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Looking for promising growth shares? Here's a formula that could help you unearth investment riches

by , 12 May 2014

If you're looking for a way to find growth stocks, this formula could be for you. William O'Neil, the founder of US journal Investor's Business Daily, attended Harvard Business School while he was a stockbroker. He devised a strategy to analyse stocks: “CAN SLIM.” The formula made him highly successful and a lot of money. CAN SLIM is an acronym for O'Neil's seven step method for finding promising growth shares. Let's take a closer look at how it works…

A seven-step investing strategy to find growth shares

C is for current earnings
O’Neil wants to see earnings up 25% or more in the most recent quarter, Alexander Green in Investment U explains. In South Africa, not all stocks report quarterly, so you’d have to judge this over six months.

O’Neil doesn’t think there’s any point looking any further is a share’s current earnings are poor.

A is for annual earnings
O’Neil wants earnings of at least 25% for each of the last three years.

N is for new
Generally speaking, very successful companies are innovators. Look at how successful Apple is. Innovation drives sales of the company’s products. And this sales growth results in good growth of profits.

S is for supply and demand
It’s easier for smaller companies that have fewer shares in circulation to show large gains. O’Neil’s research shows that 95% of companies with the biggest gains in their share price had less than 25 million shares in circulation.

L is for leader
The best performing companies tend to high new highs again and again.

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I is for institutional sponsorship
The majority of trading volume on the stock markets is from institutional investors. You want to buy the same shares as them. If you don’t you’ll be fighting against them and their market pull.

M if for market direction
O’Neill thinks you should only buy shares that are in an upward trend. He says this is because 75% of shares follow the overall market trend.

So there you have it, a formula that could help you unearth investment riches if you’re looking for promising growth stocks.

Looking for promising growth shares? Here's a formula that could help you unearth investment riches
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