How to Pick Quality Stocks by CAN SLIM Strategy

To select a stock that can give you better returns is a difficult jargon to solve. Usually, investors make use of fundamental analysis of stocks, qualitative analysis of stocks, technical analysis of stocks to check out the company’s or the stock’s health and try to predict whether it is able to deliver the desired return in the near future just say after 10 years or more. Many investors treat the combination of the fundamental and technical analysis as the killing strategy. This combined strategy is called CAN SLIM. In this column we will discuss how to pick quality stocks by CAN SLIM strategy.

What is CAN SLIM Strategy

CAN SLIM strategy is used by many investors as an investment strategy which involves the above said ways of analysis to find out the best stocks. This strategy stands on the pillars of the Earning, New product or service, Supply and demand, Leader or laggard, Institutional sponsorship and Market direction. This strategy enables investors to make investment before they start a bull run or in other words is overvalued.

C = Current Quarterly Earnings

Current quarterly earnings reveal a company’s current performance. It shows the results done by the company in the last quarters. In this method of current quarterly earnings, investors actually watch out those companies which have generated an EPS growth of at least 20% in the recent quarters over the past 3 years. As an investor, you should invest in such a company which has delivered at least 15% sales growth during last 10 quarters.

A = Annual Earnings Growth

Before making investment in any company you need to watch out carefully the respective stock’s annual growth. You should invest in such stocks which have delivered a satisfactory annual growth of 25% over the past 3 or 5 years.

N = New Product or Service

As the full form itself expresses, you need to keep eye on the new product or service launched by the company in which you are going to invest. It is important for any company to launch new product or service to enter in the broad market. Let’s make it clear with an example. Maruti Suzuki is one of the famous car companies in the world. When Maruti introduced a new Duster to hard competition to Hyundai, it was successful. Then it increased Maruti Suzuki’s profit margin and EPS.

S = Supply and Demand

There is a rule of ‘Law of demand’ which was delivered by Alfred Marshall in the year of 1936. This law tells us when the demand increases then the price also moves to upward direction. This rule can be applied in share market also. Strong demand for a particular stock which has strong fundamental and earning numbers drive the stock’s price upwards. Mutual fund agencies and other institutional investors tend to invest in highly demanded stocks. This tendency leads to sharp price increase of those stocks or shares.

L = Leader or Laggard

In any industry there are many leaders or laggards. Leaders provide better return on equity than the industry average on the wings of robust earnings. On the other hand, laggards yield far below than the industry average just because of deteriorating earnings.

I = Institutional Sponsorship

This method expresses that a stock can be a winner if owned by any banks, Govt. authorities, Mutual funds, Pension funds and other institutional Investors. Such ownership confirms a stock’s reliability and robust performance. The fund manager and his research team of Mutual funds make a proper research and check various aspects before investing in that stock. When these mutual funds or institutional investors make an investment or increase their stake in any stock, you are free to invest in that stock. You can prefer such stocks which have at least 10 institutional investors.

M = Market Direction

At the time of making investment you should check the trend of market whether it is bull or bear. There is 75% chance that the bull market will show upward results and the bear market will show downward results in the near term. But if you are a long term investor then you need not worry about the volatility in stock market in the near term.

How to pick Quality Stocks by CAN SLIM Strategy

Many investors are more concerned about the price i.e., P/E ratio of the stocks. They forget the fact that these shares are trading on higher valuations than the cheap valuations shares for a reason. Just analyse the every term before picking quality stocks by making use of CAN SLIM strategy. The Titan Company traded at P/E level of 60 in 2016. Many investors thought that this would not deliver so much return in the near future. But Titan Company is making record day by day and after one year it is now trading at P/E level of 78 in 2018 with the help of new product launch and robust earnings growth quarter-on-quarter.

By this robust performance, mutual funds get attracted eventually to this kind of companies and create a spike in demand of that specific stock or share. This spike of demand enables a stock to move upward price direction and so forth. You must not rely only on the P/E ratio only. You need focus on sustainable business model and sustainable competitive advantage of a stock. CAN SLIM strategy enables an investor to find such businesses or stocks which have all of the above said features even if they do not trade at cheap valuations.

If you have any question regarding CAN SLIM Strategy feel free to comment so that we have a discussion. If you have found this post helpful share with your loved ones.

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