This time marks the sixth 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 “L”: Leadership
CAN-SLIM’s “L” stands for “Leadership.”
Leadership evaluates whether successful stocks or companies play a leading role in their industry or market.
Here are some points related to “L”:
- Financial Leadership: Successful stocks demonstrate leadership in their industry or market based on key financial indicators such as revenue and profits. This indicates that the company is experiencing healthy growth and has the strength to surpass competitors.
- Stock Price Leadership: Leadership is also related to stock price movements. Successful stocks often show strong trends, rising faster than other stocks or the overall market. This allows investors to identify stocks demonstrating leadership in the market.
- Introduction of New Products or Services: Leadership is crucial in the introduction of new products or services. Companies leading the market and engaging in innovative initiatives are more likely to succeed compared to their competitors.
- Anticipation of Industry Trends: Leadership includes understanding which companies are anticipating future trends in their industry. Stocks that demonstrate leadership in anticipating future growth in the industry become attractive choices for investors.
In summary, in CAN-SLIM, “L” evaluates how much leadership a successful investment or stock demonstrates in its field.
Target the Top 3 Stocks within the Industry
Targeting the top 1 to 3 stocks in the industry can result in incredible growth even when other companies in the sector are struggling. “Top” companies, in this context, don’t necessarily mean the largest in size or the most widely recognized brands.
These top companies typically exhibit the best quarterly and annual EPS growth, high Return on Equity (ROE), exceptional profit margins, revenue growth rates, and active stock price movements. Additionally, they often differentiate themselves by creating innovative and outstanding products or services, allowing them to capture market share from less innovative, established competitors.
Distinguish between Leading Stocks and Stagnant Stocks
Investors who hold assets in stocks should learn to sell stocks with poor performance early and hold stocks with excellent performance for an extended period. In other words, stocks where incorrect judgments are proven should be sold while losses are still minimal, and stocks where superior choices are demonstrated have the potential to develop into breakout stocks.
Unfortunately, human nature often leads people to take the opposite actions. Many individuals tend to hold losing stocks for an extended period and sell winning stocks prematurely, leading to significant losses. To assess the performance ranking of held stocks, the Relative Strength Index (RSI) from Investor’s Business Daily can be helpful.
This index compares the price movement of a specific stock to other stocks in the market, indicating relative strength over the past 52 weeks. Each stock is assigned a numerical value from 1 to 99, with 99 being the highest.
For example, if a stock has an RSI of 99, it means the price movement of that stock surpassed 99% of companies in the market. If the RSI is 50, it indicates that half of the market had better price movement than that stock, and the other half had worse.
If the RSI of a held stock is 70 or below, it may be performing less favorably compared to stocks delivering superior results in the overall market. Although the stock’s price might rise, it may not be expected to rise as much as other stocks.
Choose Stocks with a RSI in the 80-90 Range
Focusing on leading stocks and improving the quality of stock selection can be achieved by narrowing down to companies with a Relative Strength Index (RSI) of 80 or higher. This is one approach to selecting stocks that demonstrate excellent relative strength in the market, particularly when many investors may prefer to buy underperforming stocks. William O’Neil himself has stated that he avoids buying stocks with an RSI below 80, and successful stocks often have an RSI of 90 or higher when breaking out of the first or second base, according to his observations. This serves as a crucial clue in identifying stocks that exhibit outstanding performance in the market.
Another essential criterion when buying stocks is that they should break out from a properly formed base or consolidation. Additionally, purchasing at the pivot point (the correct buy point) is crucial. William O’Neil emphasizes that stocks that have already risen 5% to 10% from the initial buying point should be avoided, reducing the risk associated with abrupt market fluctuations and highlighting the importance of a careful stock selection process.
Identify New Leading Stocks in a Market Correction Phase
When the overall market undergoes a correction or enters a downturn, it is often considered an opportune time to discover new leading stocks.
Attractive growth stocks are said to experience a correction of approximately 1.5 to 2.5 times the market average when a market-wide adjustment of 10% occurs. In other words, if the overall market declines by 10%, high-quality growth stocks may potentially see a decline ranging from 15% to 25%.
However, during a temporary correction within a bullish market or upward trend, the stocks with the least decline are considered good choices, while those with the greatest decline are seen as the least favorable choices.
For example, in a scenario where the market undergoes a medium-term correction of 10%, and among your previously performing growth stocks, some decline by 15%, some by 25%, and one by 35%, the ones with declines of 15% and 25% are often expected to show positive movement again after the overall market recovers.
A stock that has declined by 35–40% during a 10% market-wide correction should be seen as a sell warning, and it is usually wise to heed such warnings.
After the overall market correction reaches its final stage, stocks that recover and reach new highs first are likely to become the new leading stocks. Such stock breakouts tend to occur over approximately 13 weeks, with top-performing stocks typically breaking out within the first 3–4 weeks.
Identifying these breakouts during the initial phase is considered an ideal time to buy stocks, and it is crucial not to miss these opportunities.
Set a Cut-Loss Point for Stagnant Stocks
Buying stocks during a downturn is a risky behavior that can lead to financial losses. William O’Neil emphasizes the need to immediately stop such risky practices. Even for high-quality stocks, it is advisable to avoid purchasing during a decline, especially considering cutting losses when the stock falls 7-8%.
The future movements of any stock are uncertain, and the market can be influenced by unpredictable factors. To protect assets, having solid rules is crucial. Investing certainly involves risks, and everyone is susceptible to mistakes. Therefore, being an investor who learns from past failures, recognizes and corrects mistakes early is essential.
Being emotionally stable, considering situations calmly, and cutting losses at the right time are key to protecting assets and effective investing. Investing in stagnant stocks usually increases the difficulty of making profits. Identifying leading stocks and focusing on stocks that move in a bullish market is a rational approach from the perspectives of growth and profitability.
Practicing cut-loss strategies is also wise. Especially, considering cutting losses if a purchased stock falls 8% from the purchase price is an important strategy to minimize losses. Making cut-loss decisions calmly, without being swayed by emotions, can prevent significant losses.
Being sensitive to market conditions and individual stock factors, and thoroughly managing risks are integral parts of a sustainable investment strategy.
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