Real-World Application of CANSLIM Strategy 🧐

In the world of investing, fortunes can change in the blink of an eye. In Dec 2022, we discussed the underperformance of the CANSLIM smallcase, dissecting the reasons behind its lackluster performance. But fast forward to Feb 2024, and CANSLIM stands tall as one of the best-performing smallcases in our suite. Explore additional details on underperformance in this link, and don’t miss out on our recent insights into the smallcases’ outperformance.

In this blog, we will briefly understand what CANLIM is, who pioneered this investing system, and discuss why the CANSLIM system, as popular as it is, can be challenging for investors to apply in the real world.

Rooted in the pioneering work of William J. O’Neil, the CANSLIM system encapsulates seven key traits shared by top-performing stocks before significant price gains. He based this selection on meticulous analyses spanning every market cycle since 1880. These traits, represented by each letter in the CANSLIM acronym, form the bedrock of our CANSLIM-esque smallcase.

CANSLIM Explained

C: Current quarterly earnings per share (EPS) have increased sharply from the same quarter in the previous year.

A: Annual earnings increases over the last five years.

N: New products, management, or positive new events that push the company’s stock to new highs. (Headline news can cause short-lived excitement, inducing optimism within the market and subsequent price appreciation)

S: Scarce supply coupled with a strong appetite for a stock creates excess demand and an environment in which share prices can soar. (When companies repurchase their own stock, it diminishes market supply and suggests anticipation of heightened demand, often reflecting insider confidence in the company’s prospects)

L: Laggard stocks are preferred within the same industry. Use the relative strength index (RSI) as a guide. The RSI is a momentum indicator that measures the magnitude of price changes to determine whether the price of a stock or asset is overbought or oversold.

I: Pick stocks that have institutional sponsorship by a few institutions with recent above-average performance.

M: Determine market direction by reviewing market averages daily. 

Hurdles in the Application of the Criteria

The seven selection criteria of the CANSLIM strategy may seem easy to grasp in theory, but putting them into practice can be quite challenging. For instance, criteria such as institutional sponsorship (I), new products, management, or positive new events about a company (N), and supply-demand of stocks (S) are challenging to quantify. Additionally, it’s not easy for an average investor to access this information about all the stocks.

The maturity of a market also impacts the application of the CANSLIM strategy. In developed markets with robust regulatory frameworks and efficient market mechanisms, investors enjoy access to a wider array of high-quality growth stocks and reliable financial data, simplifying the execution of the CANSLIM approach. Conversely, in emerging or frontier markets marked by increased volatility and regulatory ambiguity, investors encounter greater hurdles in identifying and assessing growth prospects. Nevertheless, these markets offer unique growth opportunities fueled by demographic shifts, technological advancements, and structural reforms, making them appealing to investors seeking higher returns. Adapting the CANSLIM strategy to suit the maturity level of each market is essential for navigating risks and capitalizing on global growth potential.

About Windmill Capital’s CANSLIM-esque smallcase

Windmill Capital has adapted the CANSLIM strategy for Indian conditions. Stocks must satisfy the following criteria to be a part of this smallcase:

Current and future earnings – Earnings per share (EPS) represents the portion of a company’s profit that can be allocated to each outstanding common share. The higher the earnings per share of a company, the better its profitability. For this smallcase, we only select stocks that have been able to record high EPS growth in recent years.  Along with this, we also analyze the projected EPS for the current financial year and only select stocks of companies that are expected to grow their EPS. 

Return on Equity (ROE) – This ratio helps in determining how efficiently the company has used its equity to generate profits. This smallcase only selects stocks that have a high ROE. The higher the ROE, the better the company can use its equity to generate profits.

Momentum – This refers to the pace of change in a stock’s prices. Various indicators such as the 52-week price, relative strength, moving averages, etc help in determining if there’s an upward or downward trend in the stock’s prices. It has been observed that stocks whose prices have been rising recently will continue to do so in the near term and vice versa. This smallcase selects stocks that have seen a positive price momentum recently.

End Note

Understanding a concept in theory is merely the first step; it’s the practical application where true expertise shines. This sentiment holds especially true in the investing world, where the complexities of markets demand more than just textbook knowledge. That’s where research analysts play a pivotal role. With a deep understanding of market dynamics and investor requirements, they adeptly apply investment criteria like those of the CANSLIM strategy to unearth opportunities and navigate challenges. Their insights bridge the gap between theory and practice, guiding investors toward informed decisions and sustainable growth.

Suppose you haven’t explored the CANSLIM-esque smallcase. Now’s probably as good a time as any. And remember, in the ever-evolving landscape of investing, fortune favors those who stay patient and steadfast in their investment journey.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.

Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.