Picking the right stocks has become tricky and difficult these days. Stock prices fluctuate wildly from one day to the next. The big problem is knowing which stock will drive the market beforehand. The objective of stock picking can’t be achieved perfectly overnight as there is no magic wand to wave. Still, the investors have powerful options to pick the right stocks. Those are namely, Fundamental and Technical analysis of the stocks.
The fundamental analysis provides confidence to hold the stocks. Conversely, technical analysis allows entry and exit checkpoints for fairly accurate stock price prediction. Besides, combining the two strategies can be a win-win situation for the investors, as stated by experts.
What is CANSLIM Method?
- William O’Neil, an American entrepreneur, stockbroker, writer and a research analyst had created the concept of CAN- SLIM strategy, combining the technical and fundamental analysis together to predict growth stocks.
- Through the CANSLIM method, the investors select quality stocks based on given criteria using a techno- fundamental strategy that promises potentially higher returns in the future.
Key Factors of CAN SLIM strategy
William O’Neil ascertained the seven common facts about the top-performing stocks in the market after analysing the markets for multiple decades. He took the first alphabet of key factors and abbreviated them to form CAN SLIM criteria.
Now let’s understand each of these key factors that need to be considered while picking growth stocks: –
|Current Earnings||Current quarterly earnings per share (EPS) of a company should be greater than its previous quarterly EPS. The investors should check the quarter-over-quarter increase in earnings for the last three quarters. The general ground rule says companies presenting a 25% growth rate relatively generates high returns.|
|Annual earnings||The company whose annual earnings for consecutive three years has increased consistently, qualifies to get picked under this criterion. Moreover, the return on equity should be more than 17% for 3-5 years.|
|New||A company that innovates and gets going on the route of development is the ideal pickup for stock selection. Positive news makes the stock price go up, an announcement of a new product, new events, new management, new information, does short term marketing and impacts the company’s long term growth. Eventually, increasing the value of the stocks.|
|Supply and demand||The rule is pretty straightforward, pick a stock whose supply is limited while the demand increases. Higher trading volumes compared with three month’s average are generally used.|
|Leader or laggard||The investors should make use of the Relative Strength Index (RSI) to buy market-beating stocks. The RSI above 30 indicates buying, while if it goes above 70, investors should consider selling. The leading stocks of the leading industry are the optimal stocks to hold.|
|Institutional sponsorship||When a stock has high institutional investors, it is considered a positive sign, fuelling its price movement. Institutions that have high swag money like large investment banks, mutual funds, and pension funds, having them invested in a company looks promising.|
|Market direction||Investors should trade with the trend. The stocks with longer-term uptrend direction are best for pickup. To measure the uptrend, the investors can make use of the 50-day moving average.|
These are the seven criteria through which William O’ Neil had developed the CAN SLIM methodology.
Drawbacks of CAN SLIM Strategy
Following are the drawbacks of the strategy: –
- The strategy focuses on growth stocks that generate an above-average rate of growth, and big potential rewards for the investors. The investors need to check out the complete key factors and not just a few parts they like.
- CAN SLIM is suitable for a bullish market, where trading is extraordinarily heavy. However, the strategy struggles to keep up in the bear market.
- The investors have to carefully and actively track the quarterly business performance. So, the stocks that do not comply with the CAN SLIM criteria can be removed from the selection list.
- The CAN SLIM strategy is easy to understand but difficult to implement. Besides, stocks picked through CAN SLIM have high risk as they are quickest to drop under a market downturn.
Benefits of CANSLIM Methodology
Following are the benefits of the strategy: –
- The strategy is ideal for investors who cannot hold stocks for longer period say for more than 5 to 6 years.
- On average investors hold 15 to 20 stocks in their portfolio. However, the television channels and Youtube videos that provide financial information are jammed with recommendations of stocks to the investors. Speaking of Nifty50, it already has a list of 50 stocks with limited selection criteria.
On the other hand, the CAN SLIM strategy provides investors the opportunity to pick stocks by performing their own research to select the right stocks.
CAN SLIM is an effective strategy that combines fundamental, and technical analysis tools to identify growth stocks. For investors who are looking for medium to long term stock market investment can use this strategy to shortlist the stocks and track their performance before investing.