The man behind the philosophy of CAN SLIM investing is William J.O’ Neil. The methodology has also been featured in “How to make money in stocks: A winning systems in Good Times and Bad”. The context in this methodology is to check the companies with strong fundamentals.
What does can slim stand for?
One should note that the seven letters in the mnemonic stand for certain traits that are displayed by the stocks. Below is the mystery deconstructed:
C: Current Quarterly Earnings
Significant rise in earnings-per-share (EPS) can entice big institutional players, a trend that can move price. Any company with a reasonably good sales growth can help meet this criterion. EPS is derived by dividing outstanding shares by the net profit. If the EPS is showing a rise, then it tends to be a good company to invest in.
A: Annual Earnings Growth
Bad market conditions, slow demand and decline in margins can affect annual earnings growth. Strong earnings and growth over the past few years is to be considered as there could be a fluctuation in the earnings and one need to lookout for sustainable growth in earnings. Companies having a return on equity of 15% and above is good to have.
N: New Product / Service
The stock markets values trendsetters and disruptors especially if the new products or services generate more income sustainably. While C + A constitutes strength quantitatively, N suggests future potential for growth.
S: Supply & Demand
The ups and downs of a stock dance to this tune there by forcing the prices to rise for the shares available and a dip in demand could result in driving price down. The forces of supply and demand is what makes the stock prices move. So, having a good demand for the stock which is in limited availability and hence could spike the price up and vice versa when there is less demand.
The giants are always here to stay. Everyone looks for a high return and the companies that stay ahead give good returns to investors. In all possibility one would like to avoid the laggards. Most of the industry pundits or investment firms fall back on looking at the relative strength of the stock in this case. There are key metrics and benchmarks and investors who closely monitor tend to gain from these insights. This can also be used to compare against different stocks as well. The companies should also have strong fundamentals and in addition technically should have good relative stock strength compared to overall market. This measures the overall strength of the stock for a given time. So, any relative strength between 70-80 percentile is good.
I: Institutional Sponsorship
Consider the stocks with sponsorship of institutions having high performance is the key. Stocks owned by mutual fund companies, banks and other institutional investors could be a good start. If selected well this can result in spike for the demand of the stock resulting in higher share prices. There is no standard count of the number of institutional investors that are backing up the stock but a count of 3-10 is a good choice. If the stock selected is getting listed as one of the favorites by the institutional investors, then it’s a sure winner. Without a backup of institutional investors for a stock, it becomes very difficult for the price of the stock to move up in the market.
M: Market Direction
Identifying the trends of the direction, weather bullish or bearish is a key factor while investing in stocks. The CANSLIM concept believes that one should not swim against the current and should focus on following the market. There is a good chance that when the movement is kept along with the market trend, one tends to gain. So, any upward trend is a good sign and one should follow that trend and go defensive when it weakens. Following the NIFTY FIFTY could help. Market direction helps the investors to time their decisions of buy and sell in a better way.
While many strategies prevail in the market, it is important to experiment and retrieve the best of each strategy and create one of our own to succeed in the markets. Perhaps, like we already discussed, the best strategy is to create our own investment strategy!