If you are new to investing and trading stocks, you may have heard about CANSLIM as a stock-picking strategy. CANSLIM is a popular investment strategy where the investor considers both technical and fundamental analysis when selecting a stock.
CANSLIM uses fundamental analysis as it’s base. A fundamental analysis (FA) or company analysis is used to examine its related economic and financial factors. This is the opposite of Technical analysis which uses charts and patterns. Fundamental analysis also studies anything, micro and macroeconomic, internal, and external factors that can affect the stock’s performance.
It is a bullish strategy used in fast markets where investors buy a high-growth stock before institutional funds are fully used in other investment products. Below are the full details of what CANSLIM stands for;
- C-Investors and brokers should select stocks whose Current quarterly earnings per share (EPS) has gone up sharply compared to what was reported in the same quarter the previous year. An EPS growth above 20% is generally considered a sharp increase and has the potential for high yields. The higher the EPS, the better. Best performing stocks always have their EPSs in the ranges of 50% to 100%.
- A-The CANSLIM strategy considers stocks that have reported increases in their Annual earnings over the last five years. An annual EPS growth of 20% over a period of between three to five years is generally considered high-yielding.
- N–New events like changes in management, launch of new products, or any positive news about the company many push its stock to new highs. Good news about a company creates some short-term excitement and optimism, which raises its stock price. Investors are always investing in companies with innovative and disruptive products.
- S-Companies always re-purchase their own stock to create Scarce supply and create the impression of an expected increase in demand and shareholder confidence. By buying back their stock, companies create excess demand for the stock, which may cause its stock to soar. A buyback may also indicate that the stock is on high demand among institutional investors.
- L-L When considering stocks from the same industry, investors and brokers should consider high-performing stocks over the underperforming stocks or laggard. The Relative Strength Index can be used to measure performance of stock and ranges between zero and 100. An RSI indication above 70 is generally considered safe.
- I-Investors and brokers should select that have a few Institutional investors that have recently reported above-average performance.
- M-One of the most important factor in the CANSLIM model is Market direction. This involving studying daily market averages to determine and predict market direction. Market averages are used to determine the overall price in the market for a given group of stocks.
For bullish markets where everyone is buying and stock pricing keeps going up, it is advisable to avoid bearish markets; many investors are selling their stocks, and prices drop. In many cases, stocks selected using the CANSLIM over-perform in bull markets.
The CANSLIM model elements can be interpreted as a wish list for investors and brokers seeking growth. They are meant to increase the stock’s demand and raise its price.
The biggest disadvantage with the CANSLIM strategy is that the stocks selected can tumble the fastest in case of a change in market conditions. This strategy is only fit for people with a lot of investment experience and have higher risk tolerance.
Stocks bought using the CANSLIM strategy can be held for some time for their price to rise. However, any negative change in the market may punish the stock. The strategy is used by investors who want many returns within a shorter period in the stock market. The catch is that both profits and losses come in same proportions in response to market changes. The market direction largely determines the success of the CANSLIM strategy.