10 fast-moving growth shares

Investing legend William O'Neil looked for seven factors in a stock. Stockopedia's Ben Hobson uses them to find the best fast-growing momentum plays.

Most stockmarket investors would jump at the chance of buying the next big break-out share. For US investor and entrepreneur William O’Neil, the hunt for these kinds of growth stocks has been a life's work.
Individual investors usually arrive late (and leave early) when it comes buying (and holding on to) rocket fuelled growth stocks - but there are ways of finding them. O'Neil's strategy for tracking down companies with the right blend of profits growth and momentum has earned itself a reputation for highlighting the signs that a stock might be about to take off.
O'Neil's 1994 book How to Make Money in Stocks is an investment classic that followed years of research into 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 increase but are yet to see their share prices reflect it.

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 is a mnemonic for 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.
Notably, 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 strategy also carries a potentially high degree of risk, which is why he also insists on setting strict 8% stop-losses on entry points, which limits the financial damage that can be done if the price does fall.

Source: Stockopedia      Past performance is not a guide to future performance

A pre-costs strategy based loosely on CAN SLIM rules tracked by Stockopedia has returned an impressive 24.8% annualised return since 2012. Here are some of the stocks that share the characteristics of what O'Neil looks for in his CAN SLIM strategy:

 Source: Stockopedia

Unsurprisingly, this list of fast growing companies includes names that have produced some stunning returns in recent years. Most look expensive against regular valuation measures - but remember that O'Neil's strategy deliberately looks to trade on the momentum in fast moving shares, regardless of valuation.

Among the stocks on the list are the online trading platform Plus500 Ltd, drinks group Fevertree Drinks, bowling ten-pin bowling operator Ten Entertainment Group, life sciences company Abcam and fashion retailer JD Sports Fashion.

O’Neil always insisted that CAN SLIM isn't a 'price momentum' strategy. Yet there's little doubt that strong equity markets in recent years have been ideal for the kinds of fast growth stocks that meet his criteria. This strategy is very much a 'trader' approach that demands investors to keep a close eye on their stocks and sell them immediately if their prices start to weaken. In expensive, fast moving stocks, risk management is essential. But for investors prepared to do their homework, using O'Neil's tried and tested rules could be a useful way of finding growth stocks with superstar potential.

About Stockopedia

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

Interactive Investor readers can get a free 14-day trial of Stockopedia byclicking here.

These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.