INTRODUCTION

The charisma of investing in stocks at a higher level is always a personal process, and unless we look into the deep insights of investing and take the leap, we can’t make a fortune in stocks. What I mean by that is that when we give our rare attention with complete honesty, only then can we have the powerful insights that can grow us financially.

To invest, we have to think in terms of investing. Yet here, I believe, as an ordinary person, we all can make fortunes through the stocks by creating a specific goal and landing the goal on the runway of the stock market. In this article, we will learn about all the analysis we must do while picking stocks.

 

Business Segment Analysis for stocks picking  

Before putting our money on the market, we need to know about the business segments such as healthcare, finance, telecommunication, renewable energy, hospitality, the food industry, the mining industry, and many more. Here we need to do our own dedicated research on which industry we see growth as per our selected time frame for our goal.

• Sunrise, Sunset and Evergreen for stocks picking

 I used the simple process of Sunrise, Sunset and Evergreen Industry. Here, as the name suggests, you can understand that sunrise are those industries whose future is bright, such as green energy-oriented industries, sunset are those whose industry’s future outlook is dull, such as coal industries; and then come evergreen industries whose future is always bright as well as present, such as technology industry. When our goal is about long term, it is always best to go with sunrise and evergreen industries. When we are young enough to take risk, then sunrise industries are best.   

Company Analysis before buying stocks

Now that you are done with the industry analysis, we have to find certain companies in this industry where we can put our money. Here we will know certain processes for company analysis. So here let’s say we have chosen the evergreen industry. In Evergreen, we go into the FMCG sector because, as we all know, the requirements of the FMGC sector will never stop.

 

• Alpha Beta Concept

 The alpha of the stock represents the return from the stock compared to the index. If a stock gives a 15% annual return, that’s the alpha of the stock. Beta is about volatility as compared to an index; it represents how volatile the stock is. Here, we need to make sure beta is as low as possible and alpha is as high as possible, although generally the opposite happens.

 

• Large cap, mid cap, and small cap stocks selections

Till now, we have known the concepts of alpha and beta. Here comes the part about cap selection: large caps are always about low alpha and low beta. That means your investment would be more secure, and it would provide a low but consistent return. Large caps are those companies whose market cap is more than 20000 crore; mid-caps are those whose valuations are less than 20000 crore and more than 5000 crore; and less than 5000 are small caps. Now we will find the best in these three caps. 60% of  the money we will put on the small cap, 20% on mid, and the remaining 20% on large.

 

Now from this, we will seek ways to find reliable stocks by using indicators.

 

 

• PE Ratio

PE is the price-to-earnings ratio, which indicates how expensive the stock is. Let’s understand the calculation behind this PE ratio. The formula is: share price / earnings per share = PE ratio. Earnings per share formula: net profit of a particular year/total number of shares in that particular year. Now let’s take an example from “TATA INVESTMENT CORPORATION LTD.” We need to first get the stock price, which is ₹6,162 (as of August 19, 24). After that, let’s get the total net profit for this year from the income statement, which is 368 crore.

After that, get the number of outstanding shares, which is 5.06 crore. Now first calculate the EPS (earnings per share) of the stock: 385/5.06 = 72.72; after that, 6162/72.72 = 84.73. Now you calculated the PE ratio by yourself. That means you are paying 84.73 on the company’s 1 rupee income. Lower the PE undervalued the stocks, higher the PE overvalued the stocks.

 

• Motion & History

Whenever we pick a stock, we need to make an analysis of the stock price motion, which means that the stock has to be in a positive motion. No matter what the amount of ROI you can see on the stock, you need to be aware of the motion. What I mean by that is that stock should only have rare falls, and it must keep growing. A perfect example is VBL (Varun Beverages Ltd.).

The right opposite of this stock is HEG Ltd. If you see, this stock is not bad in terms of ROI, but because this kind of stock can fall anytime, it can increase your BP, obviously your blood pressure! Also check all red flags on that stock; a red flag means warnings, threats, and significant issues with that stock. Make sure, like in the Adani case, there is no bad news. 

 

• Debt ratio & P/CF

Leveraging can grow a company, just as overleveraging can also be the reason behind a company’s downfall. Such examples we have include “Kingfisher Airlines” and many more. Debt ratio 1 means a company’s debt is higher than its assets. In this situation, if the economy crashes or the interest rate increases, the company can get defaulted. A company’s debt ratio should always be less than 1, as per my view, it should be 0.1 to 0.3 if the company takes debt but also shows growth, although this varies by industry, for example, capital-intensive companies have higher debt, such as airlines.

Now we need to understand that P/CF means price to cash flow, which talks about how much a company gets in cash flow as per stock. We will use three metrics. Stock price, outstanding shares, and OFC (operating cash flow): Operating cash flow/outstanding shares = x, stock price/x = actual ratio. A price-to-cash flow ratio of less than 10 shows the stock is undervalued compared to its cash flow.

Stocks are always one of those enthralling assets when it comes to investment and also one of those riskiest assets and profitable. That’s why everyone embark on this growth oriented platform stock market. Read Stock Market Delusion : Phase 1

CONCLUSION:  This stock picking process is not universal; I use it in my personal investing process. Although all the indicators I presented those are universally used. Still we have many indicators and processes, this is not complete process in another part of stock picking article we will discuss about that. A million good wishes from me in your investing journey.

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Stock Market Delusion : Phase 1