Basic Equity Research
You are looking to buy ONE good share (actually one or 2 in a year is fine if you start at 23 and stop at 55 – you would have a portfolio of about 60 shares, and you cannot manage more than that).
What do we (I do nothing, some kids do all the work, I take all the credit) look for in a company?
Well all these – if the share is being recommended. Much less rigorous if we are buying it (we should take risks because we have nothing else to take…):
Strong Fundamentals
Fantastic Capital Strength
Ability to attract talent
Fantastic / Dramatic market share or tremendous brand recall
Low Volatility
Resilience -especially during bad times
Low Floating stock
Dividend Growth / Split / Buyback
Growth funded by internal accruals
Non controversial, Corporate Governance, and a management which is more in the business instead of being in the television / main stream paid media.
If you search for all these qualities very, very few companies will pass muster. Then you see whether the valuation is fair. Remember Buffet saying ‘Quality at a Price’? All the above factors are Quality. Then you look for P/E – which means you look for PEG – price earning as related to the growth that the company gives.
Strong Fundamentals means what? well to me it means increasing earnings, low leverage, growth being funded by internal accruals – and not by borrowings, stable demand of end product. Self explanatory I guess.
Attracting talent: see a PnG or a Colgate attracting and retaining talent. Or a HUL – everybody in the campus wants to join them. Wow, what a luxury. When you see other companies struggling to recruit, kids do a show and dance to get into these companies. (Caveat all 3 companies fulfill all these criteria, and are in my portfolio too)
I guess all other points are self explanatory. In case of a large cap we also see if it is well held by mutual funds. Sadly Gillette, Colgate, PnG, LMW, MRF, etc. fail this test. However they fail this test because they have a low floating stock. THAT DOES NOT BOTHER me when the quality is so top class, and I would be holding a few thousand shares (not a few million shares)….
Anything else guys?
Well there are tons…
Shivam
Nice Article. But What’s LMW ??
Anitha
Excellent article Sir. Aptly summarizes the things one should look at to identify good quality stocks.
Santhanam
@Shivam : LMW – Lakshmi Machine Works, a Coimbatore based Textile Machine and CNC Machine Tool manufacturers.
Balaji
Subra Sir,
Great insights..
You have combined both academic and practical ways of identifying fantastic companies for long term investment.
Thanks a Ton !!
PS:I am not comfortable in buying P&G, Gillette as they are @ 40+ PEs..
Indra
Hi Subra – Thanks a lot for the post. What is the measure of resilience ? Also, why is growth funded by internal accruals significant?
subra
resilience is the ability of the share to bounce back to a new high if it goes down. Stocks with high PE normally have this amazing ability to come back from a hit very quickly. See Cummins, Siemens, etc.
Growth funded from internal accruals means LESSER risk of default, if the expansion goes wrong. It means less DEBT even while GROWING the Real assets. Internal accrual may mean cash OR EVEN Engineering skills to set up the next plant.
Naveen
A very short and sweet article to what to look for while investing,totally in agreement.
Thanks for sharing this.
Naveen
If you can please share some details on some specific fundamentals and there use or some indicators of fundamentals which you don’t cosider useful for e.g Warren Buffet in his annual letter gives interest coverage ration as PBT/interest imstead of EBITDA/interest.
subra
for a retail investor tell me how changing from pbt/int instead of ebidta/int matter? baffles me.
Abhijit
Your comment is helpful too. All in all, a good educational article on a very difficult topic.
C J Gopinath
Promoter holding and pledged % is also important.
Mira D
Thank you.
DPS, FII holding % and +/-.