CANSLIM Series
	O'Neil's Book Reviewed C - Current Earnings A - Annual Earnings N - News S - Supply & Demand L - Leaders I - Institutional Sponsorship M - Market Direction
	Join A Discussion
	CANSLIM Discussion Discuss the methodology, your thoughts on market direction, stocks fitting the formula...

The second characteristic that William O'Neil found in common in the top growth stocks he studied over a forty year period was consistent annual earnings increases over the previous five years. He even puts it in bold face - "Each year's annual earnings per share for the last five years should show an increase over the prior year's earnings."

O'Neil found that the average annual earnings growth rate for the top performing stocks was 24% a year. In fact, three out of four stocks studied showed a positive annual earnings growth rate. The other one out of four were turnarounds.

He emphasizes consistent growth. A track record of earnings per shares of $3, $5, $7, $2 and $3 is not good enough. Though you can tolerate one bad year, says O'Neil, the subsequent year must surpass the previous high, not just the bad year. But the more stable and consistent the growth rate the better.

One pitfall to avoid is that some stocks that are labelled growth stocks by the popular press are, in fact, mature or as O'Neil puts it, "nearly senile" growth stocks. Their growth rate looks attractive, but if you look at the stock more closely, you'll find that it is not growing as fast as it did in its prime.

Another pitfall to avoid is stocks whose annual growth record looks good but whose current earnings in the last two quarters have slowed significantly. Both Annual and Current Quarterly Earnings must be excellent. Such a happy confluence greatly increases your prospects of a successful investment.

The Price/Earnings Ratio

Many analysts make a great deal out of the price to earnings ratio or P/E. But in fact, O'Neil points out that the average P/E for the top performing stocks in their early emerging stage between 1953 and 1985 was 20 compared to 15 for the Dow Industrials. While they were advancing, the P/E for these stocks increased to 45. In other words, investors who shied away from higher P/E ratios during those years missed out on the best investments.

Two anecdotes he relates point out the folly of relying on P/E ratios. He tells of a burly and aggressive investor bursting into his friend's brokerage office in June 1962 bellowing that Xerox was overpriced with a P/E of 50. He sold 2000 shares short at $88. This "obviously overpriced stock" then proceeded to a split adjusted equivalent of $1300!

The other story is about a mistake O'Neil himself made. As a neophyte investor he bought Northrop because he thought it was cheap with a P/E ratio of 4. He watched in stunned disbelief as the stock declined to a P/E of 2.

Is Today's Market Different?

In this modern era of fast growing dot-coms without any earnings at all, we should consider carefully O'Neil's advice. Today there is a great emphasis on growing revenues, but little on earnings. But some day, the chickens will come home to roost. Some day these companies must start showing profits. And not just profits but accelerating profits if they are to hang on to their valuations.

But why buy the stock of a company before it starts showing a profit when in many cases you can buy undervalued stocks that are already showing strong and profitable growth? In the case of the dot-coms, if a company's losses per share are decelerating as its revenues grow, then clearly it is on the path to eventual profitability. But beware of companies whose losses are accelerating in spite of increasing revenues.

Fortunately there are some resources for searching out stocks with strong growth on the Internet.

Canadian Stocks

Deloitte & Touche's Fast Fifty
Every year D&T publishes its list of the fastest growing companies in Canada. Not all are publicly traded, but watch the ones that are! Last year's Fast Fifty included such stellar stocks as Sierra Wireless, Janna Systems, Research in Motion, Descartes Systems Group, PMC Sierra and BCE Emergis. And you know how those have fared!

globeinvestor Financials Filter
Use this filter to search out companies whose income has doubled over three years (25% annual compounded growth).

Profit 100
Profit Magazine's list of the 100 fastest growing companies in Canada.

Report on Business Top 1000
Canada's 1000 largest companies. Site includes separate list of the companies with the fastest profit growth over the last five years

Wright Investors' Service Reports
Wright provides detailed reports on many Canadian companies. After selecting a company, click on Earnings Analysis for Quarterly EPS going back up to ten years. Stocks of other countries also covered.

U.S. Stocks

Deloitte & Touche Fast 500
The U.S. D&T site lists the 500 fastest growing U.S. companies.

Financial Web Super Screener
Financial Web lets you screen stocks by a wide variety of criteria including 5 year earnings growth. Gives average annual growth.

Market Player.com Screening Tools
If you can figure out how it works, this looks to be an excellent screening tool with lots of variables to choose from.

Quicken Stock Search
Quicken lets you screen stocks using a wide variety of criteria including 5 year earnings growth.

Stock Screen Comparison Table
From About.com's Stocks Guide Mike Griffis: A handy table telling you what screens various different websites offer.

Zacks.com
Rather than screening for the best earnings growth companies of the last five years, Zacks projects the predicted fastest growth companies for the next five years.

Next: N is for News!

Buy the Book!

How to Make Money in Stocks

Comments? Suggestions? Why not post them on our Bulletin Board or email me.

E-mail me!

ZZZNEWSLETTERSIGNUP1ZZZ

Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author may hold interests in investments mentioned in this article.

Previous Features