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Looking for quality? CAN SLIM model throws up these 10 stocks

CAN SLIM is a techno-fundamental strategy that helps pick quality stocks.

Updated: Jul 17, 2018, 06.41 PM IST
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William O’Neil observed that most multibaggers shared seven common characteristics.
Stock picking turned difficult this year thanks to strong volatility in the domestic equity market. Market participants look undecided whether to go with a technical or fundamental view.

But how about going with the combination of the two? CAN SLIM does exactly that to identify potential value stocks.

Developed by investor William O’Neil, this is a techno-fundamental strategy that helps pick quality stocks. Fundamentals give the conviction to hold a stock while technicals indicate attractive entry and exit points.

“CAN SLIM is a rules-based investment system based on the study of historical multibagger price runs in stocks. The system was created by one of America’s most successful stock investors, William O’Neil, after he studied stock market winners and market cycles going back to the 19th century,” says Anupam Singhi, CEO, William O’Neil India.

William O’Neil observed that most multibaggers shared seven common characteristics. He then started investing in stocks that had developed there seven traits and went on to become one of the all-time investing legends.

“The methodology is based on 100 per cent realistic historical studies of how the stock market has actually worked,” Singhi said.

Since its inception four years ago, the MarketSmith India model portfolio based on CAN SLIM has grown around 111 per cent between June 1, 2014 and July 6, 2018. The Nifty has gained over 40 per cent during the same period.

“CAN SLIM is primarily a momentum trading or investing strategy. It tends to work well in a directional market. Like any other strategy, it too has its pros and cons. CAN SLIM may not do very well in a choppy market. As a strategy, it tries to merge fundamentals and technical analysis,” says Kolkata-based value investor Abhishek Basumallick.

How does CANSLIM work?
CAN SLIM is a guideline where each letter stands for an important factor that needs to be considered before investing in a stock.

C – Current Earnings
Healthy financial performance in most recent quarters demonstrates that a business is able to succeed in the current environment.

A – Annual Earnings
A history of healthy sales and earnings growth in recent years demonstrates that a business model is sustainable and viable, and can generate profits consistently.

N – New Product/Service, Management or Price High
Studies have shown that the greatest stock market winners of the past were all trying something new. Always look for companies with new, game-changing products and services

S – Supply and Demand
S is for supply and demand of the stock. As more investors demand a limited supply of shares, a stock’s price goes up. Look for heavy volume accumulation by institutional investors, particularly at key moments like when the stock is breaking above prior resistance levels.

L – Leader or Laggard
True leaders are those companies that show best earnings growth, strongest sales, superior price performance, and are in leading industry groups. Every bull market has a new leader and there is no point getting stuck with stocks that belong to the lagging industry groups. Look for the best of the best – leaders in strong industries that are showing superior earnings growth and sales.

I – Institutional Sponsorship
Mutual funds, banks and other professional investors are big players who drive the market. For a stock to be a top performer, it must have institutional support to fuel its price moves. Look for stocks that are showing signs of heavy accumulation and consistent increase in the number of funds holding the stock.

M – Market Direction
Studies have shown that three out of every four stocks follow the current market trend. You should always trade in sync with the market. You should be buying more stocks when the market is in an uptrend, and protecting your capital when the market is in a downtrend.

“This rules-based system helps identify stocks with the right fundamental profile to succeed. Once the stock passes this litmus test, one needs to look out for a breakout from a sound base pattern. Base patterns are periods of sideways movement where the stock has less buying interest. No stock can be in a rally forever, even multibaggers have periods of consolidation and we must wait for the stocks to breakout to new highs before we take any fresh position. A rules-based system helps us nail down fundamentally strong growth stocks, and then we wait for the technical buy signal, i.e. the breakout, to pick up the stock,” said Singhi of William O'Neil India.

Who can go with the strategy?
To be successful in the stock market, all investors regardless of whether they are first-timers or experienced investing professionals need to learn sound, historically proven buy rules as well as sell rules.

Singhi says CAN SLIM strategy is tailored for investors looking to beat the market by investing in stocks with high quality fundamentals. The aim of the system is to capture big price runs by buying fundamentally strong stocks that are market leaders.

“Our strategy gives investors a huge advantage by materially improving stock selection and timing. The system requires strict discipline and helps investors develop the right money management skills,” he added.

Top stocks on the basis of CAN SLIM model

William O'Neil India shared a list of 10 stocks based on the CAN SLIM model with

Asian Paints: Organised paint companies are likely to get benefitted from increasing population and housing shortages in India, which will drive growth for residential construction industry (expected to grow at 15 per cent during the period 2018-2022). Moreover, the government’s push for affordable housing under its plan “Housing for all by 2022” is providing much needed traction for the paint industry.

Nestle India: The revival of its major brand Maggi (60 per cent market share) and new product launches (40 new products over the past two years across various segments) helping the company to substantiate its position in the market. Moreover, the reducing material cost helping Nestle in expanding its margin. The deflationary price trend in Q1 2018 (-11 per cent YoY) for skimmed milk powder continues to prevail owing to an excess supply leading to a decline in prices by Rs 4-10 per litre. Coffee prices also continue to decline 4 per cent YoY as of H1 2018, reaching the low recorded in 2014. “With the lowering input prices, we expect its margins to further expand in 2018, supported by a favourable product mix and input costs,” said Singhi.

Maruti Suzuki: Maruti Suzuki is the largest passenger vehicle company in India by sales. The management is confident about its future prospects and expects to sell 2 million vehicles by FY2020.

VIP Industries: The company manufactures a wide range of hard-sided and soft-sided luggage under the VIP, Skybags, Alfa, Aristocrat, Carlton, and Caprese brands. The company reported five consecutive quarters of high double-digit EPS growth. It is expected to grow further on the back of its capacity expansions in Bangladesh, where it currently enjoys a tax holiday of seven years. Moreover, aggressive brand promotion, growth in the aviation industry, and wider retail network add more revenue prospects for the Company.

Britannia Industries: This company drives its growth through its capacity expansion plan, new product introductions, and geographic expansion. In addition, the goods and services tax has brought the unorganised sector (25 per cent of biscuit market) under the tax net, helping the company gain 170bps of market share in the Hindi-speaking belt, where it faces intense competition from regional players. It reported three consecutive quarters of double-digit earnings growth and two consecutive quarters of double-digit revenue growth.

Edelweiss Financial Services:
Edelweiss has delivered industry leading growth with its credit book growing to Rs 42,010 crore in FY 2018 from Rs 3,956 crore in FY 2012, implying a CAGR of 48.3 per cent. The company achieved this growth while maintaining healthy net interest margins (7.7 per cent in FY 2018) and robust asset quality with net NPA at 0.7 per cent, at the end of FY 2018.

KEI Industries: This is a cable manufacturing company involved in the manufacturing and supply of power cables and other industrial cables. KEI Industries’ strong order book and the growing pace of export are helping it substantiate its position. It aims to boost its B2C business and increase its distribution channel to 1,500 by FY 2019 from 926 dealers in FY 2016. Moreover, it also increased its advertising budget to reach to a wider audience. These measures should help the company increase its retail sales in the long run.

Quess Corp: Quess is India’s leading integrated business service provider with a pan-India presence, headquartered in Bengaluru. It has 65 offices across India in 34 cities along with overseas footprints in North America, the Middle East, and Southeast Asia. The stock posted double-digit sales and EPS growth over the last three years. Quess Corp is also tapping into the smart city project in Ahmedabad by entering into a joint venture with Trimax IT Infrastructure and Service. As a part of the project, it aims to create digital, communication, and information infrastructure.

Tata Elxsi: It is one of the leading providers of technology and designing services for product engineering solutions to the automotive, broadcast and communication, and health care industries. The company largely thrives on R&D spends by global companies. Moreover, it is expected to largely benefit from the government’s target of selling 70 lakh electric and hybrid vehicles by 2020.

HDFC Bank: It is the second-largest private lender by assets with a focus on rural and semi-urban markets. Its asset quality remains top-notch thanks to stringent credit origination practices, strong monitoring system, and adequate provisioning.

Along with increased digitisation, the bank is also expanding its presence in rural and semi-urban areas, which are largely underpenetrated. Among the total number of branches, 53 per cent of the total bank outlets are in semi-urban and rural locations. The expansion strengthens its retail segment, which is highly dependent on SME and unsecured lending. The share of unsecured lending and SME continues to trend higher; recorded at 47.6 per cent in FY 2018 compared with 40.8 per cent in FY 2015. Double-digit sales and earnings growth coupled with strong ROE continue to attract the investor community, according to William O’Neil India.

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