CANSLIM Method outlines a system created by Investors Business Daily William J. O’Neil, which aims to pick growth stocks through the use of fundamental and technical analysis processes. Read the steps below to learn how to use the CANSLIM strategy.
- C: Current quarterly Earnings Per Share (EPS) has grown astutely since the quarters’ earnings reported one year earlier. Normally, investors utilising CANSLIM want EPS growth of 20% being the bare minimum.
- A: Annual Earnings growth across the previous 5 years. Ideally annual EPS growth should be higher than 20% across the last three to five years.
- N: New products, management, or current events/information that drives a companies stock price to new highs. This sort of significant news can stir up excitement, driving a rush of confidence in the market, which leads to price increases.
- S: Scarce supply combined with increased desire for a stock produces surplus demand-and an environment where share prices can shoot up. Companies buying back their stock decreases market supply which could signal an anticipation of increased demand, coupled with insider confidence within the firm.
- L: Laggard stocks are favoured when in the same industry. Make use of the Relative Strength Index (RSI) as a gauge. RSI is a momentum indicator that calculates the size of price changes to help decide whether the price of a asset is overbought or oversold. RSI spans from 0 to 100. A RSI reading under 30 implies that the stock is oversold and perhaps undervalued-presenting a buying opportunity. Where as, an RSI reading higher than 70 implies that a stock might be overbought or overvalued and may be a time to sell.
- I: Select stocks that have institutional sponsorship by a couple of institutions that of late have had above average performance. This includes newly publicly listed companies that are backed by a few prominent private equity firms. Be wary of stocks where institutions are already heavily invested, as you should invest ahead of institutions.
- M: Confirm the market direction by reassessing market averages daily. A market average computes the general price level of a particular market, as specified by a defined class of stocks, for example the NASDAQ Composite. CANSLIM stocks regularly outperform in bullish markets.
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Please do not forget to cut all losses at no more than 7%-8%, and sell once gains have reached 20%-30%, to minimise losses whilst locking in profit. This is also very prudent to preserve capital as growth stocks can lose value rapidly.
CANSLIM Method Conclusion
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