As famously quoted by our founder, Mr. William J. O’Neil, “The stock market is not random because strong investor emotions can create trends”, we firmly believe that it is not an easy task to pick stocks successfully. There are various methodologies in the market in which one can find, but the strongest one that we believe in is to “Buy high and sell even higher!”
Our methodology is based on the CANSLIM® Model developed through a process of extensive research by our founder on the winning stocks of the last five decades. This methodology provides an alternative to emotion-based trading. It helps in stock market predictions with an in-depth fundamental and technical analysis.
Every letter of the word CANSLIM stands for a factor; it depicts a characteristic of a top-performing stock.
C- Current Earnings:
A company’s stock won’t be going anywhere if the current earnings are poor. Always look for the quarterly earnings- per share growth; winning stocks have a 25% growth rate for a minimum of 2 consecutive quarters.
A- Annual Earnings:
A company must be showing an annual earnings-per-share gain of a minimum of 25% over the past 3 years. As the earnings growth becomes stronger with each passing quarter, they also gain the attention of large investment funds and other financial institutions.
N- New Factor:
For every stock to perform great, there must be a reason behind it; it could be a launch of a new product, a new service or even a change in management bringing new faces to the equation. A new angle in a company can single-handedly impact the future of a company’s stock prices. For the best companies, innovation is the key to open various opportunities and bask in huge profits.
S- Supply and Demand:
It is extremely important to keep an eye on the daily trading volume. If a stock’s price increases, you would want the demand for it to also increase, and hence the daily trading volume must also increase. If the volume is below average, it is a sign that big traders aren’t behind the company and believe that they shouldn’t invest in those stocks, so it is wise to stay away from them for the time being. The bottom line is that a price increase must be accompanied by a high increase in volumes as it indicates that big institutional investors are backing it.
L- Leader v/s Laggard:
It may be the harsh reality but a sad, losing stock that sits at the bottom of a pile often shifts to greater, deeper depths from where it is next to impossible to come back. One must always invest in a leading stock as these are the ones with cutting edge technology and the vision to move forward. In one of our studies conducted, the big winners on average, outperformed 87% of the market before they began their most dramatic price advances. Always steer clear of lagging stocks, it is highly unlikely that they’ll turn into a leader from a laggard.
I- Institutional Sponsorship:
It never hurts to watch the pros in a game and learn from them, be it Cristiano Ronaldo’s technique or Sachin Tendulkar’s straight drive. Just like that, in the investment market, the big institutional investors are often the ones with the big guns and can, to a certain extent, seal the fate of a stock. When you’re buying the stock, you must ensure that it is backed by at least 10 major funds ideally looking for 2-3 quarters of sponsorship.
M- Market Direction:
It is never a smart direction to flow against the river; just like that, it is not a smart decision to act against the market’s direction. You may have done all your research on a stock’s return, but wrong timing holds the potential to hurt you. 75% of the stocks follow the market trend, that is if the market is in a downtrend, it is highly unlikely that the stock will break the shackles and the price will sky-rocket.
Investing and picking up stocks is a learned skill; you may take years to be highly proficient in the same. You can become more familiar with market timing by reading MarketSmith India’s daily and weekly updates. To stay updated on market conditions and learn about the best stock market tips and practices, check out MarketSmith India - Stock Market Tips