CANSLIM - A Bullish Strategy for Fast Markets

Picking stocks from 5000+ securities that are listed on BSE is a hard game. This can be the most time-consuming task. What if you dedicate a whole day to learn about a business, and finally you find that the business is not profitable yet and you don’t even expect it to make any profits further? Or, what if you study everything about a business and finally find that it is overpriced? That's why filtering stocks is one hell of a task.

There are different methods of stock selection suggested by celebrated investors. There’s “the Magic Formula”, there’s “Coffee Can portfolio”, “Golden Crossover method,” and many more. Today, we shall talk about another such brilliant investing strategy - "CANSLIM"

What is the CANSLIM strategy?

CANSLIM is an investing strategy that uses a combination of fundamental and technical analysis to find out stocks that grow faster than the average. It is a bullish strategy for fast markets, which was introduced by the legendary investor and stockbroker William J. O’Neil in his book “How to Make Money in Stocks: A Winning System in Good Times and Bad”.

C-A-N-S-L-I-M is nothing but an acronym of the seven fundamentals of selecting outstanding stocks. Let's get into the nitty-gritty of each criterion to know better about it.

C - Current quarter earnings

‘C’ - stands for current quarter earnings. To start with, first examine the quarterly earnings that a company reports and compare it with the same quarter of the previous year. We would like to emphasize the word “Earnings” i.e., Earning Per Share, and not profits or sales. EPS is basically earning per share. So, if a company has 100 million shares and profit for that quarter is $ 1 billion,

EPS = $1 billion ÷ 100 million = $ 10

A company whose EPS increased substantially compared to the previous year's same quarter passes the criteria. What can this substantial growth be? 5 %? 10 %? 

Well, NO!!!!! The earnings should have increased by at least 20%.

A - Annual earnings

Done with step 1? Now it's time to check the annual earnings. Companies report their annual earnings at the end of the financial year. If a company's annual earnings are increasing for every consecutive year, that too for a period of 5 years, then the company is worth considering. In annual EPS too, the growth should be more than 25%. Further, if a company's EPS increases exponentially, high P/E shouldn’t be given much importance.

N - New Product (or New Highs)

When a company introduces a new revolutionary product, the market doesn’t ignore it. Look at Apple Inc.. every year, they introduce new gadgets, and every year the share price of Apple is making new highs. So, search for a company that continuously keeps on innovating.

The reality is that most of us would refrain from buying a stock that makes 52-week high. Instead, we buy stocks trading between 52-week highs and lows, giving us the comfort that we are exposed to lesser risk. But a stock that trades at an all-time high could be the one you should invest in. Consistent compounders like Asian Paints & Bajaj Finance are good examples.

S - Supply and Demand

Everything in the market works on supply and demand. Actually, that is why the market exists. If you compare a large-cap company and a small-cap one, the large-cap would generally have more shares outstanding; in other words, the supply of shares of a large-cap is more than a small-cap. So, on that grounds, it is better to invest in a small-cap company than a large-cap.

However, that doesn’t mean that large caps are not a lucrative option to invest in. The best prospect would be to find a small-cap company with higher promoter holding and lower debt to equity.

L - Leadership position in the industry

Always look for the stock of a company that is the market leader or is at least the second biggest player in that market. This is similar to what the prodigy, Warren Buffet, says: “Buy businesses with strong moats.”

For example, if you want to invest in the rail business, consider IRCTC or if you want to invest in the stock depositories, then have a look at CDSL. There are many other businesses that have a higher market share in their respective industry.

Also, we can check for strong stocks in the industry by checking relative price strength. Hold on, here’s what relative price strength means. Last year, we witnessed panic selling as the March lockdown was announced and the market bled red. But there were certain stocks which, if you had in your portfolio, you would have to bleed less. Let’s understand this with an example. In March 2020, the NIFTY50 index was down by nearly 40%, but TCS plunged by just about 25%. This indicates that TCS is stronger compared to the market as a whole.

I - Institutional sponsorship.

Institutional sponsorship means any bigger player like mutual funds, corporate pension funds, insurance companies, charitable, and educational institutions. You may be wondering why is it necessary that any institution is involved? Well, institutions bring along liquidity with them. This makes the market more efficient. Plus, this gives a sense of confidence to the investor.

M - Market direction

The previous six factors won't matter if you are in the wrong market. Therefore, it is necessary to know which market we are in. Is it a bull market, a bear market, or just a consolidation phase? Accordingly, you have to plan out your investment strategy for each of the stocks you hold/plan to hold.

CANSLIM case study on Bajaj Finance

Now that we know the concepts, let's get our hands dirty on one real-life company. For this activity, we choose Bajaj Finance, a popular NIFTY50 stock, for an earlier period.

C - Current quarter earnings increased by more than 20%

Bajaj Finance's annual earnings grew phenomenally for 5 years (except for 2013-14).

N - The stock has been making new highs every year since 2012.

(Source: TradingView)

S - If you have a look at the Promoter holding of Bajaj Finance, it is high.

L - Bajaj finance was the leading NBFC in lending.

I - Few mutual funds and FII’s had already spotted this STAR performer and stake in this business. (See Bajaj Finance’s shareholding pattern of 2015 below)

M - Stock as well as markets were moving upwards in 2015.

(Source: TradingView)

Today if you see Bajaj finance, the stock is trading at 7500+ levels. If you had invested at 450 levels back then, you have simply found a 16 bagger in 7 years.

The Bottom Line

Similar to this CANSLIM strategy, there are many other stock selection strategies. Try to use these criteria to shortlist stocks with their past data and track their record to see if particular criteria yield you any results. One that gives you actual results consistently is the best criteria.

Keep Learning and Keep Investing!