Introduction to CANSLIM: A Proven Stock Investing Strategy

Searching for the next great stock investment can feel like looking for a needle in a haystack. With thousands of stocks to choose from and market volatility always looming, how can an average investor consistently pick winners? The CANSLIM stock-picking method offers a solution. 

Developed in the 1950s by William O’Neil, founder of Investor’s Business Daily, the CANSLIM system provides a clear set of criteria to identify high-potential stocks poised for growth. This method analyses both technical and fundamental metrics to find leaders while also considering the overall market direction.

This article will cover what CANSLIM is, how it works, the upsides and downsides, and how Indian investors can apply it when evaluating stocks on the BSE and NSE. Whether you’re a value investor, growth seeker, or technician, read on to learn if CANSLIM could take your stock-picking game to the next level.

What is CANSLIM stock investing?

Let’s begin by understanding what the CANSLIM acronym stands for:

C – Current Quarterly Earnings 

A – Annual Earnings Growth

N – New Products, Services, Management  

S – Shares Supply

L – Leader or Laggard

I – Institutional Sponsorship  

M – Market Direction

Essentially, CANSLIM provides a methodology to scan the entire stock universe and filter down to the crème de la crème – stocks that are industry leaders with strong fundamentals and technicals.

O’Neil backtested this system rigorously, finding that applying these screens could beat the market by a wide margin over multi-decade periods. CANSLIM seeks to identify big winners that have plenty of room left to run, not assets that already experienced their boom.

Let’s take a closer look at each of the CANSLIM criteria.

C – Current quarterly earnings

This metric focuses on earnings growth in the most recent quarter. O’Neil found that stocks able to demonstrate a big positive earnings surprise tend to attract attention and bring in buyers. Specifically, look for EPS growth of at least 25-30% in the latest reported quarter.

A – Annual earnings increases  

While sudden spikes in quarterly earnings provide short-term excitement, you still want to see steady growth over longer periods. Screen for stocks with annual EPS growth of 25-50% over each of the last 3 years.

N – New products, services & management

CANSLIM winners often have an edge that will fuel their rise. Seek companies launching an innovative product or service, expanding into a new market, or bringing in a rockstar CEO or C-suite team.

S – Shares supply

Supply and demand principles apply in stock investing, too. Look for companies executing a stock repurchase program to reduce shares outstanding. The more ‘scarce’ a stock is, the better it may perform.

L – Leader or laggard 

Separate the winners from the losers by identifying industry group leaders with best-in-class metrics. Specifically, target stocks with a Relative Strength Rating of 80+ over the last 12 months.

I – Institutional sponsorship

Smart money follows quality. Monitor which stocks top fund managers and other large institutions are buying into. Their analysts likely identified something promising.

M – Market direction

Studies have proven that investors who purchase stocks when the overall market is doing well have a higher probability of success. It is important to keep an eye on the market’s trend and switch to a defensive approach during times of decline.

Now that you understand what traits to look for let’s examine how these criteria come together to uncover potentially explosive yet stable stocks.

How does CANSLIM stock investing work?

The true power lies in using CANSLIM as an entire decision framework, not just a checklist. Follow these steps to screen for and select stocks properly:

1. Identify market direction

Before searching for individual names, determine if the overall market is bullish or bearish using technical analysis on indexes. Buying stocks during downtrends fails more often, regardless of fundamentals.

2. Set initial screens  

Plug your CANSLIM criteria into a stock screener to filter thousands of stocks down to a more refined watchlist. Focus on earnings growth, relative strength, institutional activity and more.

3. Fundamental analysis  

Analyse financial reports, profit margins, return metrics, valuations, debt levels and growth projections to gauge the investment potential of passing stocks.

4. Technical analysis

Use indicators like price action, moving averages and volume alongside chart patterns to time entries and exits within uptrends. Confirm whether momentum aligns with fundamentals.

5. Review company news  

Scan news on shortlisted stocks to check for new products/services, I.P. developments, partnership deals, analyst upgrades or management changes that could catalyse share price.  

6. Portfolio Construction

Blend CANSLIM stocks that passed the above analyses into a diversified portfolio with balanced risk-reward dynamics. Rebalance on a quarterly basis.

By applying this multi-step stock filtering process that utilises both fundamental and technical data backed by big data, CANSLIM improves the odds of spotlighting prime stocks.

Positives of CANSLIM stock investing

Adopting the CANSLIM philosophy offers several benefits for stock investors:

• Profitable backtested strategy – CANSLIM has delivered market-beating returns for over 40 years across sectors and conditions.
• Clear rules – Follows a specific, numbers-driven process for stock picking, unlike discretionary choices prone to bias. 
• Risk controls – Filters for higher quality, institutional-backed stocks with solid growth and momentum. 
• Big data analysis – Massive data processing allows wide coverage and comparison of stocks based on CANSLIM metrics.
• Customisable – Investors can tweak the screening criteria to suit their risk appetite and objectives.
• Methodical exits – O’Neil laid techniques to sell stocks at the right time once they show topping signals after big runs. 

As CANSLIM focuses so heavily on earnings acceleration and relative strength, investors using this strategy may spot emerging runs earlier compared to value, dividend or contrarian approaches.

Negatives of CANSLIM investing 

While CANSLIM offers quite a few benefits, it also comes with some drawbacks to keep in mind:

• Lagging indicators – Trailing earnings data may not always reflect real-time or forward fundamentals.
• Growth focus – May miss undervalued stocks or cyclical opportunities outside hot growth industries.  
• Qualitative screens – Criteria like new products and management changes include some subjectivity.
• Overtrading – Frequent rebalancing each earnings season could mean excess stock churn.
• Lacks valuation analysis – Does not directly account for commonly used valuation multiples. 
• High concentration – CANSLIM portfolios tend to focus bets in fewer stocks relative to broad indexing.

So, while CANSLIM strategies themselves carry intelligent risk controls, be cautious about overexposing yourself to certain sectors or individual companies that show stretched valuations or sentiment.

Applying CANSLIM stock screens in India

The CANSLIM stock selection system was developed in the U.S. but its principles for finding quality growth stocks can certainly be applied by Indian investors as well.

Some ways to adopt CANSLIM analysis to Indian markets:

• Focus on larger companies – Limit screening to well-covered large cap or blue chip Indian stocks with institutional following.
• Test industry leaders – Run backtests to determine the past profitability of buying Nifty 50 or sector-leading stocks in India with CANSLIM metrics. 
• Adapt earnings screens – Relax the current quarterly earnings screen to 10-15% growth, given slower fundamentals lately.
• Check company news – Research new product launches, global expansion plans or investments in Indian names, passing other CANSLIM filters.  
• Consider valuations – Review trailing P/E and PEG ratios for screened stocks to avoid overvaluations in sectors like I.T. or pharma today.

In essence, utilise CANSLIM’s core logic of identifying growing, successful Indian stocks but customise thresholds or tweak criteria to capture realities in our domestic market.

Some CANSLIM stocks for consideration among larger Indian companies include HDFC Bank, Kotak Mahindra Bank, Infosys, TCS, HUL, Titan Company, and even Eicher Motors after its recent slide. Keep screening!

Conclusion

CANSLIM is a proven method to spot stocks that have solid earnings and strong demand from investors. It’s based on decades of research and can be a useful tool for finding promising investments. However, it’s important to do your analysis and consider factors like future cash flows and risks before making any investment decisions. With careful research and the help of CANSLIM, you can increase your chances of finding a stock that could grow significantly in the coming years.

FAQs