CANSLIM : One of the best method to picking quality stocks

With the market hitting new highs, picking stocks has become even more difficult. Investors also face the eternal dilemma: should they go by the fundamentals of a company or decide on the basis of technical factors that help time the market? Putting the two together, say experts, can be a winning strategy.

“A combination of the two works better. Fundamentals give the conviction to hold the stock, and technicals provide attractive entry and exit points,” says A.K. Prabhakar,Head of Research at IDBI Capital Markets. If you are wondering about how to combine the two approaches, the CAN SLIM methodology is just the thing for you.

Developed by investor William O’Neil, CAN SLIM is a techno-fundamental strategy that helps pick quality stocks. This strategy focuses on companies that show acceleration in earnings because of innovation and suggests buying them before the stock price witnesses a major spike,” says Anupam Singhi, Chief Operating Officer, William O’Neil India (see graphic). For investors who cannot hold stocks for an extended period—more than five years—techno-fundamental strategy promises potentially better returns.

FUNDAMENTAL STRATEGY 

CANSLIM : Way to picking quality stocks, one of the best method 

What is it about investing? Why are so many people intimidated by it?

Is it because experts try to wall you with their intellect and skills,thinking you will be impressed when they talk in terms that make you feel completely clueless.

A great financial lesson is one which is spoken in terms so easy that even a child could grasp the concept.

Personal Finance and investing does not have to be difficult but so many people are turned off because they are intimidated by the notion that investment is risky and its a game only for professionals.

Well there is a seven step method out there for picking a winning stock, all you have to remember is one acronym CANSLIM.

CANSLIM represents the seven fundamental components, so lets dive in this strategy. 

CANSLIM CHECK LIST

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C = Current Quarterly Earnings per Share. 

O'Neil emphasizes the importance of choosing stocks whose earnings per share (EPS) in the most recent quarter have grown on a yearly basis. For example, a company's EPS figures reported in this year's April-June quarter should have grown relative to the EPS figures for that same three-month period one year ago.

Quarterly earnings per share must be up at least 18% or 20%, but preferably up by 40% to 100% or 200% or more , the higher, the better. They should also be accelerating at some point in recent quarters. Quarterly sales should also be accelerating or up 25% or more.

A = Annual Earnings Increases 

CAN SLIM also acknowledges the importance of annual earnings growth. The system indicates that a company should have shown good annual growth (annual EPS) in each of the last five years.

There must be significant (25% or more) growth in each of the last three years and a return on equity of 17% or more (with 25% to 50% preferred). If return on equity is too low, pretax profit margin must be strong. 

N = New Products, New Management, New Highs. 

Look for new products or services, new management, or significant new changes in industry conditions. And most important, buy stocks as they emerge from sound, properly formed chart bases and begin to make new highs in price. 

S = Supply and Demand Shares Outstanding plus Big Volume Demand.

Any size capitalization is acceptable in todays new economy as long as a company fits all the other CAN SLIM rules. Look for big volume increases when a stock begins to move out of its basing area.

L = Leader or Laggard. 

Buy market leaders and avoid laggards. 

Buy the number one company in its field or space. Most leaders will have Relative Price Strength Ratings of 80 to 90 or higher and composite ratings of 90 or more in bull markets. 

I = Institutional Sponsorship.

Buy stocks with increasing sponsorship and at least one or two mutual fund owners with topnotch recent performance records. Also look for companies with management ownership. 

M = Market Direction. 

Learn to determine the overall market direction by accurately interpreting the daily market indexes price and volume movements and the action of individual market leaders. This can determine whether you win big or lose. You need to stay in gear with the market. It doesn't pay to be out of phase with the market.


How CANSLIM is different from Conventional methods:-

Buy right, sell right
When picking stocks, price is most investors’ chief concern. Stocks that are available ‘cheap’, as indicated by a low price-to-earnings (PE) ratio, are preferred over ‘expensive’ scrips. But cheap stocks may be priced low for a reason, just like a high PE stock may be trading at a premium for a good reason.

“In pursuit of low PE stocks, investors sometime tend to miss out on some big winners,” says Singhi. Infosys is a case in point. Inf ..

But, Infosys turned out to be one of the biggest wealth creators in India’s stock market history. PE ratio, therefore, is not always the best indicator of stock price movement. The CAN SLIM strategy can be a better alternative to selecting quality stocks.

According to markets research firm William O’Neil India, whose model stocks have seen an average PE expansion of up to 130%, the market’s best-performing stocks debunk the over-reliance on PE ratios for astute stock selection.
Investors should not rely solely on the PE of a stock, instead look at high-quality businesses with sustainable competitive advantages, even if they are not ‘cheap’. CAN SLIM helps identify such businesses.

Now, buying stocks for capital appreciation is just the start. Selling them at the right time is equally important for booking profits as well as capital preservation. “Following stop loss is very important when you pick any techno-fundamental strategy,” says Jasani.

CAN SLIM methodology not only helps you pick stocks that have a greater possibility of seeing a price appreciation, it can help you stop loss in case a company’s fortunes take a turn for the worse—as was the case with Satyam. “As advised by CAN SLIM method, cutting losses at 8% can help investors protect their capital from a huge loss,” says Singhi.

or not to sell, CAN SLIM can help you make the decision. If the stock is still being bought by institutional investors, there’s a possibility of further upside to it. In such a case, say experts, hold it for at least eight weeks, before you decide to sell it.

For stocks that haven’t seen a sudden spike, the sell signals include trade volumes falling below 50-day moving average—indicating institutional selloff— negative news that can affect a company’s future growth and/or, weakening company fundamentals reflected in its quarterly numbers.

10 stocks picked by CAN SLIM
These stocks, identified using the CAN SLIM method, have witnessed increased traction from institutional buyers over the past few quarters.

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