L = Leader or Laggard: Only Buy the Best in Class
O'Neil's insistence on buying the strongest company in a given industry group, even at a higher price, rather than a cheaper competitor.
The L criterion is a direct, explicit instruction: within a given industry group, buy the genuine leader — the company with the strongest earnings growth, the strongest relative price performance, and the clearest competitive advantage — rather than a cheaper-looking laggard in the same industry, even when the laggard appears to offer better statistical value on a simple metric like price-to-earnings ratio.
O'Neil's historical study found that industry leaders, once identified using the other CAN SLIM criteria, tended to keep outperforming laggards in the same group rather than the gap closing — directly contradicting a common value-investing instinct (covered from a different angle in this Book Club's value-investing courses) that a cheaper laggard represents a bargain relative to an expensive leader.
This isn't precisely in conflict with the value-investing courses elsewhere in this Book Club: Graham, Klarman, and Fisher all also emphasize genuine business quality, not just a low price in isolation, and Fisher's Common Stocks and Uncommon Profits course specifically argues for paying up for exceptional, durable businesses. O'Neil's L criterion sits closer to that quality-focused end of value investing than to Graham's original, statistically-driven net-net approach — the disagreement is less about whether quality matters and more about the specific technical and momentum-based methods O'Neil uses to identify it.
Two companies compete in the same industry. One has the strongest earnings growth, the highest market share, and the clearest competitive moat, but trades at a premium valuation. The other is statistically cheaper on a price-to-earnings basis but has weaker growth and a less defensible market position. O'Neil's L criterion would favor the first, premium-priced leader — his historical study suggested that industry leadership tends to persist, meaning the laggard's cheaper price often reflects a real, ongoing competitive disadvantage rather than an overlooked bargain.
- The L criterion directs investors toward the genuine leader in an industry group — strongest earnings, strongest relative performance — rather than a cheaper-looking laggard in the same space.
- O'Neil's historical study found industry leadership tended to persist rather than gaps closing, contradicting the instinct that a cheaper laggard is automatically a better value.
- This criterion sits closer to quality-focused value investing (this Book Club's Fisher course) than to Graham's original statistically-driven approach — the disagreement is more about method than about whether quality matters.