What is CANSLIM: Definition & Meaning Explained

Definition of CANSLIM

CANSLIM is an acronym for a seven-step strategy to pick growth stocks by combining fundamental and technical analysis. Here’s the full form of CANSLIM:

Current quarterly Earnings Per Share (EPS): compare this fundamental indicator with the same figure from the previous quarter. If the figure grows (by 20% or more as a rule of thumb), the company is fundamentally strong.

Annual earnings: Compare this fundamental indicator from the previous years. If there’s year-on-year growth, the company is fundamentally strong. If the year-on-year growth is by 20-25%, even better.

New product or service: strong companies continue to innovate. That’s what this letter is about - checking if the company is continuously launching new products, services, or holding events.

Supply: a fundamentally strong business should have a good supply and demand when it comes to its goods, services, and stock. Executive supply of shares may reduce the value of the company - that’s why it should always be scarce in supply.

Leader: the company should be a leader in its own right, either in or across industries.

Institutional holding: a valuable company will have higher institutional ownership, the percentage of which should always be tracked.

Market trend: an investor must check whether the company or stock is going or against the trend by comparing it to broader indices.

Book Building

Book building is the process of determining the potential issue price of a financial instrument based on investor demand, generally during an IPO.

Book building is typically done by an underwriter (like an investment bank) who will invite institutional investors like hedge funds, mutual funds, and others to submit bids for the financial instrument.

These bids act as a range that the underwriter can use to fix a price that satisfies the company issuing the security and market participants.

Differential Voting Rights

Differential Voting Rights or DVRs are special types of shares that carry more or less voting rights, depending on the issuing company. For example, a DVR share that carries less than usual voting rights may generate relatively high dividends.

A publicly traded company that wants to issue DVR shares must go through a postal ballot. There are other caveats as well. But broadly speaking, a company must have a healthy finanical track record if they want to issue DVR shares.

Ichimoku Cloud

Ichimoku Cloud is a group of technical indicators that’s used to understand trends, momentum, support, and resistance by calculating averages. Furthermore, the Ichimoku Cloud indicator is made up of two components:

TenkanSen: The short-term indicator
KijunSen: The long-term indicator

There’s a cloud that’s formed as a result of plotting the averages and using the components on a chart. One glance at this cloud can tell you multiple things like:

Uptrend: If the price is above the cloud
Downtrend: If the price is below the cloud
Neutral: If the price is in the cloud

Moreover, if the cloud and the price are moving in the same direction, there’s much more confidence in the trend that’s forming. In fact, it’s a trading signal.

Indices

Indices are a collection of financial instruments that measure the performance of those very instruments.

For example, stock market indices like Nifty 50 and Sensex measure the top 50 and 30 stocks by market capitalization.

If indices go up, it generally means that the underlying stocks are performing well. The opposite is true when indices plummet.

By the way, there’s no limit to how many instruments an index can track. The Nifty Smallcap 250 tracks 250 stocks whereas Nifty Bank tracks 12 stocks.

*All securities mentioned on this website are exemplary and not recommendatory.

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CANSLIM