Investors use various tools and procedures to evaluate equity in the stock market. Some traders and investors use technical analysis, while others rely on fundamental analysis. Sometimes, investors go down this route, combining analytical and scientific analysis into one strategy. One of these methods is the CANSLIM approach. This method enables you to choose a profitable investment by selecting appropriate stocks according to the criteria in the stock trading app.
Read the guide below to understand what a CANSLIM strategy is and what CANSLIM stocks are in detail.
What are Canslim stocks?
The full form of CANSLIM stocks depicts what CANSLIM stocks are, as explained below;
C For current quarterly earnings: A sharp year-over-year increase in quarterly earnings per share is expected.
A For annual earnings: The company should have consistently increased its annual earnings per share over the previous five to ten years.
N For new: The business should be active in demand in abundant sectors and offer new products or services.
S For weak supply but strong demand: If there are few suppliers but the business has high demand, share prices can rise and fall.
L For leader stocks: You need to compare the company's performance with its industry peers and competitors to determine whether it is a leader or lagging. The best way to invest is to buy stocks that are the market leaders in relative price strength. The most important securities are characterised by a comparative price power of 80 or more. According to a relative price strength index of 80, the stock has been outperforming the market by 80% in terms of price performance.
I For institutional investors: Institutions should own shares in a company, such as pension funds and mutual funds.
M For market trends: As a whole, the market is expected to move up.
The CANSLIM method is commonly used on the US stock market, but it is not common in other markets, such as India. It must be noted that India's capital markets differ from those of the US and others in their specific features, so it is necessary to conduct enough research and analysis before investing.
Table of Content
What is the Canslim strategy?
In 1950, William O'Neil began to develop and administer the CANSLIM method. In recent years, this technique of stock sampling has gained acceptance, and it is now considered one of the most effective tools in several decades.
The strategy, founded by the founder of the US investment research firm Investors Business Daily, quickly became one of the world's most successful stock market strategies. As previously mentioned, CANSLIM is using both Technical Analysis and Fundamental Analysis to determine growth stocks that are anticipated to increase as quickly as those of ordinary or other securities.
Investing in the right stocks will enable investors to earn higher returns. Moreover, in addition to considering fundamental factors for assessing a company's profitability, it shall also consider different technological indicators that can recognize an appropriate entry and exit point for a stock.
How does the Canslim strategy work?
This strategy is an investment approach that seeks out high-potential stocks by evaluating key criteria such as the current Quarterly Earnings focus on robust recent earnings growth, annual earnings growth seeks consistent yearly earnings expansion; New Product or Service highlights innovation driving demand and revenue and the supply and demand dynamics of stocks with rising demand and limited supply. Through this analysis, the CANSLIM strategy aids investors in identifying stocks with promising growth potential.
What is fundamental analysis?
It is a valuation method to appraise an asset's or security's inherent value. In doing so, it considers several economic and financial conditions. The essential value of a security is defined, depending on the financial situation of the issuing company and its current market and economic health, as the value of any investment.
To put it another way, fundamental analysis facilitates an analyst's ability to assess macroeconomic factors such as the state of the economy and industry health, the issuer business model, growth potential, governance effectiveness, etc., that could influence a security's value. It is intended to provide information for establishing a number that traders can collect from an asset's present price and investigate whether it has been undervalued or overvalued by others in the market.
What is technical analysis?
Technical analysis will evaluate investment or trade opportunities based on statistical trends. It primarily looks at numbers, such as historical price movements, volume, etc.
Whereas fundamental analysis focuses on trade models and earnings-related releases like sales, income, etc, the technical analysis looks at prices and volumes. The tool analyses the demand and supply of a security, which could affect the security's price, volume, and implied volatility.
The technical analysis also refers to the history of a security's trading, which, according to some analysts, may indicate further trends if appropriate investment rules are in place.
Advantages of Canslim
The benefits of Canslim are as follows;
- Canslim's stocks offer the greatest potential for profit in the stock market. These stocks, as identified via a comprehensive data-backed process, can deliver enormous returns to investors.
- In addition, identifying stocks in CANSLIM is a great way for investors to gain an ideal entry point into stocks that could be headed up soon.
- You can use the outcomes to invest in high-growth stocks before the stocks rise in big banks because the CANSLIM technique is a bullish approach and performs well in a fast market.
Disadvantages of Canslim
The drawbacks of CANSLIM are as follows;
- It's not for everyone. Because its use and application require experience and technical competence, it can't be used by all investors. Sometimes, it is difficult for new investors to keep up with the current stock levels of CANSLIM.
- This strategy is not designed for a bear run and can only be used to identify opportunities in the bull market.
- It's not possible to buy and hold CANSLIM stocks for a long time; it's a way to make money and not a long-term investment.
- If there is a sudden shift in the market, the effects and results of this strategy may be adversely affected.
The CANSLIM strategy is one of the most sought-after strategies currently employed by successful investors. This will help identify stocks that do not have a common investor's attention and can be expected to increase in value and price soon. The CANSLIM method allows you to hold high-growth stocks for longer before reaching their reasonable value. To invest in any kind of stock, you can use the trading app to make fast & reliable investments by joining a credible broker such as BlinkX.
FAQs On Canslim
Based on the backtests, CANSLIM's strategy is working and has beaten the S&P 500 since 2003. However, this outperformance comes at a cost in terms of higher volatility and higher outflows.
Since a large portion of the value of CANSLIM stocks is based on expectations of future growth, any slowdown in that growth trajectory or the market as a whole could result in the company being criticised.
CANSLIM is a bullish strategy for volatile markets that not all investors use. It seeks to invest in high-growth stocks before the end of their investing cycle.
The method allows investors to select stocks with impressive growth potential in line with special criteria, which can help them achieve greater returns. CANSLIM shares represent the stocks of companies that have great growth potential.