Like most people, I was
looking for a stock selection system that would help me identify
multi-bagger stocks. That is, stocks that can double in price in a short
period of time.
After
a lot of research and browsing on the web, I finally found a system that has
given me very good returns. Of course, this system is not unbeatable. I am
also sure finance experts have come up with better strategies than
the one I follow.
What
I needed, though, was an easy and simple to understand method of stock
picking. This is what I follow:
The
strategy is known as CANSLIM.
CANSLIM
is a stock investment strategy based on a study of 500 of the stock market
winners. It dates back to 1953 and is described in the book How to Make Money In Stocks: A Winning
System In Good Times or Bad by
William J O'Neil.
What is CANSILM?
Each
letter in CANSLIM stands for common characteristics that are found in the
greatest stock market leaders over the past 50 years.
C: Current earnings
per share
It
tells you how much profit the company has made for each share given to its
shareholders. As per this strategy, earnings per share should at least increase
by 15-18 per cent every year.
A: Annual earnings
That
is, the net profit made by a company. This should have increased by 20-25 per
cent or more consistently for the last five years. Consistency of earnings are
equally important when you look at the past earnings record
N: New management
The
company should either be under new management, have a new product or have a new
service. What we are trying to see is whether the company is embarking on newer
product which will enable the company to grow the revenue and profit growth.
S: Shares of common stock outstanding
As
far as possible, this figure should remain small. It tells you how many
shares a company has issued to investors like you. If this figure is small, the
earnings per share discussed above increases. One can get this number after
a look at the equity capital in the balance sheet.
L: Leadership
The
company should be a leader in its industry, or at least in the top three
positions in the sector/ industry/ segment it operates in.
I: Institutional sponsorship
Look
at the mutual funds that are buying this particular stock or holding this stock
for a sufficiently longer period. If well performing mutual funds are holding
your stock/s, then your chances of making money are good.
M: Market trend.
In
a falling market, even the best stock will not be able to perform. Try and
enter a upward market. That is, buy a particular stock when the share market is
moving up. However, care must be the watchword when the share markets don't do
too well. Always remember this – “The Trend is Your Friend, Don’t go against
the Trend”
CANSLIM or not, always tread with caution
The
strategy is one that strongly encourages cutting all losses at no more than 8
per cent or 10 per cent below the buy point, with no exceptions. This will help
you minimise losses and preserve gains.
The
book says buying stocks from solid blue
chip companies should generally
lessen chances of having to cut losses, since a strong company will usually
shoot up in a bull market (when the stock market .
CANSLIM
strategy is not momentum
investing; the system identifies companies with strong fundamentals, big sales and earnings
increases which is a result of unique new products or services.
Hope
it makes your investing experience much more easier. With all the important
information required to succeed using the CANSLIM method very easily available
on the Net, I don't need any sophisticated system to find good stocks.
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