Recently, The Oxford Club released the following broadcast on a powerful investment strategy that takes advantage of both bull and bear markets. It’s a strategy that many industry gurus are using without even knowing it.
This past weekend, Jared, my 15-year-old son, was practicing aerial 360-degree rotations with his BMX bicycle on a jump and landing that he constructed behind our barn. After eating dirt a few times, he finally nailed one… and then another.

I was mowing grass at the time, and witnessed the feat. He came over and proclaimed, “I knew if I could get up enough speed, I could hit it.”

What he really needed was more momentum. For us engineering types, momentum equals mass times velocity (speed). And by pedaling faster, Jared’s momentum carried him higher and farther, allowing him to complete a 360-degree rotation on his bike.

Interestingly, the concept of momentum isn’t just confined to physical things. Those of us in the terra-firma investment crowd can make use of it, as well.

Investopedia defines momentum investing this way: “An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.”

So what are signs that a stock has momentum? Heavy volume for one.

Stocks that the market really likes have a much greater chance of hitting new highs repeatedly. If a stock trades at miniscule volumes, it’s likely out of favor with the investment community, and chances are it won’t be going anywhere.

What’s more, if the stock is sought after by institutions, the buying will take place in large blocks over a period of days or weeks, in order to have as minimal effect as possible on the price.

Large block trades – and the corresponding increase in volume – is a dead giveaway that the big boys are piling in. If you’re fortunate to own one of these stocks, the gains can be extraordinary.

One of momentum investing’s biggest proponents is William O’Neil, the founder and Chairman of Investor’s Business Daily.

O’Neil, a stockbroker in a former life, achieved guru status in the 1990s with a momentum strategy that became wildly popular with do-it-yourself investors.

In his 1988 book, How to Make Money in Stocks, O’Neil coined the term “CANSLIM” to promote his investment strategy.

Each letter stands for one of the seven characteristics O’Neil says that all stocks have when they’re poised to make big gains:

• C = Current Earnings Per Share: A minimum of 25% and rising over the past few quarters.
• A = Annual Earnings: At least 25% or more, over the last three years.
• N = New Product (or service): To fuel the company’s growth.
• S = Shares Outstanding: Preferably, as few as possible. The fewer the number of shares, the faster the movement of the stock.
• L = Leader or Laggard? O’Neil suggests that a stock’s Relative Price Strength should be at least 80 (which means it has outperformed 80% of publicly traded companies).
• I = Institutional Investors: Increasingly piling into the stock.
• M = Major Markets: Should be trending higher, since 75% of all stocks tend to follow the market’s overall direction.

O’Neil has repeatedly stated that “CANSLIM” is not momentum investing, and that he’s not a momentum investor. His view is that the CANSLIM system singles out companies that, first and foremost, have strong fundamentals.

Regardless of O’Neil’s feelings, what he practices is, in fact, momentum-style investing. And you can do it too.

So, how well does it work?

The American Association of Individual Investors (AAII) conducted a study using O’Neil’s CANSLIM system from 1998 through 2002 and found that it was reliable, predictable and a strong performer in both bear and bull markets.

And the best part? It produced a 350% gain over the five-year period.

AAII concluded that it was a good strategy for, “active investors looking for growth stocks.”

And O’Neil’s system isn’t bothered by high P/Es, either. While stocks with lofty P/Es tend to be more volatile, they’re also some of the fastest moving.

So we suggest you check out O’Neil’s CANSLIM approach, pick out a few candidates, set your trailing stops and enjoy the ride. Just don’t try any aerial 360s…

Good investing,

David Fessler

Editor’s Note:

David Fessler, Advisory Panelist for The Oxford Club, is a successful long-term investor and a renowned specialist in the semiconductor and telecommunications business. He now runs an international import business, manages his portfolio and does exhaustive investing research. Find out more about The Oxford Club

Source: A System That Earned 350% When Put to the Test