Stock selection, what are the key factors to look at:
Monday, May 30, 2022
With the developing economy, people's interest in equity markets is also rising. An influx of retail investors was witnessed in the equity market cycles. Many of them enjoyed the recent long-lasting bull run, and most of them would be suffering in these volatile times. Investing is not all about buying stocks; it is about selecting which stocks to buy.
When we analyse and select stocks, basically, what we are doing is betting on the bright future of that particular company. There are various approaches for analysing and stock selection: like the Top-Down approach: We start from the broad perspective in the Top-Down approach. What is happening in the economy, and where is it heading? Then comes the industry or sector selection; if the economy is set to grow, which sectors will be the leaders? And lastly comes the stock selection; In the sectors identified, which companies will turn out to be winners? It depends on numerous factors like Quality of Management, Production Capacity, government policies, etc.
As a Portfolio Management Service provider, we undergo an in-depth analysis of each stock and sector before choosing them for our clients. There involves tons of research work and regular follow-ups on what is happening in the markets. And for this reason, only, we have been outperforming the indexes with spectacular returns consistently.
If you're not comfortable with the stock selection process, you must opt for portfolio management services that will do the heavy lifting for you.
Key Factors to look for while selecting a stock:
1) The management integrity, capability, and history
Management is responsible for the growth as well as the downfall of the company. Strong and ethical management is a must to look for before investing in that company. We need to analyse if the management has the backbone to fulfil its promises and ambitions. This can be done by confirming if they've fulfilled the promises made in the past.
2) Operational legacy
3) Return on Equity of at least 15%
ROE represents a measurement of a company's ability to return profits on the equity investments it receives from its shareholders. It is a ratio that investors can use to compare firms operating within the same industry to assess which one presents better investment opportunities. A minimum of 15% ROE should be searched for.
4) Debt to Equity ratio not exceeding 100%
Debt to equity ratio (also termed debt-equity ratio) is a long term solvency ratio that indicates the soundness of the long-term financial policies of a company. It shows the relation between the portion of assets financed by creditors and the portion of the assets funded by stockholders. A debt-equity ratio of 1:1 is considered to be alright. Lower D:E is preferred.
5) Up trending revenues
Revenues of the company should be on an upward trend, which displays consistency and the growth of the company.
6) Strong balance sheet
7) The company should be paying regular and reasonable dividends
8) Operating margins above 15%
Operating margin is a financial metric used to measure the profitability of a business. The operating margin shows what percentage of revenue is left over after paying for costs of goods sold and operating expenses (but before interest and taxes are deducted).
A lower operating margin calls for business risk; e.g., If the Operating margins of company ABC Ltd. are 8% and next year inflation takes place at 10% due to some unforeseen circumstances, the Operating margin of ABC Ltd. will shrink to -2%. Therefore, a minimum margin of 15% is decent.
9)The company should be spending on product innovation and brand building,
10)The taxes paid should be near the rate prescribed by the Government
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