Get a list of “best stocks to buy in India” at the bottom of this post.
But before that, decoding few key concepts about the best stocks will be good.
Indian stock market has thousands of stocks available for trading.
These stocks are bought and sold each day by hundreds of people.
But important is to know whether, picking any stock is a good investment?
No, we cannot buy any stock.
Out of all stocks that we have in the market, only very few can qualifies as a good-buy.
The focus should be to buy only the best stocks available.
#1. Which stocks can be considered as best?
These are such stocks which one can hold for long term.
Remember: Warren Buffett buys stocks to hold them “forever“.
To a novice, it can be overwhelming to identify best stocks to buy.
So how to pick the best stocks?
Best stocks are not available off the shelf.
Best stocks are often hidden in the heap of other stocks.
One must learn to screen their best stocks from the heap.
This is what is called as stock screening.
Why stock screening is essential?
Because we remember the names of only superstars (like TCS, RIL, Infosys etc).
But these are superstars are expensive.
Profit making is not easy with them.
We must know how to include Irfan Khan’s, and Rajkumar Rao’s in our portfolio.
In movies, it is easy for audience to decipher best stars from others.
But it is slightly more difficult to identify best stocks.
Superstars of stock market are TCS, Reliance Industries, Infosys etc.
No doubt these are good stocks, but most of the time they trade at overvalued price levels.
Trick lies in identifying stocks of great business which are also undervalued.
#2. Keep your focus on not so popular 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 buy popular stocks more conservatively. Why?
Because, popular stocks generally trade at overvalued price levels.
There are 5,000+ stocks currently trading in Indian stocks market (BSE).
Out of these, which are the best stocks?
The answer is not easy.
In fact the answer is so unique that people who know it, become billionaires.
We common men can find this answer?
Yes it is possible. But we have to follow a procedure.
We can use two basic screening criteria’s.
This will help to identify best stocks among ordinary ones.
What is this screening criteria?
See the below pictorial representation.
For stock speculators, this concept may not be interesting.
But investors can bi-heart this concept like a bible.
It helps people to pick stocks that they can hold on forever.
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?
Well, I have to make a confession here…
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. Sorry.
But there is a way out…
#3. Prepare your own list of best stocks
Success in life cannot be borrowed.
The same theory is applicable in stock investing.
We cannot borrow others stock advice and become successful.
Do you know what is the problem?
People who really can identify best stocks, do not care about posting it on internet.
And people who posts on internet are often not reliable.
But it is possible to settle for a compromise. You can do it yourself.
Yes, you head me right. It is possible.
This way to picking best stocks is more more reliable.
Do not wait for TV, Print media or internet to suggest you best stocks.
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.
Lets learn how to prepare our own list of best stocks.
Why to take this pain?
Because this is the best way to play the stock market game.
Having ones own list of best stocks is the best formula for success.
If one could copy others and make money, probably every stock trader in this world would have been millionaire by now.
But the fact is, only the ELITE investors make money in stock market.
What makes an investor rise to the stature of ELITE?
Their ability to screen best stocks from ordinary ones, makes them elite.
Lets see how to screen best stocks.
But again, popular stocks are not always best stocks.
#4. Focus on “not so popular” stocks?
What are the top two stocks in Indian stock market presently?
RIL and TCS.
These stocks has the largest market capitalisation.
So are these stocks best?
If these two stocks are best, why expert investors also buy others stocks?
Because other stocks are available at more undervalued price levels.
When people are busy buying popular stocks, experts investors accumulate less popular stocks.
This way they make tonnes of money in stock market.
Experts knowingly stay away from popular stocks.
They focus more on the following:
- Quality of business &,
- Price valuation.
Popular stocks may have quality business, but they are always overvalued.
Hence avoid them.
#5. How to avoid overvalued stocks…
We cannot buy overvalued stocks and expect to make profits.
Even if the stock is of Apple, Microsoft, Google etc, they will not make money for us.
Why? Because it is essential to buy stocks at a right price.
What is right price?
The formula is simple: Right price = Current Price < Intrinsic Value.
But resolving this equation is tough. Why?
Because one parameter in it is completely unknown. The “intrinsic value”.
Experts know how to estimate intrinsic value. But how a common man can do it?
It is tough but is possible.
There is no other way out? Yes, trade in stocks.
How traders make money in stock?
They do not think about stock 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.
Its too risky.
So how a common man can invest in stocks?
They can do the following:
- Make your own list of favourite stocks and,
- Track then using investment portfolio tracker.
Portfolio trackers can help us avoid buying stocks at overvalued price levels. How?
#5.1 Tracking investment portfolio
Which stocks must come in our list of best stock?
Stocks of companies which has strong business fundamentals.
Strong business fundamentals means what?
- Sales growth.
- Profit growth.
- Market share.
- Net worth.
- Margins etc.
- Free cash flow yield etc.
Any stocks which show good number above, must be included in the list.
But their purchase is prohibited.
These stocks represent a good business. Hence there are high chances that they are overvalued.
One cannot buy them till their price falls.
We must track the price changes of these stocks.
How to track these price changes easily?
The investment portfolio trackers helps in keeping track of market price of our favourite stocks.
When price of these stocks fall by 15-20%, grab them.
This is the easiest way.
#6. So, buying stocks whose price is falling is ok?
First things first, there is correlation between stock price and business fundamentals?
Yes they are deeply linked.
But this does not mean that, they always move in sync with each other.
Ideally what should be the case?
- Market price of stock should represent the true value of the company.
- Change in business fundamental should reflect in its market price.
This is only a theory. In investment jargon it is called as efficient market hypothesis.
But in real world, the market price behaves erratically.
This is what we call as “price volatility”.
What is the point I am trying to make here?
We cannot rely only on market price movements while picking best stocks.
The trick is in learning to do the following:
- Repeated fundamentals checking of our list of stocks.
- A detailed price valuation.
I use my stock analysis worksheet to screen good stocks from other.
Then I do the following:
- I feed these stocks into my my portfolio tracker.
- The list of stocks so prepared, are “re-checked” periodically.
- I keep a special note of whether my list of stocks are enjoying a “wider moat” or not.
#6.1 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 a good idea.
#6.2 Best stocks will always have a wider moat…
What it means by wider moat?
Moat is a term which is used extensively by Warren Buffett.
In English language, moat is a hole which is normally dug around the Forts, and it is filled with water.
Such an arrangement provides a protection to the fort from its invaders.
Any fort which has such a moat surrounding it, will make it extremely difficult for the attackers to enter and capture the fort.
How this hole (moat) analogy makes sense in stock investing?
A company enjoying wide moat means, future potential of its business is well protected.
What can protect future potential of a company?
Following features of a company helps it to enjoy a wider moat:
- Unique products,
- Skilled workforce,
- Established brand name,
- Good after sales service etc.
These features in totality can ensures future growth of any company.⇑
A company which displays these characteristics is said to be enjoying a wide moat.
#7. How to identify best stocks?
There is no short cut to identify best stocks.
I do it the harder way following the method of fundamental analysis.
I have developed a stock analysis worksheet for myself.
It makes the job of fundamental analysis slightly easier.
Though it is not a perfect tool, but it does answer few important questions about stocks.
What questions are answered by my worksheet?
#7.1. What is the potential growth rate of the stock?
Stocks which has shown consistent growth in its past are more likely to repeat the same in future.
Though the past growth rates may not be an exact indicator of the future prospects, but it still gives a realistic feeling.
My stock analysis worksheet gauge growth rates of stocks in span of last 10 years.
The financial parameters that must grow consistently for stocks are as below:
- Free Cash Flow.
- Dividend &
- Earning per share (EPS).
My stock analysis worksheet to quantifies all these values for me.
#7.2. What financial ratios say about the stock
The use of financial ratios helps me to comprehend the numbers of business rather easily.
Though use of financial ratios alone say less about the stock, but it helps us to make the first impression about it.
Financial ratios are quick way of evaluating stocks. But it is not a detailed analysis.
The ratios that my worksheet highlights prominently are as below:
- Price Valuation
- Price to Earning Ratio (P/E)
- Price to Book Value Ratio (P/B)
- Price to Sales Ratio (P/S)
- Price to Free Cash Flow (P/FCF)
- Return on Equity (ROE)
- Return on Capital Employed (RoCE)
- Cash Returned on Invested Capital (CROIC)
#7.3. How market price of stock behaved in last 10 years?
Frankly speaking price charts tell nothing about the stock’s business fundamentals.
But one must still give it a glance. Why?
It gives an idea of how the current price is placed compared to last 10 years trend.
There can be few scenarios here:
- If price is only bullish – current price can be overvalued.
- If Price is remaining modest – poses a question why price is not growing fast enough?
- When price is falling – current price can be undervalued or business fundamentals may be weakening.
I use my stock analysis worksheet to generate the 10 Year price chart.
#7.4. What is the intrinsic value of stock?
Intrinsic value estimation of any stock is job of a scholar.
I am no scholar. My stock analysis worksheet is also far from perfect.
But it does for me is good enough.
It attempts to estimate an approximate intrinsic value of stocks.
Its values may not be very accurate, but it still give me a rough Idea of whether my stock is overvalued or undervalued.
When my worksheet tells me that my stock has a good business but is overvalued, I do the following:
- I include this stock in my portfolio tracker.
- When the price of my stock falls considerable (like 20%-30% dip), I buy it.
This is a very easy way for me to ensure that I buying stocks of good business, but not at overvalued price levels.
#7.5. How good is the stock overall?
Intrinsic value estimation is like everything of stock investing.
If one can perfectly master the art of intrinsic value estimation, they need not analyse anything else.
But not many know the art of intrinsic value estimation (accurately).
The people who know this art have become Warren Buffett’s & Perter Lynch’s of the world.
So for people like me, who are not even 0.000001% of Buffett; what they must do to ensure that they are buying best stocks?
I prefer to get an overall impression of the stock based on the following parameters:
- Current price valuation.
- Future growth prospects.
- Management’s efficiency.
- Profitability of business.
- Financial health &
- Threat of company going financially bankrupt.
My stock analysis worksheet provides these overall valuations to me in a form of a percentage rating.
A stock whose overall rating is 85%+ means that is a great stock.
Best Stock to Buy in India for long term 2018
(Updated as on April’2018)
- Ajanta Pharma Ltd.
- 8K Miles Software Services Ltd.
- Vakrangee Ltd.
- Tata Consultancy Services Ltd.
- eClerx Services Ltd.
- Sun Pharmaceutical Inds. Ltd.
- Indo Count Inds. Ltd.
- Dewan Housing Finance Corpn. Ltd.
- PI Industries Ltd.
- Zee Entertainment Enterprises Ltd.
Check this link to get more details related to the fundamentals and price valuation of above list of stocks in tabulated form…
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-analyse all securities before investing in one.