We need to analyze the companies before we invest in them, and the factors we are considering for this analysis will be robust and will be helpful in long term investing. I read an article some time back on Economic Times and I am taking some part of it here that may help you.
One tool that can help in identifying the right company is an investment strategy called CANSLIM. Developed by William O’Neil , the acronym actually stands for a very successful investment strategy. This strategy has been proven and has yield good returns in the past. CANSLIM consists of seven components. They are mainly quantitative parameters to be applied while selecting any company for investment. Each letter of the word CANSLIM denotes one parameter to be analysed in depth. They are:
C – Current quarterly earnings per share
It is important to choose stocks that have grown on a quarterly basis. For example, a company’s earnings per share (EPS) figures reported in this year’s April-June quarter should have grown relative to the EPS figures for that same three-month period of the previous year.
The percentage of growth a company’s EPS should grow by is subjective , but the CANSLIM system suggests around 18-20 percent. This suggests that basically all of the high performance stocks show an outstanding quarter-on-quarter growth.
A – Annual earnings per share
These figures should show meaningful growth over the past five years. CANSLIM stresses on the importance of annual earnings’ growth. The system indicates that a company should have shown good annual growth (annual EPS) in each of the last five years.
N – New things
The third criterion for a good company is that it has recently undergone a change, which is often necessary for a company to become successful. It could be a new management team, a new product, a new market, or a new high in stock price.
S – Shares outstanding
This should be a small and reasonable number. CANSLIM investors are not looking for older companies with a large capitalisation.
L – Leaders:
Buy market leaders and avoid laggards. In each industry, there are always those that lead, providing great gains to shareholders, and those that lag behind In CANSLIM analysis, distinguishing between market leaders and market laggards is of importance.
I – Institutional sponsorship
Buy stocks with at least a few institutional sponsors who have better-than-average recent performance records. Explore all the factors that should be considered when determining whether a company’s institutional ownership is of high quality.
M - General market
The market will determine whether you win or lose. So learn how to discern the market’s current direction, to interpret the indices (price and volume changes), and actions of the individual market leaders.The final CANSLIM criterion talks about market direction. When picking stocks, it is important to recognise the type of market.
The first two parts of the CANSLIM system are logical steps employing quantitative analysis by identifying a company that has demonstrated strong earnings both quarterly and annually. By rigorously following them you have a good basis for a good stock selection.
I personally feel that the CANSLIM has the S and L factors contradicting eachother. S factors tells us that the shares outstanding should be low, that mean it’s not concentrating on large companies but the L factors says that the company should be a leader in its segment, but hows that possible practically? How can a small company be a market leader? Take examples of market leaders of sectors, Infosys, Larsen and Toubro, Reliance, DLF etc all are market leaders but are huge companies. Anyways, I would rather give importance to S factor than the L factor because we should concentrate upon choosing the future market leaders rather than the current market leaders. If we modify the L definition a little bit then perhaps a better CANSLIM will come forward.
My changes to L: Let L mean to choose the future market leaders, rather than current market leaders. We can track the growth of market capitalisation of the companies which can give us an insight on this.
After you invest following this strategy and if the price falls and you become restless then again analyze the stocks you purchased and thereby again draw the conclusions whether you want to hold it or sell it or want to buy more.
Please post comments on what you think about CANSLIM.
Disclaimer: Anything I write about investing should not be taken as my financial advice, these are just my personal opinions. Stock market investing is risky stuff.