Top 15 Stocks Using The CANSLIM Strategy
When it comes to investing, there are many options for you as an investor to choose from. Investment is being done on the basis of fundamentals, then investment is being done on the basis of technical parameters.
Looking at investment strategies, we have many ways like 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 offering 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 “information overload”.
Investors come across huge amounts of irrelevant and biased data, leaving them confused and unable to arrive at a decision.
And the current market situation has left most investors worried and groping for answers.
People do not like uncertainty when it comes to their finances. That’s exactly what we experienced in the markets so far in 2022.
But amidst all this noise, there is one method – the CANSLIM strategy – which is different because it is based on facts and figures.
CANSLIM was developed by William O’Neill 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 most people think, I would say that 95% of the people you listen to on TV shows are giving you their personal opinion. And personal opinion almost always sucks… Facts and markets are far more reliable.” — William O’Nillo
CANSLIM is a techno-fundamental strategy that helps one choose quality stocks with a focus on companies that show strong earnings growth.
The method was named the top performing investment strategy from 1998-2009 by the American Association of Individual Investors.
CANSLIM METHOD FOR SHOOTING STOCK
As with almost any stock-trading strategy, CANSLIM aims to help investors find stocks with the potential to outperform the market and other stocks in the same industry.
One of the major differences of this strategy as 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 to provide attractive entry and exit points. The fundamental aspect is used to evaluate companies based on financial performance.
And this is what makes CANSLIM much better than other methods in terms of performance.
O’Neill looked to the past and analyzed the various stocks that had outperformed the markets since 1880.
They identified seven common traits that occur frequently in nearly all top-performing companies that could indicate that the stock could turn massive profits in the future.
These are 7 common traits that symbolize CANSLIM and are still relevant to the markets today.
CANSLIM is a stock selection process that can help you identify the next Bajaj Finance, HDFC Bank or even the next Apple and allow you to create significant amounts of wealth.
What is CANSLIM?
The term CANSLIM is an acronym for a seven-step process or a set of seven rules that an investor must follow in order to choose quality stocks with high growth potential.
Let us take a brief look at each letter and how it identifies the criteria for selecting a high quality stock.
C: Current quarterly earnings of a firm
An increase of at least 25% is a good start. Investors should ideally compare the current quarterly earnings of a company with the corresponding quarter of the previous financial year. Additionally, investors should look at earnings growth in the last three quarters.
A company with high earnings per share growth means that the company is profitable and growing rapidly.
A: Annual income growth
The method stresses that the company’s revenue and annual earnings must have increased by at least 25% over the past three years.
Annual Earnings Requirement attempts to find stocks that not only have strong earnings but are using those earnings well.
As per the CANSLIM method, the ROE should be more than 17%.
n: new product, service or management
N refers to the idea that a company should have continuous growth and innovation. Companies need something new to drive the type of growth required for CANSLIM companies.
This 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 Jio with Reliance or even Tata Motors’ aggressive push into electric vehicles.
S: Supply and Demand
From a technical point of view, investors should pay attention to the sharp increase in the buy point.
A buy point typically occurs when a stock is exiting its lows or is following a consolidation. A good example of this is the cup and handle pattern.
Basically, supply and demand refers to the purchase of shares as compared to the total number of shares available in the market.
Investors should look for stocks with fewer outstanding shares. These stocks may perform well due to limited supply.
One should look for stocks that see heavy accumulation by institutional investors, especially at levels where the stock is breaking past resistance levels.
A company that buys back its shares from the market automatically reduces the supply of its stock, creating additional demand and subsequently increasing the price.
Tata Consultancy Services Limited has announced four buybacks in the last 5 years.
L: Leader or Backward
O’Neill suggests buying “leading stocks in a leading industry.” The idea here is to separate the leaders from the backwards.
Leaders can be seen through relative value performance. If a stock’s 52-week relative price strength rating outperforms 80% of the market, it’s a good bet that it is a market leader.
I: Institutional Sponsorship
A company must have some institutional investors as shareholders. Institutional sponsorship may include mutual funds, insurance companies, pension funds or other institutional investors.
Any recent increase in institutional shareholding levels is generally viewed as a positive factor.
Large buy/wholesale deals are easier to spot by institutional investors if you look for unusually large volumes when a stock is coming through a breakout point.
However, the institutional holding should not be too large as any bad news can lead to a huge sell-off.
M: Market Direction
The final criterion of the method considers the general market direction. Most of the companies follow the current direction or trend of the market.
An investor should analyze broad market movements before deciding to invest in a company because three out of four stocks follow the general market direction.
This is a summary of seven rules for identifying the next big winners of the market using the CANSLIM strategy.
Here are 15 stocks identified using CANSLIM method-
Does the CANSLIM method work?
The CANSLIM method is based on simple simple rules combining fundamental and technical aspects to find the right stock.
As an investor, one is always on the lookout to pick up stocks at the right price. Often looking to buy a cheaper stock, investors look to the PE ratio with the belief that it is a good indicator for an entry point.
But there may be a good reason why stocks are available at a lower price just as high PE stocks can trade at a premium for a good reason.
CANSLIM is a more comprehensive method for identifying the right stocks as it attempts to balance fundamental and technical analysis with momentum investing principles.
Since stocks are identified through an extensive data-backed process, these stocks can provide good returns to investors using this method.
It helps investors identify companies with solid growth and a strong business model. At the same time it is sensitive to the price movements and actions of other large investors in the market.
The strategy works best in fast markets with high levels of volatility, such as the current market. This is because CANSLIM picks stocks with high beta and top growth, which usually perform best when the market is still bullish.
CANSLIM can be a great strategy for experienced investors with high risk tolerance as the identified stock cannot be simply bought and held using it.
Large funds and institutional investors consider investing in high growth stocks before completing their purchases.
This is because the emphasis is on very high growth going forward. If there is a slowdown in the growth of the company or the market as a whole, it will result in a significant drop in the prices of such shares.
It should be readily apparent to investors that each rule of the seven-letter acronym, CANSLIM tells us that this strategy is designed to identify the best growth stocks, not to value the stock.
Disclaimer: This article is for informational purposes only. This 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.)