CANSLIM Methodology

Last weekend I was reading a book on Technical Analysis by Steven B. Achelis. After reading 150 pages my mind was fully loaded with mathematical formulas and plenty of ratios. I doubt out of this 200 indicators how many are really helpful and how many our so called technical analysts’ using? It’s a first book in which my interest level was intake, my understanding was going well but though I was feeling bored and confused.... (weird no!!) .

But Thanks to William O’Neil for his CANSLIM method. I found that very interesting. It is different from other indicator as it is covering technical indicator and momentum indicator both. He has not used much ratios and maths but still I am sure he has done his work well by considering mixing momentum and technical Indicator in single method.

In CANSLIM, each character is representing acronym of seven required factors for your investments.

C = Current (quarterly) earnings growth:

This factor is linchpin of this method. Quarterly earnings (EPS) of the share (Y O Y) should have increased by at least 20 %( samples would be of last 3-4 year). If it has single year fall back and then come back with same potential then you can ignore it. If you have too many stocks falls under this window then you can lift your EPS target around 25 – 30 %.Here we are taking EPS as it is simple and best parameter to quantify company’s earnings growth.

Huge increase doesn’t mean much if you’re comparing EPS with a minuscule year-ago number. This strategy advises ignoring high growth figures if the year-ago earnings were exceptionally small. As it can be because of any property sale or change of business. So this method is suggesting setting upper limit of accepting EPS growth to around 500%. If any stock is having EPS growth more than 500% then just ignore them.

So ultimately 2 parameter,

EPS growth (YOY) >= 20% and <=500%

A = Annual earnings growth :

Only quarterly earnings are not enough, we should see YOY yearly earnings. By this we can rule out stocks with high recent earnings but losses or little or no earnings in previous years. Basically we want to see a consistent longer-term growth history. Basically we can avoid this kind of stocks which are having erratic earning history by these 3 parameters,

12-Month EPS: Cont. Ops. >= 35 Rs.
Latest Fiscal EPS >= 20 Rs.
Return On Equity 5-year average >= 5%

N = New highs :

It’s based on famous thought –“If you are doing same old things you will get same result, to lift up from you present you need to something different”. Same applies to company when any management change happen or any new marketing policy takes place or any new business model acquired. This is purely momentum indicator. This all action can change the present trend and new heights can be achieved.

But here is twist, you have heard many times that “buy at dips and sell at top”. But this strategy tell something different as – “Buy at High and sell at Higher”

So ultimately it tells to buy equity when they are making new heights. Market smells something positive with new management or new policy change. This can result into short covering by bears which in turns make equity with new height. If momentum continues then we can see fresh buying positions by bulls which will push price higher.

We can have below parameter for new high buying. We should buy stocks in between these two:

Last Price: 0.9 * 52 – week high price

Last Price: 0.8 * 5- year high price

S = Supply and demand :

At any present time equity price reflects supply – demand ratio for it. If demand exceeds then it will result in price moving up similarly supply exceeds then it will result in price moving down.

This strategy puts some rules to make your chance more for demand exceeding situation. It tells to buy equity which has not more than 25 million shares outstanding. You can say other way that whichever equity is having higher promoter stake or institutional buyer stake will have bright future.

This can break panic selling situations because supply would be limited or whenever good news hits, there won’t be enough shares available to satisfy buyer demand, thereby making equity price higher.

Parameter to follow:

Equity Outstanding <= twenty – five (25) million

L = Leader in industry :

This rule tells to choose Leaders in industry (in particular business segments).

Example, NIFTY Bankex index has rose 50 % in last 52- week and SBI rose by 40%, so SBI‘s relative strength is 80%.

This strategy advises us to take position in equities which have relative strength more than 80%.

Parameter to follow:

52 Week- Relative Strength >= 80

I = Institutional ownership :

Here institutions can be domestic or International. It can be LIC, mutual funds, pension funds etc. This strategy emphasizes on Institutional ownership as they are bulk dealers. If they are buying in equity then they must have seen something which retail investors haven’t. But their ownership should not cross some limits, as sometimes it results in stagnant behaviour in equity price.

Parameter to follow: Institutional ownership > = 5 %

Institutional ownership < = 35 %

M = Market direction:

This is the most important rule of CANSLIM strategy and thumb rule for Stock Market. “Never Trade against the Market”. Usually CANSLIM strategy won’t work out for short term say 1 – 5 week. Because for short term investment market direction always play Big role.

One more thing, if you apply all above rule then you notice that most stocks you are getting are fit under small – cap or mid-cap. These stocks are always heavily influenced by market trend. So, we need to see market trend first before all.

Happy Investing.....!!!