Investors use a variety strategies and techniques to evaluate stocks when investing in stock markets. Some use technical analysis while others use fundamental analysis to make their investment and trading decisions.
Investors may also employ strategies that combine both fundamental and technical analysis. The CANSLIM strategy is one such example. This strategy allows you to select the right stocks based upon a set of criteria. It will ensure that your investment decision is profitable. It sounds interesting, right? Continue reading to learn more about the CANSLIM screening method for stocks.
William O'Neil was the inventor of the stock-screening method CANSLIM. He was also the founder and CEO of the Investor's Business Daily (IBD), an American stock research company. CANSLIM was first introduced in 1950s and has been widely regarded as the best performing strategy over a period of ten years, from 1998 to 2009. This strategy is also one of the most researched investment strategies in the stock exchange world.
This unique system combines both fundamental and technical analysis to identify the best growth stocks to invest. The CANSLIM strategy actually uses technical indicators to identify entry and exit points for a stock, while fundamental indicators are used in order to assess the company's financial performance to justify an investment.
The CANSLIM strategy
The acronym CANSLIM stands for seven steps that investors must follow when choosing stocks with high future growth potential. Each letter in the word represents a criteria or key factor that must be considered. Let's take an in-depth look at each one.
The letter C stands for the company's current quarterly earnings per share. Investors should compare the current quarterly earnings per shares of companies they are considering investing in with the figures from the prior financial year. A company's fundamentally better is rated higher if it has a higher percentage of growth. Investors tend to prefer companies that have a growth rate greater than 20%.
The letter A stands for annual earnings growth. A company's revenue should grow year-over-year. Investors who use the CANSLIM method seek out companies that have experienced a 20-25% annual growth rate over the past 3 to 5 years.
The letter N stands for"new product, service or management" and is the first letter of the alphabet. It is important that a company be on a constant path to innovation and development. A company's stock price will not rise if it doesn't release new products or services. The stock price will likely see a significant increase if the company releases new products regularly or is featured in the news for positive reasons.
The letter "S" stands for "supply". The ideal situation for a company's stock is to be in short supply and backed up by strong demand. This would create an environment where stock prices would rise rapidly if it was in high demand. The supply of stock is reduced by companies that purchase back shares of the market. This creates additional demand, and ultimately a higher price.
The letter 'L" stands for 'leading'. According to CANSLIM an investor should always aim to invest in a company that is a leader in a particular industry. To identify the most prominent companies, the strategy recommends the use of a technical indicator such as the Relative Strength Index.
The letter "I" stands for institutional sponsorship. Before deciding to invest, an investor should examine the company's institutional shareholding structure. An institution that is more favorable for investing should have higher levels of institutional ownership. A recent rise in institutional shareholding is usually considered a positive sign.
The letter "M" stands for market direction. Many companies that are listed on the stock exchange tend to follow the trend or current direction of the market. Investors should thoroughly examine the market movements using broad market indicators to confirm an uptrend before investing in a company.
The CANSLIM strategy is a very useful investment strategy. It can be used to identify stocks that have high growth potentials. According to a study, the CANSLIM strategy outperformed the benchmark averages in both the short-term, and long-term. This is something you need to know. This strategy is only for bull markets and uptrending market. It is not recommended to use this strategy in a bearish market or falling market situation.