CANSLIM is a techno- fundamental strategy developed by investor William O’ Neil which helps in picking quality stocks and promises potentially better returns in the future This strategy is ideal for investors who cannot hold the stocks for longer periods say more than 5-6 years.
Today when the market is close to its lifetime high, stock picking has really become even more difficult. Even investors are in a dilemma that whether they should go by company’s fundamental or should time the market based on technical parameters. However, the combination of technicals and fundamentals can be a winning strategy since technicals provide attractive entry and exit points while fundamental provide conviction to hold the stock.
How does CANSLIM methodology work?
So if you are confused as to how to simultaneously use both the approaches, you can simply go with the CANSLIM methodology-
1. Current Quarterly Earnings of a Firm
One should look at the earnings growth over the last three quarters and CANSLIM also acknowledge the importance of selecting stocks whose EPS in the recent quarter have grown on a yearly basis.A growth of at least 25% is a good starting point.
For instance, a company’s EPS in the July September quarter should have grown as compared to the EPS figure for that same three month period a year ago.
2. Annual Earnings Growth
William O’ Neil also emphasizes the importance of growth in annual earnings. The system indicates that the company should target for annual earnings and sales growth of at least 25% for the past three years and a return on equity of more than 17%. You may do NSE Academy Certified Equity Research Analysis to learn about equity research from the very scratch.
3. New Product, Service or Management
The third criteria as per CANSLIM mechanism is that it should undergo changes from time to time, which is a very important element for any company to become successful. The biggest winner companies in the past have one common element which includes changes in terms of new products, new leadership, new services, new pricing or a new condition in the industry. William O’ Neil discovered that 95% of the companies he analyzed had experienced something new.
4. Supply and demand
The S in CAN SLIM stands for Supply and Demand. The analysis of supply and demand study is one of the very important parameters in this analysis. You should look for stocks which see heavy accumulation by the institutional investors especially at levels where the stock is breaking the prior resistance levels. You may download Stockedge app to track institutional data i.e. where the big money is flowing.
You can check out the below video to understand better how to track institutional data by using the Stockedge app:
5. Leader or Laggard
Knowing the market leaders and market laggards will be of key importance as per CANSLIM analysis. Every industry has leaders which provide good gains to their shareholders as well as laggards which disappoint in most situations. The idea here is to distinguish the leaders from the laggards. In short, one should buy leading stocks from the leading industry groups.
6. Institutional Sponsorship
A stock in order to be a top performer must have an institutional support to boost its price movement. CANSLIM requires companies to have some institutional sponsorship. However, this sponsorship should be limited say, 3-7 institutional owners. It is of great concern if the stock is over-owned by the institutional investors as any bad news may lead to heavy selling.
7. Market direction
The final criteria of CANSLIM is the market direction. It’s important to trade in sync with the market as 70-80 percent of the stocks move in tandem with the direction of the market. You should know whether you are into bull or bear market, otherwise, you may end up investing against the trend and may end up losing or compromising on your gains.
To understand the concept of CANSLIM in a more better manner; you can watch the video below :
You may do NSE Academy Certified Technical Analysis course to enhance your understanding to analyze charts and other technical parameters to enhance your trading experience.
CANSLIM is a simple yet very effective analyzing tool which combines value, growth, fundamental, and even technical analysis and provides solid guidelines thus keeping subjectivity to a minimum. Thus it includes important parameters from all major investment strategies.