stands for Leader or Laggard. O’Neil suggests buying the leading stock in a leading industry. The 52-week relative strength for a stock must be in the top 30% of the entire market.
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I stands for Institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters. There must be at least five institutional shareholders.
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M stands for Market indexes, particularly the Dow Jones, S&P 500, and NASDAQ. O’Neil prefers investing during times of definite uptrends in these three indices, since three out of four stocks tend to follow the general market pattern.
Using this strategy, O’Neil has consistently beat the major averages over his long career.
In 2010, the American Association of Individual Investors (AAII) named CAN SLIM the top-performing investment strategy from 1998 to 2009, which included the recent financial crisis.
Over a 12-year period, CAN SLIM returned a total gain of 2,763% compared with the S&P 500’s 14.9% increase. That averages out to about 35.3% a year… not bad for what most of the time was a bear market.
So far this year, according to the AAII, the CAN SLIM method was up 18.8% as of July 31st — far ahead of the S&P 500, up 2.8% at the time.
A CAN SLIM Stock for the Radar
Using the CAN SLIM criteria as a relative guide on my own screen, I came up with one name in a universe of stocks.
It’s a company called Changyou.com Limited (NASDAQ: CYOU). With a float of just 10 million shares, this Beijing-based online game company boasts over 111.4 million registered accounts for its massively popular multi-player online role-playing games.
Powered by its strong earnings growth of 29.11% last quarter and other important driving factors, this stock has surged by 50% since last August, outperforming the S&P 500 by a wide margin…
That has CYOU on the upswing:
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This trend is likely to continue as CYOU’s earnings are expected to grow by more than 20% again this year from a current $3.29 a share to $4.13. As for 2012, analysts are expecting a 23% increase to $5.09 a share…
With an average target price of $56.00, that leaves 43.59% upside for CYOU shareholders here as the market rebounds and CYO bounces off its 50-week moving average.
As for the old market adage of buying low and selling high, I don’t think CYOU’s recent big jump would deter Bill O’Neil.
“It’s completely wrong,” he has written. “What seems too high in price and risky to the majority usually goes higher.”
As for me, I’ll take greed over fear any day of the week.
Your bargain-hunting analyst,
Steve Christ
Editor, Wealth Daily
