The Success of Bill O'Neil, CAN SLIM and the Innovator IBD 50

11/27/2017 10:30 am EST


Nicholas Vardy

ETF Strategist, Oxford Club

This is the story of O’Neill and his systematic approach to growth stock investing, writes Nicholas Vardy, editor of The Global Guru and other leading newsletters.

William J. O’Neil’s book How to Make Money in Stocks: A Winning System in Good Times or Bad” is an investment classic.

In it, O’Neil developed his famous “CAN SLIM” approach -- a systematic approach to growth stock investing. Each letter in O’Neil’s CAN SLIM stands for one of seven traits to look for before you buy a stock. 

CAN SLIM also selects the stocks for Investor’s Business Daily’s famous IBD 50 Index-- its top 50 recommendations in U.S. stock markets. 

On paper, the IBD 50 Index boasts a remarkable track record. Since the launch of the index in 2003, the IBD 50 has returned just under 18% per year. 

That’s more than triple the total return of the S&P 500 over the same period. 

chart 1

Until recently, the IBD 50 Index’s outstanding performance was only on paper. 

Then, in April 2015, Innovator Capital Management took the bold step of launching the Innovator IBD 50 ETF (FFTY). 

By tracking the IBD 50 Index, this ETF provides the ultimate test of whether you can replicate the idyllic returns on the CAN SLIM philosophy in the messy real world.

The Innovator IBD 50 Index: A patriotic strategy 

Sir John Templeton made his fortune by investing in global stocks, whether in post-war Germany and Japan or in volatile emerging markets. 

Not so with Bill O’Neil. You see, O’Neil is an American patriot who prefers to keep his money at home. 

Much like Warren Buffett or Vanguard founder John Bogle, O’Neil bets primarily on the long-term upward trajectory of the American economy. O’Neil believes that the freedoms and opportunities available in the United States make it the world's “prime success model.” 

Sure, investors flirt with the idea of global rivals like China taking over the mantle of global leadership. 

Today, however, the United States remains the world leader in high-growth, innovative entrepreneurial companies. So, O’Neil’s “secret” to making money in the stock market is simple: invest in U.S.-driven innovative growth. 

How CAN SLIM leads to fat profits 

O’Neil began studying “what made great stocks great” in the 1950s. 

In examining over 130 years of U.S. stock market historyO'Neil found that, year after year, the top-performing stocks displayed seven common traits. 

Thus, the CAN SLIM investment philosophy was born. 

chart 2
Source: Investor's Business Daily

Importantly, O’Neil found these traits across all time frames: in Texas Instruments (TXN) in the 1950s; in Microsoft (MSFT) in the 1980s; as well as in Apple (AAPL), Google/Alphabet Inc. (GOOGL) and Tesla (TSLA) today. 

As a growth investor, O’Neil rejects the value investor’s creed of investing only in cheap stocks. Stocks with low price-earnings ratios are cheap for a reason, says O’Neil. 

O’Neil does not mind paying a premium for stocks with good prospects. O’Neil’s philosophy is to invest in the “best of the best.” 

As O’Neil says: “You can’t buy a Mercedes for the price of a Chevy.” 

I have followed the IBD 50 list for over a decade. 

All the big growth stories of that period -- including the FAANG stocks -- Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google/Alphabet Inc. (GOOGL) -- have each popped up on the IBD 50 list at one point.

“Tis the season for the IBD 50” 

All investment strategies have their seasons. 

And 2017 was the IBD 50’s time to shine. 

Among the 36 strategies I follow for my trading service, The Alpha Algorithm, the IBD 50 ETF is the top-performing diversified strategy of 2017, logging a gain of over 42%. 

And much like a dominant athlete in his prime, the IBD 50’s rivals aren’t even close. This year, the IBD 50 ETF is over 8% ahead of the second-place ETF I track. 

Ironically, the IBD 50 strategy struggled out of the gate after it launched in April 2015. 

In fact, it underperformed the broader S&P 500 in both 2015 and 2016. 

That’s because the CAN SLIM system typically identifies smaller, fast-growing companies that thrive in bull markets. 

Once you pop the hood of the IBD 50 ETF, you see why it has fared so well in 2017. 

The IBD 50 ETF’s largest holdings are all red-hot technology stocks that are driving its market-trouncing performance. 

The ETF’s top holdings include:

YY Inc. ADR (YY)
Arista Network (ANET)
Universal Display (OLED)
Control4 Corp. (CTRL) 
and Align Technology (ALGN)

These positions are up 172.01%, 141.62%, 221.65%, 224.31% and 164.11% so far this year, respectively. 

If you are thinking about investing in the Innovator IBD 50 ETFhere’s a caveat. 

The IBD 50 index’s high-octane stock tilt ensures that it soars during bull markets. And over the long term, the ETF may even outperform the S&P 500, as the IBD 50 Index has on paper. 

But the ETF’s volatility will soar after any market sell-off. So, when investor sentiment turns negative, remember the old Wall Street adage: 

"The bull walks up the stairs. The bear jumps out the window." 

Until then, enjoy the ride. 

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