Can Slim Method To Pick Stocks

10

Stocks

The Economic Times Wealth, April 3-9, 2017

Pick quality stocks using the CAN SLIM strategy The method combines fundamental and technical factors to help identify promising stocks.

YOGITA KHATRI ith the market hitting new highs, picking stocks has become even more difficult. Investors also face the eternal dilemma: should they go by the fundamentals of a company or decide on the basis of technical factors that help time the market? Putting the two together, say experts, can be a winning strategy. “A combination of the two works better. Fundamentals give the conviction to hold the stock, and technicals provide attractive entry and exit points,” says A.K. Prabhakar, Head of Research at IDBI Capital Markets. If you are wondering about how to combine the two approaches, the CAN SLIM methodology is just the thing for you. Developed by investor William O’Neil, CAN SLIM is a techno-fundamental strategy that helps pick quality stocks. “This strategy focuses on companies that show acceleration in earnings because of innovation and suggests buying them before the stock price witnesses a major spike,” says Anupam Singhi, Chief Operating Officer, William O’Neil India (see graphic). For investors who cannot hold stocks for an extended period—more than five years—techno-fundamental strategy promises potentially better returns. Since its inception three years ago, MarketSmith India Performance Index, part of William O’Neil India, has been growing at a CAGR (compound annual growth rate) of 22%. The Nifty has grown by about 11% during the same period—24 March 2014 to 24 March 2017. Like William O’Neil India, other brokerages, who have relied on techno-fundamental strategies, have also done well. “Though we avoid automated approach for spotting stocks on techno-fundamental basis, we use traditional methods (which combine the two strategies) and we have seen a success rate of 70-75% over the years,” says Deepak Jasani, Head, Retail Research, HDFC Securities.

W

Buy right, sell right When picking stocks, price is most investors’ chief concern. Stocks that are available ‘cheap’, as indicated by a low price-to-earnings (PE) ratio, are preferred over ‘expensive’ scrips. But cheap stocks may be priced low for a reason, just like a high PE stock may be trading at a premium for a good reason. “In pursuit of low PE stocks, investors sometime tend to miss out on some big winners,” says Singhi. Infosys is a case in point. Infosys’ PE ratio touched almost 100 in 2001, when its earnings and sales were growing at over 100%. Based on just the PE ratio, the stock was way too expensive, and many would

How the CAN SLIM method works C Current quarterly earnings of a firm

Growth of at least 25% is a good starting point. Also, look at earnings acceleration over the last three quarters.

A

N

S Supply and demand

The biggest winners of the past had one thing in common: New products, new services, new leadership, new pricing or a new condition in the industry.

Look for annual earnings and sales growth of at least 25% for the past three years and a return on equity of more than 17%.

Look for heavy-volume accumulation by institutional investors, particularly at key moments like when the stock is breaking above prior resistance levels.

Buy leading stocks from the leading industry groups. Focus on both a firm’s fundamentals and market technicals helps pick quality stocks.

These stocks, identified using the CAN SLIM method, have witnessed increased traction from institutional buyers over the past few quarters. Analysts’ views

Price (`)

PE

PBV

Div yield %

BUY

HOLD

SELL

436.80

22.68

7.06

0.32

11

1

0

1,517.35

61.41

28.53

1.65

6

0

3

Blue Star

616.25

58.36

6.73

1.05

8

2

3

KEI Industries

177.15

15.79

3.76

0.28

6

1

1

1,862.50

28.65

2.23

0.94

1

2

0

Igarashi Motors India

798.90

32.85

7.35

0.69

3

0

0

Quess Corp

689.10

98.72

11.43

0.00

3

0

0

Seshasayee Paper & Boards

808.55

9.42

2.14

0.62

1

0

0

9,884.15

49.77

8.00

0.10

1

0

1

181.60

16.04

1.99

0.41

16

9

6

Minda Industries Symphony

Piramal Enterprises

Honeywell Automation India JSW Steel

Investors can look at buying these stocks if there is a surge in their trade volumes.

have avoided buying it. But, Infosys turned out to be one of the biggest wealth creators in India’s stock market history. PE ratio, therefore, is not always the best indicator of stock price movement. The CAN SLIM strategy can be a better alternative to selecting quality stocks.

M Market direction

Institutional sponsorship

10 stocks picked by CAN SLIM Companies

I

Leader or laggard

New product, service or management

Annual earnings growth

L

Stock picked by William J. O’Neil India. Other data compiled by ETIG Database, as on 28 March 2017

According to brokerage firm William O’Neil India, whose model stocks have seen an average PE expansion of up to 130%, the market’s best-performing stocks debunk the over-reliance on PE ratios for astute stock selection. Investors should not rely solely on the PE of a stock, instead look at high-quality

For a stock to be a top performer, it must have institutional support to fuel its price movement.

Three out of four stocks follow the market’s trend, so trade in sync with the market.

businesses with sustainable competitive advantages, even if they are not ‘cheap’. CAN SLIM helps identify such businesses. Now, buying stocks for capital appreciation is just the start. Selling them at the right time is equally important for booking profits as well as capital preservation. “Following stop loss is very important when you pick any techno-fundamental strategy,” says Jasani. CAN SLIM methodology not only helps you pick stocks that have a greater possibility of seeing a price appreciation, it can help you stop loss in case a company’s fortunes take a turn for the worse—as was the case with Satyam. “As advised by CAN SLIM method, cutting losses at 8% can help investors protect their capital from a huge loss,” says Singhi. If you want to book profits, especially when a stock you own is up more than 20% in just a few weeks, but are unsure whether or not to sell, CAN SLIM can help you make the decision. If the stock is still being bought by institutional investors, there’s a possibility of further upside to it. In such a case, say experts, hold it for at least eight weeks, before you decide to sell it. For stocks that haven’t seen a sudden spike, the sell signals include trade volumes falling below 50-day moving average—indicating institutional selloff—negative news that can affect a company’s future growth and/or, weakening company fundamentals reflected in its quarterly numbers.

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