When it comes to investing, there are many options for you as an investor to choose from. There is investing based on fundamentals, then there is investing based on technical parameters.
Looking at investment strategies, we have a gamut of methods such as value investing, growth investing, momentum investing, dividend investing, passive investing, the list goes on.
And then of course, we have experts, gurus, youtubers and a whole bunch of people dishing out their opinions and advice on what is the best strategy or stock to buy or sell.
Unfortunately, we live in a society where there is an "information overload."
Investors get an enormous amount of irrelevant and biased data leaving them confused and unable to reach any decision.
And the current market situation has left most investors anxious and groping for answers.
People don't like uncertainty when it comes to their finances. That is exactly what we have experienced in the markets thus far in 2022.
But in the middle of all this noise, there is one method - the CANSLIM strategy - which stands out because it's based on facts and figures.
CANSLIM was developed by William O'Neil in the 1950s. It has been one of the most widely studied investment strategies in the world.
"Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless ... facts and markets are far more reliable." - William O'Neil
CANSLIM is a techno-fundamental strategy that helps one pick quality stocks focusing on companies that show acceleration in earnings.
The method was named the top-performing investment strategy from 1998-2009 by the American Association of Individual Investors.
The CANSLIM Method to Pick Stocks
As with almost any stock-trading strategy, the goal of CANSLIM is to help investors in finding stocks with the potential to outperform the market and other stocks in the same industry.
One of the key differences of this strategy compared to others is that it uses both technical analysis and fundamental analysis.
This combination of technical and fundamental analysis can be a game changer.
The technical aspect of the strategy helps provide attractive entry and exit points. The fundamental aspect is used to evaluate companies based on financial performance.
And this is what makes CANSLIM considerably better than other methods when it comes to performance.
O'Neil looked into the past and analysed different stocks since the 1880s that had out-performed the markets.
He identified seven common traits that occurred over and over again in almost all top-performing companies which could signal a stock could make massive gains in the future.
These 7 common traits are what CANSLIM embodies and it's still relevant to markets today.
CANSLIM is a stock selection process that could help you identify the next Bajaj Finance, HDFC Bank or even the next Apple and could allow you to make significant amount of wealth.
What is CANSLIM?
The word CANSLIM is an acronym for a seven-step process or a set of seven rules that an investor is supposed to follow to pick quality stocks with very high growth potential.
Let us start off by taking a brief look at each of the letters and how it identifies the criteria for picking a top-quality stock.
C: Current quarterly earnings of a firm
Growth of at least 25% is a good starting point. Investors should ideally compare the current quarterly earnings per share figure of a company with that of the same quarter in the previous financial year. Additionally, investors should look for at earnings acceleration over the last three quarters.
A company with high earnings per share growth means that the company is both profitable and fast-growing.
A: Annual Earnings Growth
The method emphasises that a company's revenue and annual earnings should grow at least 25% for the past three years.
The annual earnings requirement seeks to find stocks that not only have strong earnings but that are using those earnings well.
According to the CANSLIM method, ROE must exceed 17%.
N: New product, service or management
N refers to the idea that a company should have continuing development and innovation. Companies need something new to drive the sort of growth required for CANSLIM companies.
It could be a new product, new service, new pricing or even hiring a new CEO.
A good example of this is Apple with the iPhone or Reliance with Jio or even Tata Motors with its aggressive push into electric vehicles.
S: Supply and Demand
From a technical perspective, investors should look out for a sharp increase in a buy point.
A buy point is typically when a stock is just exiting its lows or after a consolidation. A good example of this is the cup and handle pattern.
Fundamentally, supply and demand refers to purchase of shares as compared to the total shares available in the market.
Investors should look for stocks with fewer shares outstanding. These stocks can perform well as supply is restricted.
One should look for stocks which see heavy accumulation by institutional investors especially at levels where the stock is breaking the prior resistance levels.
A company that buys back its shares from the market automatically reduces supply of its own stock, thereby creating additional demand and subsequently a rise in the price.
A case in point is Tata Consultancy Services Ltd which has announced four buybacks over the last 5 years.
L: Leader or Laggard
O'Neil suggests buying "the leading stock in a leading industry." The idea here is to distinguish the leaders from the laggards.
Leaders can be spotted through relative price performance. If a stock's 52-week relative price strength rating outperforms 80% of the market, then it's a good bet that it's a market leader.
I: Institutional Sponsorship
A company must have some institutional investors as shareholders. Institutional sponsorship could include mutual funds, insurance companies, pension funds, or other institutional investors.
Any recent increase in the level of institutional shareholding is generally viewed as a positive factor.
Large purchases/bulk deals by institutional investors are easy to spot if you happen to look for abnormally large volumes when a stock is coming through a breakout point.
However, the institutional holding should not be too large either as any bad news would lead to heavy selling.
M: Market Direction
The final criteria of the method considers the general market direction. Most companies tend to follow the current direction or trend of the market.
An investor should analyse the broader market movements before deciding to invest in a company as three out of four stocks tend to follow the general market direction.
That sums up the seven rules for identifying the next big winners of the market using the CANSLIM strategy.
Here are 15 stocks identified by using the CANSLIM method-
Does the CANSLIM Method Work?
The CANSLIM method is based on simple straightforward rules mixing fundamental and technical aspects to find the right stock.
As an investor, one is always looking to pick up stocks at the right price. Often in the quest to buy a cheap stock, investors look towards the PE ratio with the assumption that it is a good indicator for an entry point.
But there may be a good reason for stocks available at a lower price just like high PE stocks may be trading at a premium for a good reason.
CANSLIM is a more comprehensive method to identify the right stock as it tries to balance fundamental and technical analysis with momentum investing principles.
As the stocks are identified through an extensive data-backed process, these stocks can provide good returns to investors using this methodology.
It helps investors identify companies with solid growth and a strong business model. At the same time it's sensitive to price movements and actions of other large investors in the market.
The strategy works best in fast markets having high levels of volatility such as the current market. This is because CANSLIM picks high beta and top growth stocks, which typically do best when the markets are still bullish.
CANSLIM can be a great strategy for experienced investors having higher risk tolerance as the stocks identified using it cannot just be bought and held.
The idea is to invest in high growth stocks before large funds and institutional investors have finished their buys.
This is because there is a lot of emphasis on very high growth going forward. If there is any slowdown in the company's growth or the market as a whole, it would result in significant fall in the prices of such stocks.
It should be explicitly clear to investors that each rule of the seven-letter acronym, CANSLIM tells us this strategy is designed to identify the best growth stocks and not value stocks.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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