When it comes to evaluating equities in the stock market, investors use a range of tactics and procedures. While some traders and investors rely on technical analysis, others rely on fundamental analysis.
Occasionally, investors will employ tactics that combine technical and fundamental analysis. The CANSLIM approach is one such method. This strategy enables you to select the appropriate stocks based on a set of criteria, ensuring that your investment selection is profitable.
The slim stocks technique is a way of screening shares of various companies and high-profit stocks over time to see how they grow and price. To complete the CANSLIM process, the CANSLIM strategy employs a combination of technical and fundamental analysis.
William O'Neil, the founder of the American stock research firm Investor's Business Daily (IBD), was the first to design the CANSLIM method. The CANSLIM technique was one of the finest stock market strategies when it was originally developed in 1950. Many investors still utilize it to locate high-growth stocks and make timely investments in them.
Here is the broadened explanation of the CANSLIM methodology and how to invest in company shares using the strategy:
C- Current quarterly earnings
A- Annual earnings
N- New products or management or price high
S- Supply and demand
L- Leader or Laggard
I – Institutional sponsorship
M- Market direction or trend
The table below explains how the strategy can be used to invest in the right companies:
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C: |
A rise of at least 20% in EPS from the same quarter last year is required this quarter. Anything less than that, and the company isn't worth considering as an investment. The EPS of a corporation is calculated by dividing the net profit by the number of outstanding shares. |
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A: |
Over the last three to five years - the company you're considering investing in should have increased annual earnings. To be deemed an investment, the company's EPS must climb by at least 20% per year for three years. The earning per share (EPS) is determined by dividing the net profit by the total number of shares outstanding. |
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N: |
You must determine how inventive a business is. This innovation goes beyond the introduction of new items. It could also be a distinct management style. For example, if a firm buys a lucrative company at a reasonable price, its stock price may rise. These kinds of businesses are thought to be solid investments. |
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S: |
You should invest in a company where demand outnumbers supply. A small firm with a low share supply has a higher likelihood of growth than a large corporation with high equity, according to this method. You can also check the recent increase in the company's trading volume in addition to the supply of shares. |
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L: |
You must compare the stock's performance to that of its peers and competitors in the industry to determine if it is ahead of or behind the pack. The best investment strategy is to buy stocks that are leaders in terms of relative price strength. The best stocks have a relative price strength of 80 or higher. A relative price strength of 80 indicates that the stock has outpaced the market in terms of price performance by 80%. |
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I: |
A lot of money is required for a firm to expand. Typically, investors fund a company's expansion. Always invest in companies that have a strong institutional investor backing. These stocks are thought to be profitable. |
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M: |
Following the other criteria is just as crucial as knowing the market direction. Even when you meet all of the other requirements, you must first determine if the market is bullish or bearish. Following the market indexes will help you figure out which way the market is moving. In a bullish market, this strategy works well, while in a bad market, it often avoids stock selection. |
CANSLIM is a bullish technique for quick markets that is not suitable for all investors. The goal is to invest in high-growth stocks before institutional funds have finished investing.
The aspects of CANSLIM can be viewed as a wish list for growth-oriented fund managers. Therefore - it is just a matter of time before buying demand rises. The drawback is that firms that meet the CANSLIM strategy could be among the first to fall if the market direction shifts and those big-spending institutional investors start looking for safe-haven investments.
It should be clear from reading each of the criteria above that they are designed to discover excellent growth stocks (not value stocks!). Only utilize CAN SLIM if the market is bullish (see sixth requirement – market direction). Furthermore, seasoned investors should employ CAN SLIM because equities that meet CAN SLIM are often the ones that drop the fastest when market direction swings and sentiment turns pessimistic.