Many market participants enter the stock market with the goal of finding multi-bagger investments, as this is often their primary motivation. The good news is that multi-bagger stocks are real and attainable. In fact, almost all of the market’s top performers consistently display specific characteristics that propel their prices higher over time. In this newsletter, we will explore these key traits and learn how to identify them.

The CAN SLIM method

CAN SLIM is a trading template developed by the legendary trader William J. O’Neil. It consists of a set of technical and fundamental characteristics that a stock typically exhibits before embarking on a price advance. This framework is the result of decades of research and analysis of various stocks. O’Neil detailed this method in his renowned book How to Make Money in Stocks. Trails of his work can be found in the approach of many successful traders like David Ryan and Mark Minervini.

CAN SLIM stands for:

C: Current big or accelerating quarterly earnings and sales per share
A: Annual earnings increase
N: Newer companies, New product, New service, and New highs
S: Supply and Demand
L: Leader or Laggard
I: Institutional sponsorship
M: Market Direction

When a stock displays these characteristics, it may present excellent opportunities for swing trades, positional trades, or long-term investments. Let us take a closer look at each of these attributes.

C: Current big or accelerating quarterly earnings and sales per share

When analyzing stocks that have experienced significant price movements, it’s important to ask the question, "Why?" What drove this stock to rise so substantially? The most common answer is earnings. While some may argue that technical factors alone could identify such stocks, it is typically a company's earnings that drive its price higher. Earnings serve as a key indicator of a company's performance—strong earnings suggest that more capital is flowing into the business, signaling a brighter future for the company.

Historically, companies that have delivered substantial price movements have demonstrated significant year-over-year growth in quarterly earnings during the most recent one or two quarters. Therefore, the stocks we aim to identify should exhibit a notable surge in earnings in their latest quarter. Here, earnings refer to Earnings Per Share (EPS) rather than net income, as the number of shares outstanding can be diluted. EPS provides a more accurate representation of a company’s true earnings by measuring profitability on a per-share basis, rather than at the company level.

Along with earnings, we also want sales to be increasing. Improving sales indicate that the core business is the source of the earnings. Earnings can be manipulated using cost cutting or sale of asset etc. If the sales are increasing and so is the EPS, then the earnings are real and not ‘constructed’.

Therefore, we can demand that the stock has an EPS growth of at least 25% Y-o-Y basis with increase in quarterly sales Y-o-Y.

A: Annual earnings increase

Any stock can give a quarter or two of improved earnings and sales but, we need quality stocks. When quarterly earnings growth reflects in annual earnings growth, it acts as a confirmation for us. Similar to the quarterly earnings, an increase in annual EPS should also be at least 25%. Along with this, we also want to watch the consistency of the earnings and sales growth over a period of 3 years.

N: Newer companies, New product, New service, and New highs

This can be referred to as a catalyst. A catalyst is an event or factor that initiates or accelerates price movement. It can take the form of a new product or service that addresses a specific problem or enhances the user experience, a change in management that brings about significant improvements in company operations and governance, or other transformative factors. Newer companies are particularly appealing because, unlike established firms, they have the ability to quickly capture market share through innovation and creativity. Smaller companies also enjoy greater operational flexibility compared to mature, larger organizations.

Look for companies that have launched new products or undergone management changes. Shifts in industry conditions that lead to positive operational changes can also serve as a catalyst. The presence of a catalyst is a crucial element to consider looking at companies.

Supply and Demand

This is the first technical component of the CAN SLIM method. Supply and Demand refers to the traded volume. Typically, before the price start to advance, they will have high volumes during up days and breakouts. But this is only half the story. After the breakout, when the price takes a pullback, it will have low volume. This is an indicator that the weak hands are getting out and the ‘Smart money’ is still in the trade.

Usually, we want higher than average volume in up days and rally and low volume on pullbacks.

L: Leader or Laggard

In each market bullish trend, there are a new set of stocks that lead the bull run. Incidentally, these stocks are the stocks that are showing improved fundamentals. But no matter how good a company is fundamentally, if it is not outperforming the markets, then its time has not yet come. If the stock is not leading the next rally in the market after a correction, then it will most likely have to wait.

Relative Strength analysis is one of the most effective ways to identify market leaders. By comparing a stock's performance to the broader market or its sector, this tool helps you filter out stocks that are underperforming and focus on those that are showing superior strength. Understanding Relative Strength is crucial for refining your stock selection process and uncovering potential winners. If you're looking to incorporate this powerful tool into your trading strategy, explore the course Trade Markets Using Relative Strength, where we delve deeper into how you can leverage this technique to improve your market analysis.

I: Institutional Sponsorship

For a stock to experience significant price appreciation, it requires substantial demand. This demand is typically driven by market participants with large amounts of capital at their disposal—namely, institutions. Institutions include entities such as mutual funds, hedge funds, pension funds, insurance companies, and other large-scale investors. The CAN SLIM method suggests that a stock should see an increase in institutional participation during the quarter preceding or shortly after the price begins to rise. Ideally, the participation of well-known and reputable institutions is also a favorable indicator.

M: Market Direction

When the overall market, represented by broad indices such as the Nifty 50, Nifty 200, BSE Sensex, and others, is in a correction or bearish trend, even the most promising stocks will often be subject to selling pressure from other market participants. Conversely, during a bullish market trend, stocks not only rise in price but also gain momentum. For a market to be considered in a bullish trend, the indices should ideally remain consistently above the 50-day EMA on a daily timeframe. This indicates the presence of sustained upward momentum.

Want to Take Your Trading Skills to the Next Level?

Now is the perfect time to explore stocks that exhibit the characteristics outlined in the CAN SLIM method and begin shortlisting potential candidates for the market cycle. By identifying these stocks early, you position yourself to take advantage of upcoming market opportunities.

If you're interested in delving deeper into technical analysis concepts, consider joining TNT One. This exclusive membership provides access to India's most extensive library of resources on Noiseless charts and other proven trading strategies. Tailored to meet the needs of traders at all levels, TNT One offers valuable insights whether you're just starting out or have years of experience in the market.

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