Few years back, I sustained a huge loss in stock market and the reason was very simple – I made a mistake in selecting the stock for my portfolio, the result was the price of the shares got slashed in the market and due to liquidity crunch and also because of the fear whether the market will attain its level back or not. Since then I used to think if there can be any strategy or mechanism which can let us know the right kind of stock that will be a perfect fit for our portfolio. And I am sure, like me there are hundreds and thousands of people out there in the world who want a strategy to work for them in selecting a right kind of stock. There is an easy and a simple strategy of picking stocks. This strategy is known as “CANSLIM”.
Now, the question that arises is “What is CANSLIM”?
CANSLIM is a strategy for investment in stocks and the strategy is based on the study of 500 stock market winners. Each alphabet of the word “CANSLIM” has a meaning. Let us look at the meanings from these letters:
C stands for Current Earnings Per Share – Earnings per share will tell you the total earnings available on each share post all interest and dividends on preference shares from the operat9ing profit of the company. The market leaders believe that if the earnings per share has increased by at least 15 to 18% on year by year basis, then that stock should have more chances to be included in your portfolio.
A stands for Annual Earnings – Annual earnings refer to the net profits made by the company. If the net profits of the company have consistently increased by at least 20 to 25% consecutively for last 3 years, then the stock should qualify to be included in your portfolio on this parameter.
N stands for New Management – A company is considered to have a new management if the company is either working under a new management or the company has started working on a new product or has a new service line.
S stands for Shares of Common Stock Outstanding – This figure should remain on the smaller side. The more the number of shares, the less will be the amount of profit pie that each share will get. Therefore, smaller the number of shares, the more earnings per share it will carry and therefore, the more will be the profit in the hands of the investors.
L stands for Leadership – If the company is a leader in the industry or is in top three positions in the industry/ sector or segment, then the stock should be there in your priority list of investment. There are fair chances that the industry will do good and therefore, it will be reflected in the yield from the stock of the company.
I stands for Institutional Sponsorship – You need to gather information on the mutual funds that are investing in the stocks of the companies selected for an initial round of investment decision. The period for which these mutual funds hold these stocks and the quantum of their holdings also marks a difference. If you find that the well performing mutual funds have invested in this stock and are holding the stocks, then you can be assured of the fact that the stock will give you a decent return and you should add the stock in your portfolio.
M stands for Market Trend – When the market crashes, even the best of the stocks tend to perform poorly. Therefore, this should not be the time to make analysis. Rather, you can even study the historical values of the stocks for the time when the market has fairly done better and you should concentrate more on the price trend when the market is entering the bullish phase.
Cautions of Using CANSLIM
While you are exercising the stock picking strategy CANSLIM, you should exercise few cautions. Never make a decision based on only one factor of the strategy. Rather you should combine several factors together in the light of pros and cons before actually implementing your investment decision. By investing in the stocks of blue chip companies, you can lessen your chance of having to cut losses. The CANSLIM strategy basically considers the fundamentals, enhancement in companies’ revenue, net profits, earnings per share which may be the by-products of new products or new services.
Employ the strategy and enjoy trading and keep booking profits.