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GROWTH STOCK PICKING STRATEGY: CANSLIM MODEL
Growing stocks outperform in the bull market
The S&P 500 has bounced more than 20% since October 2022, rebounding from a 52-week low. Usually, if the index gains more than 20%, it is called a technical bull market.
Growth stocks generally perform better in bull markets. Growth stocks refer to those stocks of companies with high growth potential that are often widely followed and sought after in bull markets. As a result, growth stocks typically achieve higher rates of return in bull markets compared to value stocks.
However, with so much growth in the US stock market, how do you pick out the ones with explosive potential?
THIS ARTICLE INTRODUCES YOU TO A WAY TO PICK GROWTH STOCKS CALLED CANSLIM.
What is CANSLIM Stock Option Law?
CANSLIM is a stock option model created by renowned American growth investor William J. O'Neil. This model takes stock fundamentals, technicalities, and chips into account to help investors pick growth stocks with potential growth.
WILLIAM O'NEILL ACHIEVED REAL INVESTMENT SUCCESS WITH THE CANSLIM METHOD AND BECAME THE YOUNGEST PERSON TO BUY A TRADING POSITION ON THE NEW YORK STOCK EXCHANGE (NYSE). Since then, he has published several investment books. In 1988, How to Make Money in Stocks, one of the best-selling investment books in the United States, has sold more than 100 million copies and is still popular today.
IT CAN BE SEEN FROM CANSLIM'S CONDITIONALITY THAT THE STRATEGY IS BASICALLY CHOSEN AS GROWTH STOCKS WITH SOLID FUNDAMENTALS AND STRONG PRICE TRENDS, WHICH ARE CONSIDERED TO BE STRONG. This stock option is therefore more suitable for band traders or trend traders.
CANSLIM'S 7 OPTION CONDITIONS
The CANSLIM model contains seven key stock selection criteria, each letter representing an important indicator and factor.
C, A, N, I discuss the fundamentals of the company, and S, L, M look at the technical and chip sides.
C - Current Quarterly Earnings: Companies that focus on high growth in quarterly EPS. EPS in the quarter grew by at least 25% year-on-year, preferably with EPS growth accelerating over the past few quarters.
A - Annual Earnings Growth: Observe whether the company's profit growth is sustainable. The annualized growth rate of EPS over the past three years is at least 25%.
N - New Product or Service: Pick a company with a new product, a new management level, or an innovative share price. For example, a new product launched by a company drives results, or changes in the industry landscape lead to an increase in market share.
S - Supply and Demand for Chips: Focus on stocks that are not in demand on the face of chips. Demand shows that the trading volume increases as the share price rises, which is what is known as “full price increase”. Supply is a relatively small float, and the company's shares are constantly being repurchased.
L - Leader or Laggard: Pick stocks that have a stronger movement than the big plate. The relative strength of a stock's price can be measured by the technical indicator RPS, typically an RPS equal to or greater than 80, which indicates that the stock has run to win 80% of the stock over a period of time.
I - Institutional Sponsorship: Focuses on stocks sought by institutional investors. If you see the number of institutions holding shares has increased over the past few quarters. It can be a positive signal.
M - Market Direction: Observe the direction of the market tray. The O'Neill study found that if the big plate performs poorly, stocks that meet the above six conditions are likely to fall. Therefore, it is only when the big plate shows an uptrend that you consider whether to buy.
How do ordinary investors use it?
AS AN ORDINARY INVESTOR, YOU CAN USE THE OPTIONS TO CHOOSE STOCKS BASED ON THE CANSLIM MODEL, IN PARTICULAR, YOU CAN DO THIS BY FOLLOWING THE STEPS BELOW.
First, you need to quantify the indicators.
IN THE 7 CONDITIONS OF THE CANSLIM STOCK MODEL, SOME CAN BE QUANTIFIED INTO SPECIFIC INDICATORS AND SOME ARE NOT. IT IS WORTH NOTING THAT THE FOLLOWING QUANTIFICATION CONDITIONS MAY CHANGE DEPENDING ON MARKET MOVEMENTS, AND DIFFERENT INVESTORS CAN MODIFY THE QUANTITATIVE INDICATORS ACCORDINGLY ACCORDING TO THEIR UNDERSTANDING. Some quantitative indicators and their analysis methods are listed below, but for reference only.
C: EPS growth rate for the quarter > 25%
A: Annualized EPS growth rate for the past three years > 25%
N: The share price is no more than 15% from the previous 52-week high. Since the company's new products and new services cannot be quantified, it is possible to quantify the share price at a new high, i.e. near a new high or a pullback at a new high.
S: At least 1,000,000 shares traded on a daily basis. At the level of supply and demand, look mainly at two indicators, the number of floating shares (Float) and the volume traded per day. Under the same conditions, the smaller the number of floating shares the better, the higher the trading volume, the better. Both indicators are difficult to quantify, as O'Neill has not given specific quantifiable indicators. However, you can set a minimum value for daily trading volume equal to or greater than 100 million shares to guard against liquidity risks.
L: Annual stock price relative strength RPS=>80 or stock price up 20% in the past year. An RPS greater than 80 represents a stock that has won 80% in a year, and is a strong stock. But this indicator is not available in conventional options. So let's change my mind and see how much the stock price has to rise in a year to outperform 80% of the market. The 20% increase was based on the reverse of market conditions.
I: There has been an increasing trend in the number of institutions buying the stock over the past few quarters. And these institutions have had a good track record over the past 3 years. Since O'Neill does not give a specific quantitative indicator, it is not necessary to set this indicator in the opter.
M: Major indices such as the S&P500 are bullish. Similarly, O'Neill does not give a specific quantification indicator, so it is not necessary to set this indicator in the stock instrument.
Second, pick potential stocks through an opter.
After you quantify the criteria into specific metrics, use the stock filter tool to select the eligible stocks.
Futubull software has a very powerful selection of features. For example, with the Futubull Mobile App, investors can create their own stock selection strategy on the Market-Opportunity-Shareholder Option Line.
Click “Create Option Strategy” to select the above indicators, and if you find that there is no corresponding indicator in the option, you can change the indicator accordingly. Then view the stock selection results and save the stock option strategy. Interested little ones can try them right away.
Next, perform fundamental and technical analysis.
For the filtered stocks, fundamental and technical analysis is also required.
Fundamental analysis includes non-quantized factors, such as new products and new services, seeing if a company has an iphone moment like Apple or an AI moment from Intel, and so on. Also, see if the number of institutional holdings is growing.
Finding growth stocks that are fundamentally good does not mean that you can invest directly. Also pay attention to the technical side, such as stock price movements, trading volume and technical indicators.
For example, in O'Neill's book, the use of graphs is also mentioned as an auxiliary judgment, such as the shape of a cup handle, etc. It can be a positive signal when the stock price breaks through the pattern and the trading volume increases.
Finally, risk management.
CANSLIM IS JUST A BENCHMARK AND DOES NOT MEAN THAT STOCKS SELECTED USING THIS METHOD ARE BOUND TO RISE. INVESTORS SHOULD PAY ATTENTION TO RISK MANAGEMENT AND PORTFOLIO CONFIGURATION.
When buying stocks, you need to have a good trading plan, set stop losses, stop profits, and have good position control to make a profit.
WHAT SHOULD I LOOK OUT FOR WHEN USING CANSLIM?
WILLIAM O'NEILL'S CANSLIM STOCK OPTION LAW COMBINES METRICS SUCH AS FUNDAMENTAL, CHIP AND TECHNICAL ASPECTS TO CHOOSE STOCKS, BUT IT ALSO HAS ITS FLAWS, AND INVESTORS SHOULD PAY ATTENTION TO THE FOLLOWING ASPECTS WHEN USING THIS METHOD:
CANSLIM CHOSE GROWTH STOCKS RATHER THAN VALUE STOCKS, SO THEY ARE NOT SUITABLE FOR ALL INVESTORS.
THE CANSLIM MODEL DOES NOT TAKE STOCK VALUATIONS INTO ACCOUNT, SO THE SELECTED STOCKS ARE LIKELY TO BE HIGHLY VALUED.
CANSLIM'S FUNDAMENTAL INDICATORS ARE BASED ON PAST PERFORMANCE, WHICH MAY LEAD TO A STOCK PLUNGE IF THE COMPANY'S PERFORMANCE IS NOT AS EXPECTED IN THE FUTURE.
THE CANSLIM MODEL IS ONLY SUITABLE FOR BULL MARKETS. MANY OF THE STOCKS SELECTED IN THE CANSLIM MODEL ARE AT 52-WEEK HIGHS IN THE SHARE PRICE. IF THE BIG LIST FALLS, THESE STOCKS MAY ALSO BE THE WORST HIT.
While the CANSLIM model is not perfect, it is worth learning more than the strategy itself, it is more worth learning about the way and thinking it designs strategies.
Many people often refer to being limited to one approach when learning to invest, technical analysts only look at graphs and prices, fundamental analysts only look at business patterns and forecasts, people who look at individual stocks don't look at macro majors, and so on.
But why can't we put the references together? THIS STRUCTURE OF CANSLIM PROVIDES A GOOD REFERENCE. INVESTORS CAN QUANTIFY THEIR OWN INDICATORS BASED ON THE CANSLIM FRAMEWORK, FORM THEIR OWN OPTIONS STRATEGY, AND CONSTANTLY VERIFY TO FIND THE BEST OPTION STRATEGY FOR THEM.
