Check list - Buying a stock

Yes/No Questions To Ask Yourself Before Buying A Stock

1. Are you buying this stock purely on someone else’s recommendation?
2. Are you planning to buy first, and look into the numbers later on?
3. Are you depending on this stock to perform spectacularly well in the short term to pay for your kids’ college education?
4. Are you investing because your friends have been boasting about the money they’ve made in the stock market, and you want to join in?
5. Do you suspect the stock is overvalued, but figure that you’ll ride the wave for a little while and get out before it crashes?
6. Does this investment account for more than 25% of your overall portfolio?
7. Do you think that because you know the company well and like the way it does business, you don’t have to research the financials?
8. Do you think that a low stock price means the stock is cheap?
9. Are you buying because the stock market’s been on a tear and you feel as if you’ve missed out?
10. Did you pick this stock purely because it’s in a “hot” sector?
11. Does the company have a lot of debt?
12. Does this company’s entire business model rely on it discovering the cure for cancer?
13. Do the financial statements include any “creative” accounting practices?
14. Is the company dependent on securing additional capital in order to stay in business?
15. Are you afraid that if you don’t move quickly, you’ll miss the chance of investing?
16. Does the company swing wildly between profit and loss from year to year?
17. Is there a large difference between the “bid” and “ask” prices (i.e. the buying and selling prices)?
18. Is it possible that you’ll struggle to sell the stock when the time comes?
19. Are you buying because you want to support your favorite brand?
20. Does the company have any major outstanding legal action against it?
21. Does the overall market seem highly valued right now?
22. Are you investing money you might need access to in the next few years?
23. Are you buying this stock because you think the price has dropped so much that it can’t drop any further?
24. Are you buying this stock because you think the price has risen so much that it must keep on rising?
25. Do you see this as a way to “get rich quick”?

Risk component while choosing a stock

High Rish and Low Risk components which selecting an company's stock

How to identify multibaggers stock.

An investor must look at the following factors whilst searching for multi baggers.

• Low Equity base – lower the Equity base, higher the EPS and higher the valuation
• Promoters Holding – higher the promotor’s holding lower the floating stock and hence stock price can shoot up if y-o-y and q-o-q results are good.
• Sector Choice - choosing the right sector is as important as selecting the right potential multibagger
• Earning Visibility – investors must search for companies having a robust business model with promising earning visibility going forward.
• Price Earnings Ratio – if a company has good business model, strong fundamentals and balance sheet strength backed by +ve cash flows and if such company is quoting in the range of around 10 PE then we may look at such stock to see the multibagger potential.
• Book Value – if the price of a stock is much below the book value then the investor must dig deeper to find out the potential of the stock in becoming a multibagger
• Zero Institutional holding – this one is crucial for the obvious reason that a ‘discovered’ and well researched stock would in all probability be having institutional support. So,investors need to look out for scrips having virtually no institutional holding.
• Positive Cash Flow – needless to mention investors need to take a hard look at companies having consistent positive cash flow for the past several years backed by the above factors.

6 Most important factors to consider while searching for a Multibagger

This term is used frequently by lot of users and portfolio services, in different contexts. Even while showing just an 80% growth in their recommended stock price, they may use this word! But the actual meaning of the term is multifold appreciation / return in the share price. Like a four bagger means it multiplies the share value by 4 times and like 10 bagger, 50 bagger, 100 bagger so on.

• Factor 1: Promoters Quality

Promoters are the persons manage the company’s activities, and any long term sustainable return will be achieved for retail investors, only if, the promoters are above average r at-least average quality. No ship will reach its destination, if a thief is placed inside itself as a Captain!

• Factor 2: Business opportunity, scalability and sustainability

The second important factor t consider after evaluating the promoter is the business perspective of the company’s operation and it's niche.

• Factor 3: Market Capital

The present market cap of the company should be evaluated. Few may raise their eyebrows after seeing this point. But I think it’s very essential, since an already large cap may not be able to grow at a greater rate in long term.

[Example: In-order to get a 10 bagger in 10 years and a 100 bagger in 20 years, we require a 26% CAGR. And I bet, TCS won’t be an 10 bagger in next 10 years nor 100 bagger in next 20 years, since it’s market cap is already 5 Lakh Crore – at best it may give market related return 14 – 18 % only, making it 3 to 5 bageer in 10 years and 13 to 27 bagger in 20 years]

• Factor 4: Valuation

The next point is to get in to the ship at an reasonable level. Once the valuation becomes too stretched and along with the market cap also reaches threshold levels, and we may need to consider different parameters and situations.

• Factor 5: Growth in quarterly results and debt levels

Check the overall debt level and their increase; along with the performance and results on a quarterly basis giving importance in that order.

• Factor 6: Share Holding Pattern

The number of share holders and their distribution is also important. An already popular stock will be having mutual funds and others in it as investors. Where, a true multibagger return will be only possible if the stock is less popular. Also check for the promoters and retailers portions in the holdings, and number of retailers etc.

Each of these points mentioned require a detailed coverage, and few other factors also (dividend, bonus, FV split etc) required to discuss with these already mentioned major points. It will be posted one by one in the above order.

Promoter quality

• How to evaluate the Promoter quality?

Promoters are the persons manage the company’s activities, and any long term sustainable return will be achieved for retail investors, only if, the promoters are above average r at-least average quality. No ship will reach its destination, if a thief is placed inside itself as a Captain!

Its a million dollar question! Is there any collective mechanism to ensure promoter quality of a company with cent percent guarantee? The obvious answer is NO.

That’s why including great investors like Rakesh Jhunjhunwala, Ramesh Damani and others made mistakes while selecting few odd companies.

So I would like to quote a famous quote from one of the most famous American President, before discussing further.

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

-Abraham Lincoln

From the above quote, If we can escape from the second group ( i.e. some of the people becoming fools all the time ), our share market success is bound to happen; and eventually we can differentiate between good, average and bad promoters.

In general, we may be able to classify the promoters in to four groups.

All the promoters comes to share market for collecting money from the public, but the inherent reason behind the collection of the money and future dealings will be different for each one. Based on that reasons and actions, I have made these classifications.

Phillp Fisher's 15 great check list to select a great stock

Philip Fisher's career began in 1928 when he dropped out of the newly created Stanford Graduate School of Business (later he would return to be one of only three people ever to teach the investment course) to work as a securities analyst with the Anglo-London Bank in San Francisco. He switched to a stock exchange firm for a short time before starting his own money management company, Fisher & Co., founded in 1931.He managed the company's affairs until his retirement in 1999 at the age of 91, and is reported to have made his clients extraordinary investment gains.

Although he began some fifty years before the name Silicon Valley became known, he specialized in innovative companies driven by research and development. He practised long-term investing, and strove to buy great companies at reasonable prices. He was a very private person, giving few interviews, and was very selective about the clients he took on. He was not well-known to the public until he published his first book in 1958.[5] At this point Fisher's popularity rose dramatically and propelled him to his now legendary status as a pioneer in the field of growth investing.[6] Morningstar has called him "one of the great investors of all time". In Common Stocks and Uncommon Profits, Fisher said that the best time to sell a stock was "almost never". His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held it until his death. Phillip is remembered for using and proliferating the "scuttlebutt" or "grape vine" tool, in which he searched fastidiously for information about a company. When you scuttlebutt, you make more informed decisions due a better basis for analysis and valuation.

Here's trying to provide the crux of his book Common Stocks and Uncommon Profits where he lays out 15 different fundamental checks to select a killer stock at a great price.

• 1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Fisher splits outstanding companies into two camps: "fortunate and able" and "fortunate because they are able". The former group consists of well-run companies that also benefit from a secular tailwind. Modern examples might be Amazon and eBay, both of whom have benefited mightily from the Internet revolution. As the Internet has grown, so have these companies' fortunes. Some of their success can certainly be attributable to excellent execution, but these companies' long-range sales curves extended as more and more people embraced online shopping.

The latter group consists of companies that create their own luck by reinventing the business by introducing new products or shifting strategy. In the book, Fisher uses the example of DuPont, which expanded its chemical offerings well beyond blasting powder and consequently lengthened its long-range sales curve.

• 2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

This may sound a lot like the previous point, but as Fisher says, this point is "a matter of management attitude." Consider Apple: Steve Jobs could have stopped with the iPod and would have been long remembered for revolutionizing the way we listen to music. Early investors would have made good money riding only the iPod's success. But what really made Apple a top-performing stock for the past decade was Jobs' drive to make sure that the iPod was followed by the equally-revolutionary iPhone and iPad products.

Few companies will match Apple's success, but the example does show how identifying companies with management teams intent on staying on the offensive with new products/processes can reward shareholders by having an extended long-range sales curve.

• 3. How effective are the company's research and development efforts in relation to its size?

Most R&D analysis begins and ends with the tried-and-true "R&D spending as a percentage of sales" metric. Though this ratio can reveal how current R&D spending compares with the past, it tells us very little about what kind of returns the company is getting on each R&D dollar. Admittedly a difficult figure to determine, you can look at the success of recent product launches as a sign of R&D productivity. Ideally, you want a company's R&D spending to be dedicated to creating or enhancing its economic moat. Firms that not only create new products but also create unique production methods will benefit more than companies that just create new products that can be quickly replicated by existing techniques in the industry.

• 4. Does the company have an above-average sales organization?

This is an often overlooked area of research -- indeed, one that I've under-appreciated over the years. The reason for this common oversight, as Fisher rightly notes, is that there's no accounting measure or ratio -- as there is for research and development, for example -- that captures marketing spending and effectiveness.

But the quality of a sales force matters. Think about it this way: Ever been to a restaurant with crappy service? Even if the food is good, because of a bad service experience you're much less likely to go back or recommend the place to friends. The same thing occurs in business all the time.

Analyzing the quality of a company's sales force requires a more qualitative approach. If you can, ask customers, suppliers, competitors who has the best sales force in the industry. If you can get the company on the phone, ask them how their sales force is rewarded. If you don't have access to those parties, a Google search may reveal something helpful.

• 5. Does the company have a worthwhile profit margin?

As Fisher puts it, "the greatest long-range investment profits are never obtained by investing in marginal companies." That is, if the company isn't doing anything remarkable, nothing is changing, and its margins are razor-thin, there's no point buying it. In most cases, I look for companies able to consistently generate 10%+ margins. There are exceptions -- for example, firms can have low profit margins and high asset turnover and generate good returns on equity (see: Costco, Wal-Mart, etc.).

• 6. What is the company doing to maintain or improve profit margins?

The investing community often falls into the trap of extrapolating present trends. If a company's margins have averaged 8% over the last five years, for example, many forecasts will assume about 8% margins over the next five years, too. As such, the market price for the stock has a good chance of implying about 8% margins going forward. So when a company is able to break away from historical trends and boost margins to, say 15%, that will have a profound impact on the stock price and investors who anticipated that move will be rewarded.

• 7. Does the company have outstanding labor and personnel relations?

Put another way, "Are rank-and-file employees passionate about working for the company?" Though this is rare, when employees are enthusiastic the productivity levels can be extraordinary. It's precisely these companies that can truly deliver better-than-expected profit margins and returns on capital even if the market is skeptical. When doing your research on this point, reach out to people in your network who may work for the company or industry to find out who has passionate employees. LinkedIn, Glassdoor, and other websites may also provide some quality information about employee morale.

8. Does the company have outstanding executive relations?

Similar to Point #7, but more focused on executive motivation and passion for the job. Excessive management pay packages is certainly cause for concern, but you also want the executives to be appropriately compensated. Otherwise, they'll likely have one eye on the business and one eye on the door.

9. Does the company have depth to its management?

I've debated this point with others in the investment industry and I've heard good counterarguments, but there is something to be said for a company that can retain employees -- especially in this day and age -- for 10+ years and promote them to senior positions.That is usually a sign that highly-skilled people like working for the company (see Point 7) and have bought into the culture and mission. Conversely, a company that needs to frequently hire from the outside might have trouble retaining key employees or might be looking to change the corporate culture. Hiring outside executives to repair a defective corporate culture is often necessary, but it can also disrupt operations for a few years and you may want to put your investing dollars elsewhere unless you know a lot about the specific situation.

10. How good are the company's cost analysis and accounting controls?

Financial sleuths can examine the consistency of a company's assumptions for pension accounting, depreciation, revenue recognition, etc. Firms that frequently change these assumptions to make the numbers "work" each year should be avoided. Also consider management incentives (found on the annual proxy statement) to see if executives have moving targets each year or lowered hurdles that have enabled management to earn a healthy bonus regardless of performance.

11. Are the other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

This question can be rephrased as "Does the company have an economic moat?" By doing a competitive analysis of the firm against its peers, we can begin to figure out if the company is relatively advantaged and, more importantly, if that advantage is sustainable or unsustainable.

12. Does the company have a short-range or long-range outlook in regard to profits?

Long-term shareholders naturally want a management team with an eye toward building long-term value rather than just managing for short-term results. While it's true that the long-term is made up of many short-terms, you also don't want companies to consistently forgo value-enhancing projects or squeeze important suppliers/customers just because it might hurt the quarterly EPS.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

Basically, you want to find companies that are financially healthy enough to fund their growth investments with internally-generated cash or with reasonable amounts of debt. Firms that consistently need to issue equity (and dilute current shareholders' stake in the process) should be avoided.

14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?

Take a look through the company's reports and conference call transcripts following a particularly poor quarter or year. Is management forthcoming about mistakes they've made or is everything sugar-coated or blamed on the economy/weather/markets? If management takes ownership for the company's under performance and thoroughly explains the steps they're taking to improve the business, you might just have a winner.

15. Does the company have a management of unquestionable integrity?

The key word here is unquestionable. A management team that has any history of dishonesty, fraud, or ignoring shareholder interests will likely repeat this behavior and you don't want to be in their way when they do. I've made this mistake fairly recently, actually, and even though the company checked off a lot of boxes on the good side of the ledger, management's lack of integrity should have outweighed all those points.

Thanks to the Internet and company filings, we have plenty of ways to analyze management track records and behavior at current and former companies. The key here is when in doubt about a management's integrity, just walk away.

Dr Vijay Malik's way of Selecting Top Stocks to Buy

• A Step by Step Process of Finding Multibagger Stocks

http://www.drvijaymalik.com/2015/01/selecting-top-stocks-to-buy-step-by.html

• Shaking the Money Tree (1972) - 15 Timeless Investing Lessons

http://www.drvijaymalik.com/2015/02/shaking-money-tree-1972-15-timeless.html

Case study :

http://www.drvijaymalik.com/2016/01/analysis-rexnord-electronics-and-controls-limited.html

Profitability Ratio

Growth investments

• Return on Equity : Look for companies with ROE > 20. Look at your portfolio, and if you find businesses that are consistently earning less than 20% return on equity, know that they are actually killing your wealth in a world of 15% inflation and 30% income tax
• Return on capital employed (ROCE): Growth in itself is not enough; it is the quality of growth that creates value. Quality can be derived from the return on capital employed. If the return on capital is higher than the cost of capital being deployed in the business, it will add economic value