When it comes to stock market investment, many beginners will try and make an initial investment with tips received from their Brokers, which is a very bad idea as your Demat broker’s main interest is to tempt you to buy and sell so that they get their brokerage.
How to find fundamentally good companies which are available at very attractive price levels?
Performance of company and profits made by the company over a period of time is a major criterion among others.
You can learn the art of investing from this book, this is written in simple words and easy to understand for everyone!
Always Remember, Betting on Virat Kohli is better than betting on Parthiv Patil 🙂 meaning it is always better to buy a well-performing company than a one time star.
What filters used to select these stocks?
- Size of the Company: Companies with Market capital of more than 8000Cr is only considered. Market capital is the market price of the company multiplied by the Number of shares of the company. Company of size 8000Cr + shows the investors confidence in that company which company has built over time. Many people are betting on these stocks. When looking for Bluechip company this will be the first criteria.
- Last 5 Years with minimum 20% Earnings growth- Annualised: Companies that performed over the last 5 years on a consistent basis, this proves strong management strategy and long term view, Growing at 20% on an annualized basis indicates an all-rounder performance in all economies.
- The ratio of Debt to Equity must be less than 2: Many companies take Loan ( Debt) to manage business activities, apart from the money they have from shareholders called equity in that business. Debt to Equity ratio less than 2 means, for every 1re of equity ( Shareholders money) liabilities that the company takes, should not exceed Rs. 2. Lower the ratio, the higher is the chances that the company is able to manage the money with shareholders money.
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- Average Return on Equity of more than 20% in the last 5 year period: Return on Equity means Net Income generated by the company on the shareholder’s Money(equity). Choosing stocks which delivered 20% + returns on shareholders money is the best way to choose for long term wealth building. These stocks have delivered more than 20% Average ROE in the last 5 years.
- Interest coverage ratio more than 2: This Interest coverage ratio tells us how effectively the company can be able to pay interest cost on the debt taken by the company through profits made. Interest coverage ratio = Earning before interest & tax / Interest costs. Any company where the interest coverage ratio is lesser than 2, the performance of such a company may be at risk. Such companies struggle to repay their interest payment.
- Always Own funds are better for any expansion of business, in case if planned expansion could not generate profits as expected due to what so ever the reason may be, then the company will be struggling to repay the debt & interest.
- This debtor may ask you to repay the money by selling assets, You may have to sell your assets at much lower prices due to pressure.
- These ratios will indicate any of such faults which the company may be made without your knowledge.
- Price to earnings growth less than 1.5: Price to Earnings growth (PEG) is a critical ratio to find whether the stock price is undervalued or overvalued. PEG of less than 1.5 is considered as reasonably priced with the growth as filtered in other factors mentioned above.
Top Best Bluechip stocks which meet all the above factors
Top 1 : Natco Pharma – CMP Rs. 570
This Pharma company has so many critical illness patent rights both in US and in India for medicines of cancer and hepatitis C etc.
- Market capital: 10,500 Cr
- Debt to Equity Ratio: 0.06- This indicates the company is virtually debt free
- Interest coverage ratio: 58.6
- Return on Equity 5Y Avg(%): 21.94%
- Price to Earnings Growth: 0.22
Top 2 Aarti Industries Ltd.- CMP Rs. 1388
- Market capital: 11,310 Cr
- Debt to Equity Ratio: 1.32
- Interest coverage ratio: 4.26
- Return on Equity 5Y Avg(%): 22.79%
- Price to Earnings Growth: 1.05
Top 3 Eicher Motors Ltd. CMP Rs. 20,620
The maker of Royal Enfield
- Market capital : 55,950 Cr
- Debt to Equity Ratio: 0.02- Almost Nil Debt.
- Interest coverage ratio: 536
- Return on Equity 5Y Avg(%): 32.5%
- Price to Earnings Growth: 0.85
Top 4 Hero Motocorp Ltd. CMP Rs. 2689
- Market capital : 53,690 Cr
- Debt to Equity Ratio: 0.02- Almost Nil Debt.
- Interest coverage ratio: 171.2
- Return on Equity 5Y Avg(%): 36.57%
- Price to Earnings Growth: 1.32
Top 4 KRBL Ltd. CMP Rs. 338
- Market capital : 8000 Cr
- Debt to Equity Ratio: 0.54- Almost Nil Debt.
- Interest coverage ratio: 10.46
- Return on Equity 5Y Avg(%): 23.87%
- Price to Earnings Growth: 1.07
Top 5 Rajesh Exports Ltd. CMP 565
- Market capital : 16,669 Cr
- Debt to Equity Ratio: 1.22.
- Interest coverage ratio: 3.5
- Return on Equity 5Y Avg(%): 20.85%
- Price to Earnings Growth: 0.52
Top 6 Sundram Fasteners Ltd. CMP 510
- Market capital : 10,735 Cr
- Debt to Equity Ratio: 0.46- Nil Debt.
- Interest coverage ratio: 15.79
- Return on Equity 5Y Avg(%): 20.92%
- Price to Earnings Growth: 0.82
Top 7 Minda Industries Ltd. CMP 308
- Market capital : 8081 Cr
- Debt to Equity Ratio: 0.38- Nil Debt.
- Interest coverage ratio: 12.56
- Return on Equity 5Y Avg(%): 20.38%
- Price to Earnings Growth: 0.38
Should you rush to buy these stocks now?
Definitely NO. Investment in Equity will be always should be in a systematic approach! No Doubt these are Quality stocks one should see their risk apatite and capital allocation and long term time of 5 years and above to consider these stocks.
All the best !, Happy Investing!
Disclaimer: I am holding shares of Natco and Eicher motors as on publication of this article However I keep seeing all new opportunities for exits and entries in the markets as may be necessary from time to time.