Learn to identify stock for beginners

Q&A: Questions & Answers
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I am a beginner to value investing and had been a avid reader of Valuepickr forums. I want to learn from Seniors on how to identify a lead and do further investigation of stocks. What confuses me is the sheer number of industries and numerous stock each industry has…Gone through arbitrary stocks without much learning or value addition. A start guidance from seniors from guide me and many newbies like me.

Thanks in advance,

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start with the industry you are most familar with…i am in construction so i follow infra companies and related stocks like, cement, paints, tiles, wires ETC.

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first Rule is don’t loose your money. So if the odds of loosing your money is high don’t even consider that stock.

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Separate your research in 3 parts:

  • Fundamentals of the company
  • Valuations of the company
  • Current trend (includes news flow)

Fundamentals of the company

Find companies with consistent revenue growth and consistent net profit growth. Make sure that profit margins are now low. Stay away from companies that have made a loss even in 1 qtr. Stay away from companies that are paying too much interest at finance cost.

If a profit loss statement confuses you then find one with a cleaner PL statement.

Valuations of the company

Simplest thing to check is the company’s PE is less than or near its peers in the sector. Check if the company has a good dividend yield record wit DY greater than 1%.

Current trend (includes news flow)

Check for news about a company. Make sure there is no negative news flow. Check if the sector is having a positive news flow. See what kind of price move a company has made recently. Check if the company trading above or below its 30 or 50 DMA.

These are some basic things anyone can quickly check for a given company. Thing is you might have to do this for many many companies for find your favorite one. Just keep digging … one company at a time.

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This is what I am trying to create a prototype, see whether it helps. Questions are welcome.

Key Activities: 1. Stock Screeners 2. Stock Analysis and document 3. Investing, portfolio management

If I need to dissect your requirement it’s twofold 1. Identify an opportunity 2. Analysing a stock to ensure a proper buy and manage

Stock screening to me is abstract of understanding and news flow. Either you can borrow stock ideas and then analyse to get a comfort around stock and price. Even with borrowed ideas we need to do a bit of home work. Or create screeners to shortlist stocks.

Stock screeners largely depend on investing style (we call investment philosophy as well). One need to understand and create his own style. There are numerous information available on forum. For example invest only in business what you understand.

For quick grasp stock screeners are created:

  • basis fundamental numbers like profitability, growth, financial health. This is cornerstone of value investing philosophy as you have stated more inclined towards it.
  • spot the mega trends (growth trends and uncontested market place). You wont have much number crunching here rather more subjective and mapping.
  • technical charts and reconcile back the successful charts to a fundamental growth.

Best is start with a single screener and then shoot specific questions, folks here will be able to answer to the spot.

The second part is analyse and document a stock. Unfortunately it’s bit of hard work, keeps changing with time to time.

Recently during interaction with a few developers, I was framing few questions as to what should I look for within a company. Here is the list:

The Business

  1. What is the business all about and how the company is making money currently?
  2. How does financials flow for the business model/description in 1?
  3. How the business model has been generating money historically including for shareholders?
  4. What makes us comfortable that company can protect its profit or accelerated its earnings ( competitive advantage, growth themes etc)
  5. Can we spot catalysts that can drive earnings, return and value higher (management, business, special situation)?

The Performance & Risk Management (Around area of growth, profitability and financial health)

  1. What are the key financial, operational, compliance and strategic risks company have & how they have managed to mitigate it?
  2. Are the non mitigated risks identified and quantified with a feasible impact?
  3. Are there any red flags, creative accounting practices in financials?
  4. Are there any other KPI we should be tracking which is not covered in risk mitigation?

The Management People

  1. Identify the type of management (hired hand, owner operator etc)?
  2. Employee management: compensation against ROE performance, role played in mitigating risks, wealth creation chart of management (compensation+ holding) against performance of stock (price and ROE)
  3. Owner/quasi management: wealth creation chart vs own stake+ compensation, role played in managing risks
  4. Softer side of people- integrity, philanthropy, HR practices etc (keep it minimum if becomes too subjective).

The Valuation

  1. Is it available at balance sheet based value?
  2. If no, does valuation justify the earnings power (accelerated earnings growth)?
  3. If there is a growth , what is the value of growth?

The Technicals

  1. Price behaviour against speculation profit and fundamental profit. The behaviour against other fundamental KPI.
  2. Chart analysis of price, momentum and volume.
  3. Trending- accumulation/distribution, body/tail

Conclusion document

  1. A crisp understanding of business, management, valuation and follow up points
  2. Rationale and method for entry, exit and holding
  3. Justification for core portfolio

Unfortunately each of the area requires investigation and workings. My request is to build capabilities by picking one by one area starting with easiest first.

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My advice to you is:

  1. Invest in sectors which you understand(keep it simple and focused ).
  2. Read, Read and Read ……(read valuepickr forum regularly )
  3. Wherever you invest ,invest for long term (as if you are investing in a business /real estate –where you don’t sale in days/week/or months )
  4. Initially you may get it wrong and loose but its okay to loose initially as you loose less but don’t loose the learning
  5. Have stop loss of 10-30% or 3 years whichever is earlier depending on your risk profile .
  6. Stay hungry (for knowledge) and stay foolish

Once you acquire some knowledge , then :

  1. Invest in mega trends (where the category penetration is low )
  2. The company should have significantly competitive advantage /Right to Win
  3. At reasonable valuations(very relative! ) –I mainly like to see EBIDTA margin % (gives an impression of pricing power ) ROCE ,PEG and discounted cash flow amongst many which I see
  4. Reasonable market share –Rule of 3 –relative market share concept
  5. Management integrity (MNC /JV /Tie up a preference )
  6. Prefer small and mid cap with scalability options
  7. Promoter holding % (have to be more than 40/50% ) with no pledging
  8. Ownership by FII/Body corporate
  9. If you buy the right company ,own it for atleast 5 years !

Discl: I have a very high concentrated portfolio and some of my holdings are -Can fin Home ,Capital First ,Alphageo ,Repco Home finance , Oriental carbon , TVS Srichakra , Shemaroo , EROS ,PPAP automotive etc

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Thanks for the advice…I will pick a stock and analyze as per suggestions above.

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Is there a simple tool for stock screening for beginners, which involves most of the points. I don’t have much time to research as am in healthcare.usually have started with stocks which are undervalued right now and some PSU blue chips. Please advice me on how to go about it . Am investing 10000 in stocks and 20000 in mutual funds per month.

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Hi, please check out Screener.in, you can customize the fields required also…I too just stumbled upon this over the last month. Your broking site should also have a Stock Screener which gives you objective values of the company you are looking for.