Indian stock market has thousands of stocks in its holding. These stocks are bought and sold each day by millions of people.
But is it good to pick ‘any’ stock and start trading?
No, we cannot buy any stock for investing. 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 on best stocks to buy in India for long term.
To a novice, it can be overwhelming to identify best stocks. Majority people know only, TCS, Reliance Industries, Infosys etc. These are big names which are always in news.
But in reality, there are more than 5,500 stocks listed in BSE. So the question arises, which are the best stocks among this list of whooping 5,500 numbers?
The list of best stocks to buy in India are not readily available even on internet. What is advisable is to MAKE ONES OWN LIST.
Yes, this is the best way to play the stock market game. Have your ‘own’ list of best stocks.
If one could copy others and make money, probably every stock trader in this world would be a millionaire. But the fact is, only the elite makes money in stock market.
What makes these people so unique and rare? What makes them succeed among the huge horde of average performing investors?
Their ability to screen the best stocks from plethora of non-performing stocks makes them successful.
In this article we will see how to screen best stocks. This way, one can start screening stocks on their own.
In general, to screen best stocks, one must focus on ‘business fundamentals’ PLUS few minor ‘technical analysis’.
Even the best of stocks has vert volatile price movements. If idea is to prepare ones ‘own’ list of best stocks, one must prepare and review their list every 3 months.
Your ‘list of best stocks’ change with market price fluctuations. But how price can effect ones list of best stock?
What are best stocks?
Best stocks are not only those stocks which has strong business fundamentals. They must also be available at right price.
Hence, when price falls, those stocks which were not attractive earlier becomes attractive. Similarly, when price rises, those socks which were preferable earlier, becomes overvalued, hence move out of the list.
Market price movement of stocks cannot alter the business health (core fundamentals) of the 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.
Companies business performance also keep changing from quarter to quarter (3 months). Performance of companies are declared in their financial statements (quarterly).
This is the reason why, I ask you to recheck your list of best stocks every 3 months.
Every change in companies ‘quarterly reports’ and ‘market price’ will reflect on ones ‘list of best stocks’.
Characteristics of Top Stocks :
What one must glance at to know if a stock is a good buy or not? Frankly speaking, to identify a best stock, superficial observation is not enough. One must dig deep into companies details.
But before digging deep into reports, these are few factors that gives a hint about the companies ‘fundamentals’ and ‘price valuation’.
I personally glance at these values before doing a more detailed stock analysis.
To start with, I ask following questions about stocks?
* Company ranks in the list of top 100 market cap stocks?
* Company ranks in the list of top 100 stocks in terms of its sales turnover?
* Compared to its competitors, how company ranks in terms of its sales turnover?
* Is the 5 years sales growth rate of company beating inflation?
* Companies profit margin has improved over last 5 years?
* How fat is the Net Worth improving?
* Net cash flow from operation has been positive in last 5 years?
* The company has a reliable dividend payment history?
* Stock of company is available which P/E ratio, compared to its competitors?
The screener one can use to identify best stocks to buy in India
High Market Share
Out of all stocks that trade in Indian stock market, I love those stocks which has high market share in its sector.
This is one of those ‘easy’ screening criteria based on which we can remove average and down performing companies.
The criteria that I use to screen stocks in terms of market share is “Revenue”.
But I also like to keep the parameter of “Market Capitalization” as my screener.
A combination of high revenue and high market capitalisation ensures that we do not miss out any stocks wich are liked by the market.
High Profits and high Margin
Once we have a list of stocks based on their market share, we must use another important screen.
The use of this screen will remove not so profitable companies from our list.
For any investor the priority should be to include only highly profitable companies in the investment portfolio. No matter how high is the market share of the company, if its operations are not profitable enough, it will be difficult for the company to maintain its market share.
Hence it is equally important to look and lump-sum profits and profit margin all together.
The criteria that we can use to screen stocks in terms of its ‘profit’ and ‘profitability’ is (a) net profit & (b) gross margin.
People love to see stocks with high and improving net profits (PAT). But frankly speaking we must avoid focusing too much attention on net profits. High improving PAT is good but its not everything.
Along with PAT, I screen stocks based on its gross margin as well.
Our list is ready, go ahead a buy?
Yes, now we have a list of stocks which has high revenue, high market market capitalisation, high PAT and high gross margin.
In short, we have list of market leaders which are also has a very profitable business.
So are we ready to buy them now?
Not so soon. What we know is stocks which has strong business fundamentals. But generally such companies trade at extremely expensive price levels.
So we need another screener, right?
Yes this screener is easier as data related to that is more easily available on internet.
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 stocks analyses can buy my stock analysis worksheet.
Best Stock to Buy in India for long term in 2017
(Updated as on June’2017)
Best Stocks to watch in India – Quotes
|SL||Stock||Price||Market Cap (Rs.Cr.)||P/E||Div. Yield|
|8||Blue Dart Express||4,467.00||10,530.00||75.96||0.34%|
|11||Colgate Palmolive India||1,020.00||27,905.00||48.08||0.98%|
Best Stocks to watch in India based on getmoneyrich’s stock analysis worksheet
|SL||Stock||Price Valuation||Business Fundamentals||Profitability Ratio||Price Histroy||Overall Grading|
|1||AIA Engineering||24 / 100||77 / 100||85 / 100||100 / 100||72 / 100|
|2||Cummins India||34 / 100||81 / 100||97 / 100||100 / 100||78 / 100|
|3||Eicher Motors||24 / 100||93 / 100||84 / 100||100 / 100||76 / 100|
|4||Nestle India||19 / 100||88 / 100||100 / 100||100 / 100||77 / 100|
|5||Siemens Ltd||47 / 100||93 / 100||67 / 100||85 / 100||73 / 100|
|6||ABB India||9 / 100||57 / 100||39 / 100||33 / 100||34 / 100|
|7||HDFC||45 / 100||61 / 100||65 / 100||100 / 100||68 / 100|
|8||Blue Dart Express||23 / 100||92 / 100||83 / 100||100 / 100||75 / 100|
|9||Bosch Ltd||15 / 100||96 / 100||82 / 100||100 / 100||74 / 100|
|10||Britannia Industries||16 / 100||46 / 100||83 / 100||100 / 100||61 / 100|
|11||Colgate Palmolive India||24 / 100||69 / 100||100 / 100||100 / 100||73 / 100|
Rating of our best stocks by Morningstar
|8||Blue Dart Express||Fairly Valued||High||Strong||Wide|
|9||Bosch Ltd||Fairly Valued||High||Strong||Wide|
|11||Colgate Palmolive India||Overvalued||High||Strong||Wide|
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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.