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Robert Abbott
Robert Abbott
Articles (431)  | Author's Website |

William O’Neil: Fundamental and Technical Analyses Combined

The creator of the CAN SLIM system explains how his approach works

February 04, 2019 | About:

Do an online search for great investors or great investing books, and you’re sure to see William J. O’Neil’s name show up in the top-10 lists. He has an excellent investing record based on a system of his own devising called CAN SLIM and founded the advisory service Investor’s Business Daily. After starting in the investment industry in 1958, he started his own brokerage business in 1963 and Investor’s Business Daily in 1984.

His book, “How to Make Money in Stocks: A Winning System in Good Times and Bad,” was first published in 1988 and has since racked up four editions, the most recent of which was published in 2009 (the edition that is used here).

O’Neil’s investing style is more eclectic than those of most proponents of value investing or growth investing. He has a foot in both camps, he embraces technical as well as fundamental analysis, but is mostly known as a growth investor.

In his Introduction, O’Neil wrote that investors should learn, and benefit, from the super winners of the past 100 years. To start, there are several recommendations for avoiding losses:

  • Buy stocks that are going up in price, not down, and if you buy more you should do so only after the stock is above your original purchase price.
  • Buy stocks that are close to their high for the year, not when they’ve dropped and appear cheap. Invest in higher-priced, better-quality stocks, not in the lowest-price stocks (echoes of Charlie Munger (Trades, Portfolio)).
  • Among the fundamentals, give less attention to book value, dividends and the price-earnings ratio, and more attention to strong earnings and sales growth, price-volume metrics and whether the company is the profit leader with superior new products.
  • Do not subscribe to too many market newsletters or advisory services.
  • Get familiar with daily, weekly and monthly price and volume charts.
  • Apply “time-tested sell rules” to determine when to get out of a position, as well as buy rules to guide you back into the market.

In winding up this section, he wrote, “The stock market is human nature and crowd psychology on daily display, plus the age-old law of supply and demand at work. Because these two factors remain the same over time, it is remarkable but true that chart patterns are just the same today as they were 50 years ago or 100 years ago.” In other words, expect the past to repeat itself.

And in what he called a “Secret Tip,” he advised that the first step in becoming a successful investor is to examine great successes from the past, and the price and earnings patterns they displayed immediately before “spectacular” price increases.

Included in those patterns — both fundamental and technical — are quarterly and annual earnings histories, how much trading value was involved, the relative strength of their share prices and the number of common shares outstanding. In addition, O’Neil reported that many of the biggest winners had significant new management, new products or ties to strong industry moves.

O’Neil also wanted investors to understand and use charts, “Charts plus earnings will help you tell the best stocks and general markets from the weaker, riskier stocks and markets that you must avoid altogether.”

Backing up these assertions was his own research; at the core of it are charts of the most successful stocks in each year for the previous 125 years (this book was published in 2009). His examples (not necessarily set at one year) include:

  • Texas Instrument (NASDAQ:TXN): Between January 1958 and May 1960, it jumped 10-fold, from $25 to $250.
  • Xerox (NYSE:XRX): It popped from $160 in March 1963 to $1,340 in June 1966.
  • Cisco Systems (NASDAQ:CSCO): In October 1990 it was worth 10 cents, and by March 2000 it had shot up to $82.00 (split adjusted).

All of O’Neil’s research and thinking was brought together in what he called CAN SLIM. Each letter in CAN SLIM stands for one of the seven characteristics of the winning stocks he studied:

C: Current quarterly earnings and sales (the higher, the better).

A: Annual earnings increases (watch for significant growth).

N: New products, new management, new highs (buy at the right time).

S: Supply and demand (shares outstanding plus big volume demand).

L: Leader or laggard (which is your stock?).

I: Institutional sponsorship (follow the leaders).

M: Market direction (how you can learn to determine it).

O’Neil said of his formula, “It’s based 100% on realistic historical studies of how the stock market has actually worked rather than on our personal opinion or anyone else’s, including Wall Street’s ... or academic theorists. Furthermore, human nature at work in the market simply doesn’t change.”

How well has the formula worked? No doubt different investors have generated different results, but a comparison between CANGX (a mutual fund based on CAN SLIM) and VMGRX (Vanguard Mid-Cap Growth Fund) — Morningstar categorizes them both as mid-cap funds — is not flattering to CAN SLIM, subject to a couple of caveats discussed below:

CANGX trailing returns

VMGRX trailing returns

As these Morningstar tables show, the Vanguard fund has a 10-year record that easily outdistances the fund based on CAN SLIM.

Now, the caveats:

  • The fund is not run by O’Neil, but by what appears to be an independent fund manager, NorthCoast Asset Management.
  • According to the performance chart on the fund’s website, CANGX had a 10-year annualized return of 7.82%, compared to 13.12% for the S&P 500.
  • Morningstar reports CANGX has an above-average expense ratio of 1.43%, plus a turnover rate of 218%, both of which will have pulled down returns.

So CAN SLIM, as executed by CANGX, has been disappointing when compared with a peer and with the S&P 500; we acknowledge, though, that CANGX may not be the best representation of the formula.

In any case, William J. O’Neil’s ideas have substance and are worth the time of value investors, especially those who seek to broaden their horizons.

(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)

Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution." In his book, "Big Macs & Our Pensions: Who Gets McDonald's Profits?" he looks at the ownership of McDonald’s and what it means for middle-class retirement income.

Visit Robert Abbott's Website


Rating: 5.0/5 (1 vote)

Voters:

Comments

chipkent
Chipkent premium member - 1 week ago

I've seen zero information on William O'Neil's investment return. It is all hearsay. As far as I can tell, he makes all of his money selling newspapers.

Robert Abbott
Robert Abbott premium member - 1 week ago

Hi Chipkent - Thanks for your comments. In response I've dug more deeply into performance related to O’Neil directly and to results based on CAN SLIM. While you are right that there is little information about O’Neil's yearly returns, there is enough information overall to draw a broad conclusion:

First, between 1958 and 1963 he was the top-producing broker at Hayden Stone, and made enough money to buy a seat on the NYSE before age 30.

Second, Investor's Business Daily has been successful in the long run, with many subscribers who voluntarily pay fees to have access to information about CAN SLIM stocks.

Third, this search also led to discovery of a relatively new security (2015), the IDB 50 ETF (FFTY). While it includes only the top 50 (most profitable, etc.) it may be a better representation of the system than the CANGX mutual fund. Over the three years of its existence, it has outperformed by S&P 500 index by 1.60 points.

One final note on the ETF: It is a concentrated portfolio, roughly 40% in technology stocks, and other 40% in healthcare and consumer and cyclical stocks. I suspect the dip in tech stock prices in 2018 was the reason the ETF performance sagged last year.

Overall, I would say that O’Neil deserves his place on so many top 10 lists of the greatest investors.
Thanks again for commenting!

Big Game James
Big Game James - 1 week ago    Report SPAM

Ahoy Robert. I would agree with you that William J. O'Neil belongs on the lists of top investors. Whether one can find his actual track record or not, he obviously made money in stocks.

By the way, a popular podcaster and investor named Linda P. Jones has this to say about How To Make Money in Stocks:

"This book taught me how to invest in stocks and I made $2 million!"

Imagine if she had dismissed the book because she couldn't find his track record and therefore decided that he only made money selling newspapers. Thanks for the excellent coverage of William J. O'Neil, Robert!

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