This time marks the fourth installment of William O’Neil’s Growth Stock Discovery Series. For those who missed the previous articles, please take a moment to read them through the following link:
I would recommend purchasing William O’Neil’s book to thoroughly understand the details of his investment methodology.
- CAN-SLIM’ｓ “N”: Newer Companies, New Products, New Management, New High
- Buy Stocks at the Right Timing
- Differences Based on the Supply of Stocks
- Choose Leaders with an Entrepreneurial Spirit
- Find Companies Engaging in Share Buybacks in the Public Market
- Company with a Low Debt Ratio to Total Capital is Desirable
CAN-SLIM’ｓ “N”: Newer Companies, New Products, New Management, New High
CAN-SLIM’s “N” stands for Newer Companies, New Products, New Management, New Highs Off Properly Formed Bases.
For a stock price to experience significant growth, some new elements are necessary. These may include the introduction of highly successful new products or services, innovative ideas, or a refresh of the management team, all contributing to a rapid increase in earnings growth rates.
Expansion of demand within an industry, price increases, and technological innovations can also have positive effects on stock prices.
According to research on breakout stocks from 1880 to 2008, over 95% of successful stocks in the United States underwent some form of change. Historically, the emergence of new industries or products such as railways, electricity, telephones, cameras, and inventions like Edison’s have contributed to sharp increases in stock prices. Subsequently, the advent of automobiles, airplanes, radios, and the continuous introduction of new products replaced old ones, exemplified by the shift from iceboxes to refrigerators. Furthermore, the birth of new products and companies like television, computers, jet planes, personal computers, fax machines, the internet, and mobile phones has driven economic growth, created numerous job opportunities, and contributed to the improvement of the standard of living for citizens.
Buy Stocks at the Right Timing
Buying a stock just because it has reached a new high doesn’t necessarily mean it’s the right buying opportunity. The use of charts is crucial in stock selection.
It’s important to study past price movements in detail and identify breakouts from well-formed chart patterns. Breakouts from stock price patterns often indicate the potential beginning of a significant upward move, and typically involve a base formation period lasting from 7-8 weeks to as long as 15 months.
The optimal buying opportunity occurs when the stock price breaks out to the upside from a base during a bullish market. It’s desirable to make the purchase soon after the breakout from the base.
Buying after the stock has already risen 5% to 10% from the breakout point may be considered too late, as the best buying window may have passed.
Differences Based on the Supply of Stocks
When the number of issued shares of a stock is high, the stock’s price tends to rise when there is sufficient demand, indicating the need for numerous buy orders.
Conversely, if the number of issued shares is relatively low, the stock price can be pushed up with a certain level of demand, but there is a higher risk of rapid fluctuations due to the lack of liquidity.
Not only the total issued shares but also the float (the number of shares in the market that are not held by insiders or management) is crucial. If the management holds a significant portion of the shares, it is seen as a positive sign, as it indicates a commitment to the company’s success, and such stocks are often considered good buying opportunities.
Companies with a large number of issued shares are sometimes perceived as having an older organizational structure, experiencing slower growth, and becoming unwieldy due to their size. Therefore, the dynamics of issued shares and the proportion held by management are important factors for investors to consider in their decision-making process.
Choose Leaders with an Entrepreneurial Spirit
As the scale of large corporations increases, there is a potential for a simultaneous increase in power and influence, but it may also lead to a decrease in imagination and inefficiency in productivity. Many large corporations tend to be conservative and avoid innovative decisions, and this tendency can be attributed, in part, to the fact that the management holds a significant amount of the company’s stock.
This is a significant flaw that large corporations should address. When the leadership team and employees of a large corporation lack sufficient interest in the success of their own company, it becomes a disadvantage for investors. The complexity of organizational structures in large corporations and the management’s distance from customers can also contribute to this issue.
In a fiercely competitive capitalist economy, it has been pointed out that the ultimate boss should be the customer. As the means of information transfer are changing rapidly, new and innovative small and medium-sized enterprises are providing innovative products and services, experiencing rapid growth. The future significant growth in the United States might emerge from such small and medium-sized enterprises.
Find Companies Engaging in Share Buybacks in the Public Market
To find companies that continuously repurchase their own shares on the public market for an extended period is crucial, especially for growing small and midsize enterprises that meet the CAN-SLIM criteria.
Share buybacks not only reduce the number of outstanding shares but also suggest that the company anticipates improvements in future sales and earnings.
The decrease in the number of outstanding shares results in the company’s net income being divided among fewer shares, leading to an increase in earnings per share (EPS).
Company with a Low Debt Ratio to Total Capital is Desirable
When selecting stocks, it is important to examine the proportion of long-term debt or bonds within a company’s total capital.
Generally, lower debt ratios are considered indicative of a safer and stronger company. Companies with low debt ratios are often perceived as more secure, particularly when economic conditions turn unfavorable or interest rates rise. High debt ratios can expose companies to significant earnings impact during such circumstances.
Companies with high debt ratios are typically considered lower quality and higher risk. In the period from 1995 to 2007, there were examples of excessive leverage, particularly in financial institutions and housing-related companies. Some of these companies, driven by government support, made substantial investments in subprime loans for low-income individuals, ultimately contributing to the 2008 financial crisis.
A crucial rule for investors and homebuyers is not to borrow amounts that cannot be repaid. Excessive debt can have detrimental effects on individuals, companies, and governments alike.
Companies that have reduced their debt ratios in recent years may warrant consideration, as the reduction can lead to lower interest payments and the potential for increased earnings per share (EPS).
Additionally, it’s important to pay attention to the presence of convertible bonds in the capital structure. The conversion of these bonds into common stock can dilute earnings and is worth noting in the evaluation process.
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