Qala

O'Neil’s investment style, combining both qualitative and quantitative techniques, is focused on finding growth stocks with the highest probability for rapid price
appreciation. In his book, How to Make Money in Stocks, O'Neil introduces the C-A-
N-S-L-I-M system for individual investors searching for potential stock winners.

The premise behind the C-A-N-S-L-I-M system was driven by in-depth analysis of
every big stock market winner over a 40-year period. Each letter in C-A-N-S-L-I-M
represents one of the seven key factors that O'Neil found was prevalent in the stocks that showed the biggest price moves. The meaning behind each letter is as follows:

C = Current Quarterly Earnings Per Share

Seek those stocks that report a major percentage increase in earnings per share
(EPS) in the most recent quarter from the comparative quarter in the previous year.
O'Neil suggests that the most successful money managers have a bottom limit of
25% to 30% EPS growth. In a bull market, stocks showing earnings growth of 40%
to 500% should be the norm.

A = Annual Earnings Increases

Look for stocks that report an increase in annual EPS for the last five years over the comparative year. O'Neil suggests as a minimum, screen for stocks in which the
annual compounded earnings growth rate is at least in the 25% to 50% range over
the last four or five years. Do not short stocks showing high P/E ratios.

N = New Products, New Management, New Highs

In a study conducted by O'Neil of the biggest stock market winners in the period
from 1953 to 1993, over 95% of the winners were shown to have introduced a major
new product or service, have new management, or were trading at new highs.

S = Supply and Demand

The concept of supply and demand in economics is that price will move up when
demand rises and/or supply falls. O'Neil suggests looking for stocks with fewer
shares outstanding as buying and upside price moves in these stocks could be
amplified. Stocks with around 10 million to 25 million issued shares are preferred.
Also, look for stocks that have high insider ownership by the company’s top
management.

L = Leaders and Laggards

Look for the stocks that display the top relative strength in their industries, as these stocks show strong price acceleration following a high relative strength. O'Neil advises against laggard stocks and stocking with the leaders. Avoid stocks that show a decline in the relative strength line for seven months or more.

I = Institutional Sponsorship

Finding out which institutions own which stock is key to stock selection. Search for
the top three to 10 institutional investors and screen what they are buying.

M = Market Direction

You need to analyze the price and volume moves of stock market indices on a daily
basis and understand what direction the market is heading.

When to Sell

Regarding when to sell a stock, O'Neil suggests investors adhere to a strict stop-loss strategy, including selling stocks that have declined 7% to 8% below the entry price. Also, stocks that have not appreciated by 20%–plus after 13 weeks may be candidates for selling. Keep stocks that have increased by 20% in four to five weeks.

The 15 factors that an investor needs to examine in detail are:

1. The market size and growth prospects for a company’s product or services
needs to be large enough to allow for strong sales growth over several years.
This makes sense as markets lacking size and/or potential could ultimately
result in stagnant or flat growth, which would cap the growth of the company.

2. There needs to be an emphasis on research and development to make sure
innovation is at the forefront, to stay ahead of the competition. In this way,
new products are introduced to replace or expand existing product lines.

3. The scope of the research and development should bear relation to the size of
the company. This makes sense as growing companies should see a
corresponding growth in research and development expenditures to stay
ahead.

4. As far as the sales channels, the company should have an above-average
sales presence.

5. The company should have a worthwhile profit margin.

6. There should be an effort on the part of the company to maintain or
strengthen the profit margins.

7. On the human resources front, there should be excellent labor and personnel
relations between the company and its workers.

8. The company needs to have excellent executive relations.

9. The management structure should be strong.

10. The company’s cost analysis and accounting controls need to be good.

11. Does the company have anything related to its business that gives it an
advantage over its competitors?

12. The company should have both a short-term and long-term earnings
outlook.

13. Management should communicate with investors regardless of whether the
company is doing well or poorly. Watch out for companies that fail to
communicate when times are bad.

14. Management should have integrity.

15. If the company should ever require the need for equity financing to grow its
business, would there be a dilution impact to current shareholders?

As far as selling, Fisher suggested there are only three reasons to sell a stock:

1. A major mistake was made in the evaluation of the company.

2. The company fails to satisfy the 15 points to the same degree as previously.

3. There is a superior company to reinvest capital but you need to be certain.

1. The business must be simple in nature and understandable, have a steady
operating history and good long-term potential.

2. The business should have excellent “economic goodwill” or reputation, which
are generally well-respected and large companies.

3. Management should be rational and honest with shareholders.

4. Concentrate on the company’s “return on equity” instead of earnings per
share, since earnings can be manipulated by accounting. Companies with high
profit margins and cash flow are preferred as it allows for growth.

5. Determine the intrinsic value of a business and try to pay less for it. By doing
so, you create a “margin of safety” just in case you pay too much.

6. Disregard what is happening in the stock markets as it has no impact on the
business of the company.

7. Sell a company when (1) its intrinsic value is not appreciating at a
satisfactory rate; (2) market value of company is much greater than the
estimated intrinsic value; and (3) cash is needed for a superior investment.