Learning Article : Using CANSLIM Parameters to Increase Your Chances of Winning

Any investing strategy must answer two crucial questions:

  • What to invest in?
  • When to invest (and exit)?

The first question pertains to the “Stock Selection” aspect of the strategy, which comprises rules and techniques for “Stock Screening”. The CANSLIM investing system offers such stock selection tools, developed after rigorous back-testing on ~100 years of stock data.  Simple yet strong, these tools equip investors with faster, effective, and comprehensive analysis of a stock:

  1. Earnings Per Share (EPS) Rating – Almost all big winners started their rally after exhibiting explosive growth in quarterly earnings. Hence, it is imperative to filter stocks that have good earnings (EPS) growth, especially if you’re hunting for stocks having the potential to deliver multi-fold returns. EPS Rating compares a company’s earnings per share growth with all other domestically traded companies in our database. The stocks are rated on a scale from 1 (worst) to 99 (best), which is calculated based on the stock’s EPS growth for the past two quarters along with its three- to five-year annual growth rate. Usually, it is better to prefer stocks with EPS Rating of 80 or above.
  2. Price Strength = Relative Strength (RS) Rating – Price strength rating calculates the weighted average performance of stock price movement over the last 12 months. On a scale of 1 (worst) to 99, this scale indicates price performance with respect to the overall market. For a stock outperforming the overall market price-wise, the rating will improve, and vice-versa. A rating of 80 or above indicates healthy price strength.
  3. Buyer Demand Rating – The rating (also known as Accumulation/Distribution Rating) evaluates a stock’s price-volume action over the past 13 weeks, and calculates the degree of demand/supply in the stock. Heavy buying and strong volume will hint toward accumulation, whereas sell-off on high volume will be a sign of distribution. This parameter indirectly measures the investors’ interest in the stock and is one of the most important indicators of technical strength. This letter rating varies from “A” (best) to “E” (worst). Generally speaking, it is safer to pick stocks with Buyer Demand Rating C- or better.
  4. Group Strength = Industry Group Rank – This evaluates the performance of 197 industry groups over the past six months. Big winners and leaders in the past mostly belonged to the industry group doing well as a whole. Hence, limiting your shortlist to the best-performing industry groups increases the odds in your favor. The score ranks the industry groups from 1 (best) to 197 (worst). In most cases, one should only focus on ideas from industry groups ranking 40 or lower.
  5. Master Score – This is a blended indicator of all of the above parameters. In a single letter-rating, investors can get the overall picture of fundamentals (EPS strength) and technicals (Relative Strength, Buyer Demand, etc.). In general, stocks with a Master Score of “B” and above are good for investing.

Related: Components of Winning Stocks: Rising Institutional Sponsorship

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

Performance computations reflect a time-weighted rate of return and includes a brokerage of 0.5%. All holdings are rebalanced to equal rupee amounts daily. Dividends are not considered in computations. Percent gains and losses are calculated for all issues that remain on the “Current Holdings” at the end of the day. For stocks that were added to “Current Holdings”, the basis used to calculate the percent change is the price noted when the issue appeared as a “Current Holdings” in MarketSmith India. For stocks that were removed, the selling price used to calculate the percent is the price note d when the issue appeared as “Removed” in the MarketSmith India. For more information, see our Legal disclosures here.

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