Overview of Canslim Methodology and Its Benefits
Canslim Methodology:What it is?
The CANSLIM stock technique was developed by Investor’s Business Daily creator William J. O’Neil as a tool for investing. This methodology integrates both technical and fundamental analysis to identify the top-performing growth stocks. The acronym CAN SLIM represents the seven critical characteristics that O’Neil found to be present in the best-performing stocks:
7 essential Pillars of Canslim Investment Criteria are-
C : Current quarterly Earnings(EPS)
Identify the companies with strong and accelerating earnings growth. Target at least 20-25% earnings growth for the current quarter. The comparison should be year one year & not quarter on Quarter.
A : Annual Earnings Growth
Search for companies with a history of strong annual earnings growth for the last five years or at least three years. This way we will be able to identify stock with sustainable performance. The target should be at least 20% or more. Probably this will be a clever tactic to avoid flash in the pan moment for stocks & identify the real winners & weed out the losers.
N : New Products, Services, or Management
Companies with innovative products, services & New visionary leadership are often well-positioned for growth & ultimately result in new high optimism for business growth & stock price. Don’t be afraid of stocks making a new high & don’t find comfort in buying stocks showing a new low. Many times a stock showing a new high or 52-week high is with some reason & showing in a 52-week low list is with reason. High is not always risky & low is not always safe. Please remember that In most of the cases opposite is the case.
S : Supply and Demand
The law of Supply & Demand has a profound effect in every sphere of industry & Life, a stock market is no different. You should Pay close attention to the supply and demand for a stock. Look for stocks with increasing promoter ownership and trading volume. Thus if we are comparing smallcap stocks with some 10 million outstanding & all Other factors being equal another big one with 60 million outstanding. Then stock with less outstanding will always be a winner.
We have many times seen that foolish stock splits & Bonus issues create an artificial supply of new shares. After this event is over stock prices tend to decrease to a larger extent.
L : Leader or Laggard
A new business cycle creates a new leader with a new leading industry. Also, a new bull market creates new leaders & new laggards. History never repeats but resonates. Look for stocks with relative price strength above 80. always ride on the winners & get rid of losers or laggards for winning portfolio creation.
I : Institutional Sponsorship
Look for stocks with few institutional ownership like Institutions such as mutual funds, pension funds, and hedge funds, insurance companies, foreign institutional investors can provide buying support and stability to a stock’s price. Here more than no of Sponsorship it is the trend which is important. To make sure that it is increasing & not decreasing. Also, check for over ownership of the stocks which is not good for stock.
M : Market Direction
Don’t Argue with the market. Market mood may be classified as the market in a confirmed uptrend, market uptrend under pressure, and market in correction. Invest in stocks when the overall market is in an uptrend. Trying to swim against the tide of a bear market can be risky, so it’s important to invest when the market is showing strength. Always keep in mind that the market is always supreme. It can minimize the excesses in no time. In a fraction of time, it can tame your ego & it has a cure for every swollen head.
Benefits of the CANSLIM strategy include:
- Growth Focus: CANSLIM focuses on companies with strong EPS growth, which can lead to higher returns over time.
- Technical Research: It includes technical analysis for identifying stock price trends and volume patterns, to study investors’ mindset and market movement.
- Fundamental Research: It uses fundamental factors like EPS growth, sales growth, and market demand to assess a company’s underlying strengths & weaknesses.
- Market Timing: This method studies a market direction as a crucial factor, helping individuals to align their positions with the overall market direction.
- Market Leaders: It focuses on market leaders, which are typically businesses with exponential growth prospects and competitive moats within the industry.
- Institutional Reinforcement: By evaluating institutional sponsorship, CANSLIM looks for businesses that are also darlings of institutional investors, which can provide buying support and boost investors’ confidence in stocks.
- Flexibility: CANSLIM allows for adjustments based on changing market dynamics, enabling investors to fine-tune their strategies accordingly.
- Advocating Profit booking: This method advocates for frequent profit booking in a year. If effectively used using perfect market timing can lead to multifold returns than your usual buy & Hold strategy. Also one must keep in mind that the buy & forget strategy may be good for stalwarts, but not useful for small-cap Or micro-cap investing.
Disadvantages of Canslim strategy:
- Intricacy: CANSLIM’s strategy includes technical and fundamental research techniques, which may be intimidating for new investors.
- Subjective: CANSLIM strategy includes new products or new management styles, which can be subjective and often open to interpretation, risking potential biases in stock picking.
- Growth vs Value: CANSLIM mainly identifies growth stocks as a weapon that can be more volatile & risky wrt. value stocks. This focus may lead to a higher beta portfolio and potential losses during market meltdowns.
- Market Timing: While CANSLIM includes market direction as a key parameter, timing a market entry and exit is difficult in a real-life scenario. Market fluctuation may be a nightmare & trying to play according to the market tune may result in devastating for your portfolio.
- Focused portfolio: CANSLIM criteria may lead to limited diversification, which can expose individuals to unprecedented levels of company-specific risk.
- Overemphasis on history: Market trends & stock prices are always forward-looking. Bright history is not always a guarantee for prospective good future earnings. Business dynamics & business cycles always change.
- Time-Consuming: CANSLIM strategy requires day-to-day monitoring of stock performance and market trends, which can be time-consuming for individuals.
- Opportunity loss wrt Value Stocks: Reversion to mean is a powerful concept. When some stocks go down due to temporary business headwinds & market perception, a real intrinsic value emerges. This potential buying opportunity can be easily overlooked by growth-centric Canslim investing.
- Periodic Profit Booking: Canslim advocates multiple buying & selling for profit booking. This habit potentially increases taxes. Also if we suddenly withdraw from your winners, you will lose many potential multibaggers in your portfolio.
- Bull Vs Bear Market: Canslim is a growth-centric strategy. It doesn’t work effectively in the Bear market.
In Conclusion:
The CANSLIM investment criteria is a powerful strategy that combines fundamental analysis with technical analysis to identify high-potential growth stocks. It focuses on buying stocks with strong earnings and sales growth, while also paying attention to market trends and overall direction. However, like any investment strategy, it’s important to do your research and consider your risk tolerance before implementing it for your winning portfolio.
Please Refer to the following for extra Reading:
https://get.investors.com/marketsurge/
https://rocksofwisdom.com/future-multibagger-stocks-in-india/
https://rocksofwisdom.com/fundamentally-strong-small-cap-stocks
https://rocksofwisdom.com/how-do-mutual-funds-work-in-india
https://rocksofwisdom.com/types-of-mutual-fund-schemes-in-india