Tuesday, March 28, 2006

CANSLIM Review Part 3

L: Leader or Laggard
It is necessary to decide what companies are the leaders in a sector, and which are the laggards. We can use the above characteristics like EPS, Current quarterly earnings etc to differentiate the good picks from the others. The author only encourages investors to buy market leaders and avoid laggards. An indicator called the "Relative Price Strength" of a company is used to estimate the position of an individual company from its competitors. This indicator is solely found in the "Investor's Business Daily" and only applicable to the NYSE/SESDAQ. We shall not further mention this as it is not clearly defined in the book how this indicator is calculated.

I: Institutional Sponsorship.
When a company has many major institutions such as banks, fund managers backing them, their shares are considerably more liquid. Moreover, some institutions have ownership over thie company, which gives investors an added assurance when buying their shares. For example, Temasek holdings having a share in Singtel. Note that it is important to look at the track record of the institutions supporting the company. Only the best performing ones should be noted.

M: Market Direction

It is the last but perhaps the most difficult characteristic to determine. Even if a stock possess the above 6 qualities like strong annual growth, good quarterly earnings and is a leader in the market, it's price can still fall short of expectations in a bear market. The author suggests that one should learn to determine the overall market direction by intepreting daily market prices, volume movements and the action of market leaders. Furthermore, one should also study the "general market" by looking at various market indices. In our case, it is the STI. The index may indicate emerging trends in the market.

This ends the review I have on the CANSLIM method. It only serves as a short summary and one should read the book in order to appreciate its details. There are many other interesting concepts and examples which I've not included here. They might not be relevant to this review, nor maybe relevant to the local context. Over the following weeks, I shall try to apply this CANSLIM method to some listed companies to see how it works.


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