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How to pick quality stock using CANSLIM method?

elearnmarkets | 04 Sep, 2017  | Follow Author | Add to my Favourites 
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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 where 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 an yearly basis. Growth of at least 25% is a good starting point. For instance, 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 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 analysed 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 parameter in this analysis. You should look for stocks which see heavily accumulated by the institutional investors especially at levels where the stock is breaking the prior resistance levels.


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 disappoints 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, it must have an institutional support to boost its price movement. CANSLIM require the importance of 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 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 market. You should know whether you are into bull or bear market, otherwise you may end up investing against the trend and you may end up losing or compromising on your gains.


Bottomline


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 minimum. Thus it includes important parameters from all major investment strategies.


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About elearnmarkets

www.elearnmarkets.com is a young vibrant company established with the vision of taking online financial education to a new level, both in India and abroad. Guided by their mission of spreading financial literacy, they are constantly experimenting with new education methodologies and technologies to make financial education convenient, effective, and accessible to all. They provide courses on basic finance, Fundamental Equity research, Technical analysis, Economics, Derivatives, Currencies and Commodities and many of their courses are conducted by reputed market experts and certified by leading exchanges like NSE, MCX and NCDEX.


For more information please write in to [email protected]


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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