What is CANSLIM method in market?
Picking a stock to invest in is not easy for any investor. Whether you are a seasoned trader in the market or a novice who just opened a demat account, it will take a lot of research and analysis before picking out the best stocks to invest in. That will take time and effort. To make life easier for the investor community, William O’Neil of Investors’ Daily, came up with an award-winning system for picking stocks.
O’Neil created a product that was never seen before. He brought together a few fundamental factors of stock into one method. He later found seven common characteristics to select the stocks, which can grow faster than the market. Each criterion is represented by one of the letters in the strategy’s name.
C- Current quarterly earnings
N- New products or management or price high
S -Supply and demand
L- Leader or Laggard
I – Institutional sponsorship
M- Market direction or trend
Let us look at these seven traits of the can slim method to picking the best stocks.
C- Current quarterly earnings:
This quarter, a company’s EPS needs to have at least 20% increase from the same quarter last year. Anything lesser and the company need not be considered as an investment option. You can calculate the EPS of a company by dividing the net profit by the number of outstanding shares.
A -Annual earnings
The company you consider as an investment should increase annual earnings over the last three to five years. The company’s EPS should increase at least 20-25% every year over three years to be considered an investment.
EPS is the earning per share and can be calculated by dividing the net profit by the total outstanding shares.
You need to check how innovative a company is. This innovation is not just the release of new products. It can also be a unique style of management. For example, a company’s share prices might increase if it acquires a profitable company at a reasonable valuation. Companies like these are considered a good investment.
S -Supply and demand
You should buy shares of a company where the demand exceeds the supply. According to this method, a small company with low share supply has a higher chance of growth compared to a large company whose equity is high. Apart from the supply of shares, you can also check the recent surge in company’s trading volume.
L- Leader or Laggard
You need to compare the stock’s performance to its peers and competitors in the industry and check if it is leading the pack or lagging. Stocks that are leaders based on relative price strength rating are considered the best investment option. Stocks with a relative price strength of 80 and above are considered best. Relative price strength of 80 means that the stock has outperformed 80% of all other stocks in price performance.
It takes a lot of money for a company to grow. A company’s growth is usually financed by its investors. You should always invest in companies with some solid institutional investors' backing. These stocks are considered a good investment.
M- Market Direction:
Knowing the market direction is as important as following the other criteria. Even if you fulfil all the other criteria, you need to know whether the market is bullish or bearish. You can find which way the market moves by following the market indices. This method works best in the bullish market and typically avoids any stock selection in the bearish market.
Thus the CANSLIM method can help you pick out the best stock. It is not enough that you know which stocks to invest in. You should also always follow the basic rules of investing. Once you choose the right stocks and follow the correct practice of investing, you are sure to make profits out of your investments.
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