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Sunday, November 16, 2008

William O'Neil Investing Strategy

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

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.