Indian stock market has thousands of stocks available for trading.
These stocks are bought and sold each day by hundreds of people. But is it good to pick ANY stock and start trading?
No, we cannot buy any stock and expect to make profit. Out of all stocks that we have in the market, only a very tiny minority qualifies as a good buy.
Hence stock picking must be done with extreme care. The focus should be to buy best stocks available in stock market.
In general, which stocks can be considered as best? The are such stocks which one can hold for long term. Warren Buffett buys stocks to hold them “forever”.
To a novice, it can be overwhelming to identify best stocks to buy. This is where this blog post will help the readers to understand how to pick the best stocks.
Majority people in India knows only, TCS, Reliance Industries, Infosys etc. No doubt these are best stocks.
But this is also true that there are other names which can also be tagged as best stocks.
Which are those stocks?
The big names like RIL, TCS, WIPRO are always in news, but what about those stocks which are not as popular?
Is is good to buy only popular stocks?
On the contrary, experts say that one must be very cautious while buying popular stocks. This is because, popular stocks generally trade at overvalued price levels.
There are more than 5,000+ stocks currently trading in Indian stocks market (BSE).
So the question arises, which are the best stocks among this list of whooping 5,000+ numbers?
Investment Gurus often talk about the two (2) basic screening criteria to identify best stocks for investing as shown in below pictorial representation.
For stock speculators, this concept is not important. But long term investors can bi-heart this concept like a bible.
Ok, so now we have the concept. We have mugged-it-up, and we feel strong. But where is the list of best stocks to buy?
You might have noticed that the list of best stocks are not readily available even on internet.
You know what is the problem? The problem is no body knows it. Yes not even me.
If best stock is gold, then investors are like miners. They have to do some digging-in to extract the gold.
In this blog post, we will try to learn how to unearth this gold, our own list of best stocks.
Yes, you heard me right, I am suggesting all my readers to have their own list of best stocks.
It is advisable to MAKE ONES OWN LIST of favorite stocks.
Because this is the best way to play the stock market game. Having ones OWN list of best stocks is one sure foot-forward towards becoming a successful stock investor.
If one could copy others and make money, probably every stock trader in this world would have bean millionaire by now. But the fact is, only the ELITE make money in stock market.
What makes an investor rise to the stature of ELITE? Their skill to find the best stocks on their own.
The ability of a person to screen the best stocks from plethora of non-performing stocks can makes them a very successful investor.
In this article we will see how to screen best stocks. This way, one can start screening stocks on their own.
Lets take a small example. What are the top two stocks in Indian stock market presently? RIL and TCS. These are those stocks which has the largest market capitalization compared to other stocks. So are these stocks best?
If these two stocks are the best, why banks, insurance companies, financial institutions, foreign investors etc are also buying others stocks?
There is not doubt that the underlying business of TCS and RIL are rock solid. But as these are the most popular stock of Indian stock market, they are very-very overvalued.
So what does this example conclude?
When we are busy buying popular stocks, experts like mutual fund managers, are busy buying stocks of other good business which are not so popular.
And why they do like this?
Because less popular stocks are available at comparatively better price levels.
It is absolutely essential to know that, we cannot buy stocks at overvalued price levels and expect to make profits. Even if the stock is of Apple, Microsoft, Google etc, one will not make profits till the stocks are bought at undervalued price levels.
Then how traders make money? They do not think about stock valuation!
Yes traders do not think about market price valuation. Their way of making money is different. They ride on the stocks price momentum to make money. But the problem with this theory is that, it closely resembles GAMBLING.
Gambling is too risky. Real investors in the Market do not gamble with stocks.
So how a common man should invest in stocks?
Make your own list of favorite stocks and track then using investment portfolio tracker.
But why we must use a portfolio tracker?
Which stocks must come in our list of best stock? These are those businesses which has strong business fundamentals.
Any business which has strong fundamentals invariably comes under the radar of professional fund managers. Once the fund managers target a stock, it starts becoming overvalued.
Hence, though these stocks represent a good business, one cannot buy them till their price falls
When price falls, those stocks which were not attractive earlier becomes attractive. Similarly, when price rises, those socks which were preferable earlier, becomes overvalued.
How to track these price falls-and-rise easily?
The investment portfolio tracker helps people like us to keep a track of market price of our favorite stocks.
Buying stocks whose price is falling is ok?
Market price movement of stocks cannot alter the business health of a fundamentally strong company. But it effects its market price valuations.
When valuation is good, it means stock is trading at price levels below its intrinsic value. When valuation is bad, it means stock is trading at price levels above its intrinsic value.
How often one must re-check the list of best stocks?
Companies business performance keep changing from quarter to quarter (3 months). Performance of companies are declared in their financial statements (quarterly).
This is the time when we can recheck our list of best stocks.
But if this is too frequent, updating ones list at least once a year is also not so bad.
Every change in companies ‘quarterly reports’ and ‘market price’ will reflect on our ‘list of best stocks’.
How to identify stocks doing good business?
This is my favorite topic.
There are host of financial ratios using which one can estimate if a company is doing good business or not.
But what we are going to discuss here is slightly different.
This method is easy and I suppose any one can use it to prepare ones own list of best stocks.
We will consider a stock good only if it is a sector leader. Why does it mean?
Lets take an example to understand this point.
Suppose there is a business sector called “Metal and Mining”. In this sector there are several companies doing their business.
But the top 2 companies which stand out of others (in terms of market capitalization) is Hindalco and NALCO.
So for us, these two companies will come in our list of best stocks.
Please note this point that, here we are not screening stocks on market cap alone.
Our bigger purpose is to identify Sector Leaders.
A company which is leading its sector while doing business deserves to be in our list of best stocks, right?
I personally find this method of stocks screening very effective.
The Sectors that I consider to screen my stocks are as listed below (reference: Investing.com)
Whenever one finds any of the stocks of above sector/industry experiencing a major price dip, he/she must become aware.
The next step is to open the stocks last 10 years financial report to do a more in-depth stock analysis.
If everything comes out well here, one can proceed and buy that stock.
This form of stocks investing is considered nearly fool-proof.
Good business will also have a wider moat
What it means by wider moat?
The Moat is term which is used extensively by Warren Buffett.
In English language, moat is defined as a hole which is normally dug around forts, and it is also filled with water. Such an arrangement provides an hindrance to the attackers. Means, any fort which has such a moat surrounding it, will make it extremely difficult for the attackers to enter and capture the fort.
Similar analogy is drawn with respect to a company. A company enjoying wide moat means, future potential of its business is well protected.
What can protect future potential of a company?
Things like, unique products, patents, skilled workforce, brand name, after sales service etc, ensures future growth of company.
A company which displays these characteristics is said to be enjoying a wide moat.
Questions to be asked by the investor to identify best stocks
#1. What is the size of the company? How big is the company?
Generally speaking, we would like to buy stocks of which companies? Big, stable, famous companies, right?
So how to identify these companies?
There are many ways of doing it, but I prefer to screen companies based on its market capitalisation.
This stock metric is not only easily available, but it also encompasses lot of other technical and fundamentals aspects of the business within it.
#2. The company is keeping its debt levels low or not?
This is tricky. Particularly for common men like us, it is not easy to interpret if the company is carrying too much debt.
But lets take a small analogy to get the concept right.
Suppose there are two companies A & B. A has a debt of Rs.10 Crore and B has a debt of Rs.20 Crore. Which company looks better here? If we have to look only at debt levels, Company A looks better.
Now suppose, Networth of A is Rs.10 Crore and Net worth of B is Rs.20 Crore. Means, the debt equity ratio (D/E) of A is 1 (10/10) and that of B is also 1 (20/20).
So which company is better? Debt/Equity ratio being a very reliable debt burden indicator is not able to differentiate between A & B. What to do?
There is a way out.
Suppose Company A and B has a cash/Cash equivalent reserves of Rs.4 Crore and Rs.25 Crore respectively.
Debt – Cash for Company A is = Rs.6 Crore (10-4).
Debt – Cash for Company B is = Rs.-5 Crore (20-25).
A negative value for Company B indicates that company is having enough cash to pay-off all its debt.
Hence, even if the company B is carrying far higher debt than A, but still it is a far secure bet for the investors.
How to know if the companies “Debt-Cash” component is negative or what?
We will have to take help of Enterprise Value and Market Capitalisation.
Enterprise Value minus Market Capitalisation = Debt – Cash
#3. How profitable is the company?
To understand the profitability levels of the company, we will dig into their operating margins (OM) and return on equity (ROE).
Operating margin will highlight the efficiency of companies operating practice, compared to others.
Return on equity will highlight if the company utilising the shareholders funds well or not, compared to others.
#4. How fast is the company growing?
It is important to keep an eye on the potential growth prospects of the company.
Investors would not like to buy shares of a large but half-dead elephant.
So what to do?
The solution is simple, check the companies last five years sales, EPS and Networth (book value) growth.
The faster is the company growing, the better.
#5. Current price levels of company is good for buying?
This question is easier to ask, but its answer is not that simple. In fact, this is perhaps the most difficult part of the stock investing.
It is possible to approximately judge price valuations of a company by the use of Ratios. But it is not so effective.
What is actually required here is a REAL SKILL. The skill to calculate the companies intrinsic value. But yes, this is not easy.
I have also developed a product which can help you to learn to identify best stocks in totality. Along with fundamental checks, it also analyzes stocks in terms of its price valuation. Users who are interested to learn the concept of stock analysis can buy my stock analysis worksheet.
For people who does not want to go into those details calculations, use of financial ratios like P/E, P/B, PEG works well.
But I will like to introduce few not so know rations, which are extremely powerful for price valuation of stocks.
#5.1. Price Valuation – Enterprise Value and Ebitda Ratio?
Enterprise value is used here instead of Market Capitalization.
Market capitalization just reflects the price of company trading in the stock market which an investor must pay to buy its share. (P.Note: Market capitalization / number of shares outstanding = market price).
But enterprise value reflects the actual cost of the company, that an investor must bear if he buys the shares of the company. (P.Note: Enterprise Value / number of shares outstanding = market price).
At times, when Debt-Cash is negative, actual cost to investor is less than the price he has paid. When when Debt-Cash is positive, actual cost to investor is more than the price he has paid.
[If you want to know more about Enterprise value, check this link….]
Hence, the use of the ratio Enterprise value dividend by Ebitda will be a more realistic figure to look at to know if the company stocks are trading at overvalued levels or undervalued levels.
#5.2. Market Capitalization and Free Cash Flow Ratio?
A company which is generating more free cash flow is good for the investors.
Comparison between market cap and free cash gives a very realistic picture of the present price valuation of the stock.
#6. How much returns the company has generated for its investors in the past?
Returns for investors is generated in three ways, dividend payout, bonus shares, and price appreciation.
Looking at past 5/10 years data of the company, gives a clarity to investors that if the stock/company has made money for its investors or not.
Though for value investors, looking at past price and bonus issues, are not as interesting, but it is still worth looking at…right?
I believe so….
Best Stock to Buy in India for long term
(Updated as on January’2018)
Size of Company and its Debt Levels
|SL||Company||Sector||Size of Company||Market Cap (Cr)||Enterprise value Minus Market Cap (Negative is better)||Debt Equity Ratio|
|1||Ajanta Pharma Ltd.||Healthcare-Drugs & Pharma||Mid Size||13214.94||-230.79||0|
|2||Arrow Greentech Ltd.||Chemicals-Plastic Packaging goods||Small||615||-43.43||0|
|3||Cupid Ltd.||Healthcare-Drugs & Pharma||Small||428.65||-19.04||0|
|4||Tata Elxsi Ltd.||Technology-Computer Software||Mid Size||6498.24||-251.53||0|
|5||Vakrangee Ltd.||Technology-Computer Software||Large||47460.85||-459.74||0.07|
|6||La Opala RG Ltd.||Construction-Glass & Glassware||Mid Size||3443.22||-134.75||0|
|7||eClerx Services Ltd||Services-Misc.Other Services||Mid Size||6179.47||-605.99||0|
|8||Tata Consultancy Services Ltd.||Technology-Computer Software||V.Large||533799.09||-45496||0|
|9||Avanti Feeds Ltd.||FMCG-Marine Foods||Mid Size||11685.11||-351.32||0.03|
|10||Vardhman Holdings Ltd.||Textiles-Cotton & Blended Yarn||Mid Size||1843.3||-334.41||0|
|11||Stovec Industries Ltd.||Engineering-Industrial Machinery||Small||706.24||-27.04||0|
|12||Multibase India Ltd.||Chemicals-Plastic Resins||Small||861.06||-27.39||0|
|13||Maruti Suzuki India Ltd.||Automobile-Cars & Multi Utility Vehicles||V.Large||285776.8||-1718.7||0.01|
|14||Indraprastha Gas Ltd.||Energy-Crude Oil & Natural Gas||Mid Size||22869.03||-1026.46||0|
|15||Fiberweb India Ltd||Chemicals-Other Plastic Prod.||Small||510.91||-21.52||0|
|16||Whirlpool Of India Ltd.||Cons Durable-ACs & Refrigerators||Mid Size||19420.27||-1058.95||0|
|17||Allsec Technologies Ltd.||Services-BPO Services||Small||673||-89.59||0|
|18||Suven Life Sciences Ltd.||Healthcare-Drugs & Pharma||Mid Size||2676.11||-239.27||0.11|
|19||Britannia Industries Ltd.||FMCG-Bakery & Milling Prod.||Large||56493.23||-171.05||0.05|
|20||Indian Toners & Developers Ltd.||Chemicals-Dyes & Pigments||Small||416.63||-22.55||0|
Profitability and Growth
|SL||Company||Operating Margin (%)||ROE (%)||5 Year Revenue Growth||5-Year EPS Growth||5 Year Book Value Growth|
|1||Ajanta Pharma Ltd.||35.94||36.75||23.97||45.62||39.33|
|2||Arrow Greentech Ltd.||75.65||40.75||67.4||96.44||44.81|
|4||Tata Elxsi Ltd.||23.45||36.69||19.1||38.55||24.21|
|6||La Opala RG Ltd.||33.53||21.73||17.99||33.01||36.3|
|7||eClerx Services Ltd||36.78||30.67||22.98||16.67||28.2|
|8||Tata Consultancy Services Ltd.||30.97||33.64||19.26||20.24||23.62|
|9||Avanti Feeds Ltd.||12.94||42.93||47.35||46.42||43.01|
|10||Vardhman Holdings Ltd.||101.53||4.48||69.64||27||21.15|
|11||Stovec Industries Ltd.||22.27||30.67||25.66||36.4||17.17|
|12||Multibase India Ltd.||24.39||23.05||16.85||43.36||21.33|
|13||Maruti Suzuki India Ltd.||18.58||21.68||13.54||33.72||17.75|
|14||Indraprastha Gas Ltd.||26.61||19.48||8.67||13.26||18.95|
|15||Fiberweb India Ltd||15.43||22.47||18.65||35.78||23.13|
|16||Whirlpool Of India Ltd.||14.26||23.44||8.2||20.48||25.5|
|17||Allsec Technologies Ltd.||21.5||50.88||12||41.23||8.64|
|18||Suven Life Sciences Ltd.||27.63||13.81||21.63||51.13||39.38|
|19||Britannia Industries Ltd.||15.78||37||10.54||34.56||45.61|
|20||Indian Toners & Developers Ltd.||27.29||24.02||13.04||20.83||14.94|
|SL||Company||Enterprise Value / Ebidta||Price / Sales||P/E||P/B||PEG (5Y)|
|1||Ajanta Pharma Ltd.||18.92||6.57||27.34||7.35||0.60|
|2||Arrow Greentech Ltd.||16.06||11.12||23.2||5.84||0.24|
|4||Tata Elxsi Ltd.||19.46||4.99||33.28||10.75||0.86|
|6||La Opala RG Ltd.||31.97||13.05||54.37||7.67||1.65|
|7||eClerx Services Ltd||12.73||4.68||18.78||4.51||1.13|
|8||Tata Consultancy Services Ltd.||13.7||4.42||20.91||6.59||1.03|
|9||Avanti Feeds Ltd.||17.79||3.76||30.12||13.71||0.65|
|10||Vardhman Holdings Ltd.||6.96||8.18||8.71||3.7||0.32|
|11||Stovec Industries Ltd.||15.28||3.29||28.36||6.69||0.78|
|12||Multibase India Ltd.||32.68||8.56||53.32||11.73||1.23|
|13||Maruti Suzuki India Ltd.||21.36||3.59||38.13||7.48||1.13|
|14||Indraprastha Gas Ltd.||19.91||5.12||37.55||7.21||2.83|
|15||Fiberweb India Ltd||21.14||3.53||24.87||5.09||0.70|
|16||Whirlpool Of India Ltd.||29.7||4.17||57.8||11.79||2.82|
|17||Allsec Technologies Ltd.||7.84||1.96||10.45||3.68||0.25|
|18||Suven Life Sciences Ltd.||12.44||4.92||21.3||3.38||0.42|
|19||Britannia Industries Ltd.||37.92||6||62.19||19.64||1.80|
|20||Indian Toners & Developers Ltd.||18.23||5.91||25.05||2.7||1.20|
|SL||Company||Sector||Size of Company||Market Cap (Cr)||Return for Investors in Last 5 Years||Return for Investors in Last 10 Years|
|1||Ajanta Pharma Ltd.||Healthcare-Drugs & Pharma||Mid Size||13,214.94||69.95||60.15|
|2||Arrow Greentech Ltd.||Chemicals-Plastic Packaging goods||Small||615.00||113.72||30.12|
|3||Cupid Ltd.||Healthcare-Drugs & Pharma||Small||428.65||99.36||28.74|
|4||Tata Elxsi Ltd.||Technology-Computer Software||Mid Size||6,498.24||55.24||23.24|
|5||Vakrangee Ltd.||Technology-Computer Software||Large||47,460.85||67.30||54.62|
|6||La Opala RG Ltd.||Construction-Glass & Glassware||Mid Size||3,443.22||62.65||52.00|
|7||eClerx Services Ltd||Services-Misc.Other Services||Mid Size||6,179.47||23.48||24.03|
|8||Tata Consultancy Services Ltd.||Technology-Computer Software||V.Large||533,799.09||16.25||18.80|
|9||Avanti Feeds Ltd.||FMCG-Marine Foods||Mid Size||11,685.11||140.24||74.84|
|10||Vardhman Holdings Ltd.||Textiles-Cotton & Blended Yarn||Mid Size||1,843.30||58.10||34.37|
|11||Stovec Industries Ltd.||Engineering-Industrial Machinery||Small||706.24||54.77||31.83|
|12||Multibase India Ltd.||Chemicals-Plastic Resins||Small||861.06||71.28||29.38|
|13||Maruti Suzuki India Ltd.||Automobile-Cars & Multi Utility Vehicles||V.Large||285,776.80||43.25||26.49|
|14||Indraprastha Gas Ltd.||Energy-Crude Oil & Natural Gas||Mid Size||22,869.03||45.46||26.99|
|15||Fiberweb India Ltd||Chemicals-Other Plastic Prod.||Small||510.91||124.88||46.81|
|16||Whirlpool Of India Ltd.||Cons Durable-ACs & Refrigerators||Mid Size||19,420.27||40.40||40.97|
|17||Allsec Technologies Ltd.||Services-BPO Services||Small||673.00||40.86||13.37|
|18||Suven Life Sciences Ltd.||Healthcare-Drugs & Pharma||Mid Size||2,676.11||47.35||15.81|
|19||Britannia Industries Ltd.||FMCG-Bakery & Milling Prod.||Large||56,493.23||57.14||30.73|
|20||Indian Toners & Developers Ltd.||Chemicals-Dyes & Pigments||Small||416.63||82.12||25.74|
Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.