A strategy for finding fast-moving growth stocks

Thursday, Jul 18 2019 by
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A strategy for finding fastmoving growth stocks

One of the standout trends in the stock market over the past decade has been the success of strategies that look for fast growth and momentum. In generally bullish conditions, investors have gravitated to firms with rapidly growing profits. And while these stocks can often look expensive, the momentum in their prices is incredibly powerful.

Growth strategies are popular with traders and investors looking for quick, upward price moves. It’s the territory of the multi-bagger. But make no mistake, when conditions change, it’s an approach that takes no prisoners. Unlike value strategies, which rely on a gradual correction of market mispricing, growth stocks and strategies can be much more sensitive to the market mood. So they need careful handling.

Some of the masters of this kind of investing are the likes of Mark Minervini and William O’Neil. Both of these American trading gurus have made careers out of buying stocks where earnings momentum and price momentum are rising in tandem.

O’Neil’s 1994 book How to Make Money in Stocks is an investment classic that followed years of research into the background of some of the best performing shares of all time. Its appeal lies in the excitement of finding companies that are seeing their profits rise and where the market is just starting to notice.

The popularity of this approach meant that O’Neil, a stockbroker by trade, could build a mini empire for what he called the ‘CAN SLIM’ strategy, which is driven by his online news and research portal, Investor’s Business Daily.

CAN SLIM represents the seven factors that O’Neil looks for in a stock. His strategy blends conventional ‘growth’ measures such as Current and Annual earnings growth and New product innovation with ‘technical’ indicators like the Supply and demand for shares, whether it’s the Leader in its specific sector, whether it has Institutional support allied with overall bullish Market strength.

Importantly, O’Neil tends to disregard valuation measures like price-to-earnings ratios when it comes to analysing shares. His studies of the market found that it was actually those companies that looked very expensive based on these measures that went on to be some of the greatest winners.

For that reason, the approach also carries a potentially high degree of risk, which is why he also insists on setting strict 8 percent stop-losses on entry points, which limits the financial damage that can be…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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8 Comments on this Article show/hide all

Jack Corsellis 18th Jul 1 of 8
1

Great post Ben, thanks.

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Trevor47 19th Jul 2 of 8

Very useful, Thanks

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iwright7 19th Jul 3 of 8
1

Yet another excellent article Ben. Others might be interested to note that the AAII has been running 2 US Can Slim screens since 2004 (Original and 3rd book edition) showing a impressive cumulative gain of 20% and 18%/annum, positioning Can Slim in 4th and 6th place out of some 70 tracker screens.

https://www.aaii.com/stockideas/performance?sort=TOTAL&order=0

O'Neil believes that stocks with low PE ratios are probably correctly priced by the market. Nor is he interested in balance sheets, or intrinsic values. What matters for him is that a stock must be growing fast and the markets must recognise this. For this reason Can Slim should best suit active investors/traders, although with the AAII and the Stocko Can Slim screens all showing circa 19% annualised returns, a less active approach would tend to be indicated. Ian



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herbie47 19th Jul 4 of 8
1

Yes a good article but it should be pointed out CANSLIM screen is down 12.8% in the last year, will it rebound in the next year or fall even more?

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iwright7 19th Jul 5 of 8

Herbie - All screens suffer periods of under-preformance.  The point with annualized % is that they include the rough and smooth and circa 19% annualised (since 2004 in the AAII case) is very good.  With the rapid flow of digital information I would be more concerned that Value won't rebound, rather than Growth screens. 

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herbie47 19th Jul 6 of 8

Yes of course there are times of under performance but you don't need to invest at that time, Minervini chooses when to invest in growth stocks, not sure what he is doing at the moment as I have not followed recently, a while ago he had very little invested and was shorting the market. The problem with these Guru screens is you don't know which shares are included in the screens.

Why can't I do reply on here anymore?

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RichardEllis 20th Jul 7 of 8

I often run CANslim, & what worries me it is that a stock can pass the screen, but a short while later, when nothing material has changed, it fails. This of course is simply due to the binary nature of the rules & probably this issue is not confined only to the CANslim screen. Take for example Timken, a US stock. It passed CAN slim on 28th Jun but failed it a few days later on 10th July. Its not easy to see why this, is as the financial data (revenue, eps etc) are unchanged & the Q,V,M values hardly moved: 90,75,91 to 94,79,87.

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herbie47 20th Jul 8 of 8

You can run it through the checklist and see why it fails. But yes some are going on and off the screen frequently, it can be 50MA, you can also see when they enter and exit the screen. However as the screen is only adjusted quarterly it does not actually happen on the screen results.

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