If you’ve ever wondered how to find shares capable of delivering the sort of explosive growth seen by the likes of internet fashion retailer ASOS in recent years, the answer could lie in the work of one of America’s best known investors. Throughout 2013, William O’Neill’s strategy for tracking down companies with the right combination of earnings growth and momentum has produced some terrific results. As with many growth investing models, rising markets this year have reduced the pool of UK companies qualifying for O’Neill’s so-called CAN SLIM screen but there’s still a bumper line up of potential stock candidates across Europe.
O’Neill is a cult figure among American investors; his 1994 book How to Make Money in Stocks is a masterclass on the use of both fundamental and technical rules when buying and selling shares. Its broad appeal lies in the excitement of finding stocks that are beginning to deliver earnings acceleration but haven’t yet been re-rated by the market. The popularity of this quest to find the stock stars of tomorrow has enabled O’Neill to establish something of a mini empire for his CAN SLIM strategy, which is driven by his online news and research portal, Investor’s Business Daily.
His strategy marries traditional ‘growth’ characteristics such as earnings momentum and product innovation with ‘technical’ indicators like rising demand for shares and price strength. Traditional valuation measures like P/E ratios don’t feature here, with O’Neill’s studies of the market finding that the greatest winners of all time were all on premium P/Es, with some priced as high as 50x or even 80x earnings. For that reason, the strategy also carries a potentially high degree of risk, which is why O’Neill also insists on setting strict 8% stop-losses on entry points. You can read more about the strategy works and what CAN SLIM actually means here.
Over the past 12 months a strategy based on these rules tracked by Stockopedia has returned a stellar 48.5% against the FTSE 100 which has managed just 12.3%. Behind that performance are stocks like Secure Trust Bank (LON:STB), which rose by 47.7% (to £21.20) during the six months it was held in the CAN SLIM portfolio. Likewise, shares in high street retailer Next (LON:NXT) have risen by 10.3% (to £50.25) since they were bought in June, while over the same period shares in ASOS (LON:ASC) have gained 27.2% (to £50.60). And it isn’t just large cap stocks that have surged either; Jarvis Securities (LON:JIM), a small cap stockbroker was bought in March and has since seen its shares leap by 51.3 % (to 395p) while Carrs Milling Industries (LON:CRM) has gained 27.9% (to £16.25) over the same period.
But while O’Neill’s formula has excelled at finding growth stocks with scintillating share price gains this year, its demanding criteria comes at a cost. A well diversified basket of potential buying opportunities isn’t always available, and frothy market conditions haven’t helped. However, for CAN SLIM investors prepared to look beyond UK borders, European markets offer many more options. Since June, our pan-European version of the screen has produced a 16% return, outperforming its FTSE Eurofirst 300 benchmark by 11.8% but with nearly three times as much diversification. You can see the full list of companies currently qualifying as CAN SLIM stocks in Europe, by using Stockopedia's Europe Edition.
More options in Europe
Among the European holdings, a couple of Polish companies have been exceptional performers since they were picked up during the portfolio rebalancing in September. They include pharmaceuticals wholesaler Neuca (NEU) and clothing manufacturer LPP (LPP), which have risen by 23.7% and 21.8% respectively in that time. Another European stock to flirt with the CAN-SLIM screen over the past year is Spanish wireless technology business Let’s Gowex (GOW) where the shares took off in late September on news of a sharp rise in half year profits. Gowex builds free WiFi networks for cities and transport systems using a public-private partnership model. It’s involved in projects ranging from Bordeaux to Buenos Aires, with larger networks being rolled out in New York City and San Francisco.
Using CAN SLIM to find growth shares
Of course, as with any quantitative screen, it's always important to DYOR but this approach provides a compelling starting point. While O’Neill has always insisted that CAN SLIM isn’t a price momentum strategy, there’s little doubt that strengthening markets through 2013 have been a real boost for the stocks that it has picked up. That said, those conditions have made it all the harder to find sufficient numbers of UK companies that are producing his required blend of earnings growth and relative price strength. For investors prepared to do their homework, European markets may offer a solution.
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Filed Under: Growth Investing,