Last Updated on September 23, 2023 by BFSLTeam BFSLTeam
Table of Content
Explaining CANSLIM Stocks
CANSLIM is a stock selection strategy that combines fundamental and technical analysis to identify stocks that have the potential to outperform the market. It was developed by William J. O’Neil, the founder of Investor’s Business Daily, a financial newspaper that provides stock market data and analysis.
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What are CANSLIM Stocks and CANSLIM Methodology
The name CANSLIM is an acronym that summarises the seven key criteria that O’Neil used to screen for growth stocks. CANSLIM meaning is that each letter represents a factor that can indicate a strong and sustainable growth trend for a company’s earnings and share price.
Criterion to Look For CANSLIM Stocks
- C: Current Earnings Growth
The first criterion is to look for stocks that have shown a significant increase in their current quarterly earnings per share (EPS) compared to the same quarter in the previous year. O’Neil suggested that investors should look for EPS growth of at least 20%, but preferably higher. This indicates that the company is able to generate more profits from its sales and operations, and that it has a competitive advantage over its peers.
- A: Annual Earnings Growth
The second criterion is to look for stocks that have also shown consistent annual earnings growth over the last three to five years. O’Neil recommended that investors should look for annual EPS growth of at least 20%, but again, higher is better. This indicates that the company has a long-term track record of increasing its profitability and market share, and that it can withstand different economic cycles and competitive pressures.
- N: New Products, Management, or Events
The third criterion is to look for stocks that have some new catalysts that can drive their future growth. This could be new products or services, new management or leadership, new acquisitions or partnerships, or any positive news or events that can attract more attention and demand for the company’s offerings. O’Neil argued that these new factors can create a momentum effect, where more investors become aware of and interested in the company, and push its stock price to new highs.
- S: Supply and Demand
The fourth criterion is to look for stocks that have a favourable supply and demand balance. This means that there is more buying pressure than selling pressure for the stock, which can lead to higher prices. O’Neil suggested two ways to measure this balance: the trading volume and the share buybacks. The trading volume is the number of shares traded in a given period of time. A high trading volume indicates that there is a lot of interest and activity in the stock, which can signal a strong trend. The share buybacks are when the company repurchases its own shares from the market, which reduces the number of shares available for trading. This indicates that the company has confidence in its future prospects, and that it wants to increase its earnings per share by reducing its share count.
- L: Leader or Laggard
The fifth criterion is to look for stocks that are either leaders or laggards within their industry or sector. O’Neil proposed two ways to identify these stocks: the relative strength index (RSI) and the industry group rank. The RSI is a technical indicator that measures how fast and how much the price of a stock changes over time. It ranges from 0 to 100, where a low value (below 30) means that the stock is oversold (undervalued) and a high value (above 70) means that the stock is overbought (overvalued). O’Neil advised investors to look for stocks with an RSI above 70, which indicates that they are outperforming their peers and showing strong momentum. The industry group rank is a measure of how well an industry or sector performs relative to other industries or sectors in the market. O’Neil recommended investors to look for stocks that belong to an industry or sector that ranks among the top 20% in terms of performance, which indicates that they are part of a leading trend.
- I: Institutional Sponsorship
The sixth criterion is to look for stocks that have some institutional sponsorship, but not too much. Institutional investors are large entities such as mutual funds, hedge funds, pension funds, or banks that buy and sell large amounts of stocks in the market. They have access to more information and resources than individual investors, and they can influence the price movements of stocks with their buying and selling decisions. O’Neil suggested that investors should look for stocks that have some institutional sponsorship by a few institutions with above-average performance records, which indicates that they have done their research and analysis on the company, and that they have confidence in its growth potential. However, he also warned investors to avoid stocks that are too widely owned by institutions, as this could mean that they are already fully valued or overvalued, and that they have less room for further appreciation.
- M: Market Direction
The seventh and final criterion is to consider the overall direction of the market before buying any stocks. O’Neil argued that even the best stocks can struggle or decline if the market is in a downtrend, and that investors should avoid buying stocks when the market is weak or bearish. He suggested that investors should use market averages, such as the Dow Jones Industrial Average, the S&P 500, or the Nasdaq Composite, to gauge the general mood and trend of the market. He also advised investors to look for signs of market tops and bottoms, such as changes in trading volume, breadth, and sentiment, to anticipate possible reversals or corrections in the market.
Advantages and Disadvantages of CANSLIM
CANSLIM is a popular and widely used strategy for finding growth stocks that can deliver high returns in a short period of time. It combines both fundamental and technical analysis to identify stocks that have strong earnings growth, positive catalysts, favourable supply and demand, industry leadership, institutional support, and market timing. It can help investors to focus on quality stocks that have proven track records and future potential, and to avoid stocks that are risky or overhyped.
However, CANSLIM is not a foolproof or risk-free strategy. It requires a lot of research and analysis to find and evaluate stocks that meet all the criteria. It also requires a lot of discipline and patience to follow the rules and guidelines of the strategy, and to avoid emotional or impulsive decisions. It can also be challenging to apply the strategy in different market conditions, such as volatile, sideways, or bearish markets. Moreover, CANSLIM is a very aggressive and active strategy that involves buying high-priced stocks that can be very volatile and susceptible to sharp declines if the market or the company’s performance changes. Therefore, it is not suitable for conservative or passive investors who prefer lower-risk or longer-term investments.
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Conclusion
In conclusion, CANSLIM stocks represent a strategic approach to stock selection developed by William J. O’Neil. This methodology combines fundamental and technical analysis through seven key criteria: Current Earnings Growth, Annual Earnings Growth, New Products, Management, or Events, Supply and Demand, Leader or Laggard status, Institutional Sponsorship, and Market Direction. While CANSLIM can be a powerful tool for identifying high-potential growth stocks, it demands rigorous research, discipline, and market awareness. It suits investors seeking short-term, high-return opportunities but may not be suitable for those with a more conservative or risk-averse approach. Understanding its advantages and limitations is essential for successful implementation in the dynamic world of stock trading.
