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.
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.
Market price valuation of stocks
After all the fundamental checks on the companies, it is essential to look into the price valuation of stocks as well.
In order to identify best stocks, price check is essential. It is true that fundamentally strong stocks generally trade at overvalued price levels.
Hence it is a must to do price valuation checks before buying one.
The criteria that we can use to screen stocks to know its price valuation are as follows:
#1. Price Earning Ratio (P/E)
This ratio will tell us, compared to companies profits, how high its market price is placed. By using this ratio we can even compare two companies of different sectors. A a very old rule of thumb, a P/E ratio of above 15 signifies that the stock is overvalued. But such simplification is not advisable. It is better to compare P/E of stocks you are analysing with other stocks of same sector. Try to figure our the average P/E ratio of that sector (add P/E ratio of all companies of that sector and dividend it by number of companies). Generally the companies that we have in our list will have P/E above this average P/E ratio. Track their P/E ratio. The buy time will come when their P/E falls below the average P/E you have calculated just now.
#2. PEG Ratio
There will be some companies whose P/E ratio will be exorbitantly high. Do not discard such companies right away. Calculate its PEG ratio first (PE ratio dividend by 5 year EPS growth rate). If PEG is ore than 1, only then you discard it. Since last several years, PEG ratio is one valuation that has worked very well to identify value stocks.
#3. Dividend Yield
I love valuing stocks based on its dividend yield. This is like a litmus test for all stocks. Majority stocks fail this test, but I still like my ‘list of best stocks” to cross this test.
We must not focus too much on dividend yield itself. What is more important is to check the dividend patter for last 5 years.
A stocks which has continuously increased its dividend payout in last five years is very likeable.
So how to test stocks for its dividends?
Note last five years dividend/share of any stock. Calculate an average of dividend/share. Now divide this average dividend per share with its current market price.
The higher is this value, more undervalued is the stock.
As a rule of thumb, a stock with average dividend per share for last 5 years is above 4%, is a good buy.
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.
Best Stock to Buy in India for long term
(Updated as on August’2017)
|SL||Stocks||Competitive Advantage||Price Valuation||Predictability of Results||Financial Health of Company|
|1||Pidilite Industries Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|2||Asian Paints Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|3||Housing Development Finance Corp Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
|4||Infosys Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|5||HDFC Bank Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|6||Kotak Mahindra Bank Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|7||Castrol India Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|8||GlaxoSmithKline Consumer Healthcare Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|9||Blue Dart Express Ltd||Wide Moat, High Competitive Advantage||Undervalued||Low||Strong|
|10||Bosch Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|11||3M India Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|12||Hero MotoCorp Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|13||CRISIL Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|14||Alkem Laboratories Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|15||Tata Consultancy Services Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|16||Marico Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|17||Kansai Nerolac Paints Ltd||Wide Moat, High Competitive Advantage||Fair||Medium||Strong|
|18||UltraTech Cement Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|19||United Breweries Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Strong|
|20||Eicher Motors Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
|21||Page Industries Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
|22||Emami Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
|23||Shree Cement Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
|24||Adani Ports & Special Economic Zone Ltd||Wide Moat, High Competitive Advantage||Fair||Low||Reasonable|
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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.