How to pick stocks for long term in India?

how to pick stocks for long term

There are more than 1.5K listed companies in Stock Market, which brings multiple stock options to investors. They have options to choose either a Microsmall cap, Smallcap, Midcap or Largecap stock or stocks. Whether a midcap stock will give you a great return or a smallcap stock will fill your pockets with money, it is very difficult to determine. With different level of market capital of company, you gets some different kind of uniqueness in your portfolio.

Have you listen about “Old Is Gold”? If you go in a Place like Las Vegas (USA) where Public likes to collect historical and old artifacts, you will find that more a object would have age, more the value of it would be! Suppose you have a 10 year old pistol, and you want to sell it. Now, If you take this 200 year old pistol to sell in Las Vegas, you may get $100. But if you go with a 200 year old pistol and try to sell it, you may also get $10,000. It is due to Interest of Las Vegas Citizens who likes to collect old things. But if you go to try this in country like our India, you will get a opposite reaction!

Here, we don’t like to have old things and wants to have latest things in our hand. Therefore, if you try to sell a 200 year old pistol in India, you may get maximum of Rs 10, which you will even get when you will sell it to a recycler. But in case you go to sell just a 10 year old pistol, you may get Rs 5000 easily.

In stock market, you will also have options to invest in shares or those company which have been operating since 1950 or beyond it also. But there are few that listed companies also which had began their operations after 2000.

In markets like our Share Market, “Old is Gold” to some extend could be right. But in a majority, it is not wise to use this term here at all. The new Gold of share market are now those companies who focus on two main things. First is the Growth of the company itself. And the second is the Growth of its Shareholders. Without any constant growth in the business, it becomes very difficult for a company to have constant growth in the dividend payout or you can say the expenditure on growth of the wealth of shareholders.

While on the other hand, without any constant growth in the shareholders wealth, it can’t be said that Company is achieving a constant growth. Because no rise in shareholders wealth means no rise in market value of company. So, it can be easily understood that both terms i.e company’s Growth and Shareholders Growth are closely related and linked to each other.

How to pick stocks for Long term?

Now coming to the main topic, let’s discuss how the investors whether they are for long-term or near term, should choose their stocks. There are number of things on which a investor should take a look before he buys any stock for long term. But here, I am discussing about these things in that way which could be less lengthy and easy to understand.

 

 

Consider these things before you BUY any stock for Long Term

1) Rate of Growth (CAGR) of company’s Sales and Net profit should be higher than 5 percent! You can take average CAGR of past three years to have a better picture of Growth Rate. However, if the business is facing temporary growth issue like high competition, increased cost of input( higher cost of raw material, sudden increase in other expenses etc ) which would last for upto only certain period like 2 years, the situation could be different in such case.

2) Return on Capital Employed is very important to check when you are buying a stock for years. Return on capital employed (ROCE) is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. ROCE is calculated as: ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed. ROCE is the primary measure of how efficiently a company utilizes all available capital to generate additional profits. If the ROCE of share is higher than 10 percent, then it is very good. More the ROCE would be, more easily the company would be able to raise the funds.

3) Promoter credibility must be Good! Can you tell me how you will judge a person’s credibility without knowing it. Probably, your answer would be NO because you don’t the person personally and he is not even so popular in Media reports so that you can take some help from there. One thing which you can do to measure his/her credibility to some extent, is to take some information about him through his neighbours, relatives or from that address where he is working or had did a work( Job ). But in case of finding the credibility level of promoter of a small company, all above mentioned steps are useless because firstly you don’t have complete address of the above mentioned related persons and secondly retail investors don’t have enough time to do this work for just purchasing few shares of its company.

However, in case of large sized corporate, it could be little easy for you to grab some information about promoters through media reports. The is also an indirect way to measure how promoters of company have responded to the loans they took to boost their companies growth. You can use Media reports to find how promoters are using their money in social welfare and Investment procedure and then can build some credibility picture of promoter. Pattern of Dividend payout during profitability years and years with least margins, can also be very helpful to determine how much promoters really cares about its shareholders.

4) Business Environment should be very favorable and profitable for business. After generating good amount of profits for years and years, we have seen many individual companies forming into groups like Reliance, Tata, Adani, Birla etc. But to generate such profits, the start of company should also be good. And for a good start, the sector should also have great number of growth opportunities, good market size which overall means a good business environment where company is working. So, the sector in which the business operate should be good enough to help company to grow.

5) Debt should be in control! If the management is solely using Debt to keep business operations active, than it is bad. Debt should be used to fuel/boost the growth of business. If business is not able to grow little much without any use of debt, than it means that business doesn’t have any attraction power and can’t build a relationship, bond with its customers. In case of B2B business also, the company should use debt when it is capable of generating more return on debt used in business than Interest payable on it and should be used to fuel the growth rather than keeping business just active. Situation could be different if business is suffering from temporary problems.

6) Last thing which should be used by investors before buying any share for long term is to analyse the valuation of shares. Compare Price to earning, Price to Book, Price to sales ratios etc with its peers and industry average to get a clear picture about where your stock is currently trading. Cash Flow Statement is also important to study. But if the management is giving constant dividend, than it is OK. However, you should analyse and compare the net profit and operating profit margins with its peers and industry average to get a more detailed picture of the business.

 



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