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), calculated based on the stock’s EPS gain in 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, it 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 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 better.

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.

6. Relative Strength: The Relative Strength Rating looks at a stock's percentage price change over the last 12 months, with the most recent periods receiving higher weight. All stocks are arranged in order of greatest price percentage change and assigned a rank from 99 (highest) to 1 (lowest). For example, a value of 85 means the stock has outperformed 85% of all other stocks in India.

Related: Components of Winning Stocks: Rising Institutional Sponsorship

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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.

MarketSmith India is an investment advisory product based on William O’Neil’s Can Slim method with model portfolio, pattern recognition, idea lists powered by institutional quality data