How does CANSLIM strategy help long-term investors pick stocks?
CANSLIM is a perfect tool for long term investors to pick stocks that tend to outperform market.
A key to long-term wealth is to remain invested in those fundamentally strong and top-quality stocks, which show good growth prospects and lead in the market direction. However, investors tend to forego at what price they are buying the stock and often end up buying at overbought levels. So, it remains equally important to understand the technical aspects of the stock along with rising fundamental numbers.
Investors deploy numerous tactics to pick up stocks in their portfolio, which has led to the finest refinement of strategies with higher probabilities of outperforming the market. So here, we would be discussing one such strategy called CANSLIM, which is a techno-fundamental strategy used by the long-term investors to pick stocks that tend to outperform market.
CANSLIM was developed by William O’Neil, the founder of an American stock research firm “Investor’s Business Daily”. It was originally developed around 1950s, when William O’Neil found key parameters to cherry-pick stocks that consistently beat market returns. It is one of the finest techniques used by investors that has been able to generate multifold returns over a longer period.
What is CANSLIM and how is it used?
CANSLIM is primarily an abbreviation of all the key parameters used. They are-
C- Currently Quarterly Earnings
A- Annual Earnings
N- New (product, CEO, high, management)
S- Supply and Demand
L- Leader or Laggard
I- Institutional Sponsorships
M- Market direction
Let’s understand one-by-one, what does these parameters have to say about a stock.
C- Current Quarterly Earnings: It is often recommended to invest in those companies that have been able to generate strong double-digit earnings (preferably >25 per cent) in its latest Quarterly Results.
A- Annual Earnings: A company must have a good track record of rising double-digit profitability numbers and return on investments.
N- New: A company should have good vision for upcoming future and growth prospects and thus, should be actively involved in launching new products, new experienced management or a new high on the technical chart.
S- Supply and Demand: A preferred stock is that in which demand has consistently outnumbered supply. A firm with low number of outstanding shares shall witness huge demand from the investors.
L- Leader or Laggard: In an industry, it is the leader that drives the market sentiment and attracts investment opportunities with top-class futuristic expectations. Investors tend to choose the leaders and avoid companies that remain behind to its competition.
I- Institutional Sponsorship: A strong institutional backing is preferred in the company likely to expand, which increases the probability to good profitability.
M- Market direction: The last parameter mostly decides the fate of stock performance. If the overall market condition is good, more stocks are able to fit the above characteristics and tend to follow the bullish market. In case of bearish markets, these stocks are avoided amidst uncertain future earnings.
Now that the market is rising, tell us in the comments which stocks fit the CANSLIM criteria!