Taking cues from Morgan Stanley’s ‘Connecting the Dots’ (June 2012), we decided to shortlist our own set of dependable stocks. For this we used following filters –
Filter 1: Is the Sales growth faster than nominal GDP growth?
This can be achieved by either being a part of a fast growing industry and/or gaining market share within the industry.
Filter 2: Is Profit growth faster than Sales growth?
This signifies a combination of several dimensions like market dominance, pricing power, better cost management, judicious investments and right mix of debt and equity.
Filter 3: Is Earnings per Share (EPS) growth broadly in line with Profit growth?
This signifies that growth and capital efficiency are linked. This also indicates whether an individual shareholder participates proportionately in company’s growth or not.
After shortlisting stocks by using the 3 filters, we added information about Return on Equity (RoE), Debt/Equity (D/E) & Dividend Yield (DY) as these are information which should be looked into before taking a final call to buy any stock.
We started with a universe of 50 safe large cap stocks which form the Nifty50. After putting Filter 1, we were left with 35 stocks. On putting Filter 2, we were left with 19 stocks. Final filter resulted in shortlisting of 13 stocks, which met all three criterias.
During last 3 years, average sales growth of these 13 stocks was 22.10%, which was much above the nominal GDP growth rate of 13 percent. Average Profit growth for these stocks was 31.40% & EPS grew at an astounding CAGR of 33.40%.
So, without much delay, we present the 13 rock solid and dependable stocks of Indian markets…
- TCS
- ITC
- HDFC Bank
- Wipro
- BHEL
- Power Grid
- Bajaj Auto
- Kotak Mahindra Bank
- Axis Bank
- Hero Motocorp
- Asian Paints
- Bank of Baroda
- IDFC
How these 13 stocks fared on 3 criterias is detailed in table below –
During the last 3 years, an investment made in portfolio of these 13 stocks would have given a market beating return of 17.90% (CAGR)
Only one stock, BHEL, gave negative returns (-17.34%) in this period. Overall market returned a meager 3.73%. This portfolio outperformed the market by 14% + (!!).
A snapshot & analysis of all 50 stocks can be found below. Please click the image to enlarge.
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| Click to enlarge |
Caution – This is not a recommendationto BUY any of these stocks. We have not considered valuations of these stocks in the post. So do your due diligence before buying any of these stocks. Also, past performance is no guarantee of future results.
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Did you like what you just read?
I like Filter 3.
Where can I get the raw data, I wanted to try out couple of other filters.
@Anonymous
Since we had just 50 stocks to start with, we used MS-Excel as detailed in this link (http://1.bp.blogspot.com/-pYHcaD3WArI/UGNddP_-xpI/AAAAAAAAAYE/h59tYaXYtD0/s1600/Criteria+Analysis+for+all+Nifty+50+Stocks.jpg)
If you want to use a few filters/screeners, then please checkout this link (http://stableinvestor.com/2012/08/stock-screeners-for-indian-markets.html) to find a list of good screeners.
Dear SI,
As we were discussing on the fabulous work done by you in this post, especially the 3rd filter of EPS, my friend Rahul suggested that you should sometimes look for the leading factors too, rather than depending on the lagging factors too much.
Your views required!
@Vaibhav
Thanks Vaibhav. But credit must be given to Morgan Stanley for coming up with such simple approach of shortlisting great stocks. We totally agree with you and your friend Rahul that investment decisions should not be based only on past data but also on future growth prospects.
But looking at past data allows us to shortlist stocks of ‘good breed’. We believe that a stock of good breed has better chances of doing good in long run than those of average or poor breed.
Also, this list of stocks is just a shortlist and not final buy-list. When investing for next few years, one would definitely look at future plans of companies as well as overall growth scenario for the concerned industry.
dear stable,
i appreciate you hard work and morgan stanleys method for selecting stocks.really good work.but all recommendation from large cap stocks.it is quite easy to select large cap stocks but real challenge for small and mid cap stocks(i believe).hopefully some thing come from you in small and mid caps.
soumyajit dasgupta
@Soumyajit Dasgupta
Ofcourse Soumyajit. Its much easier to choose good stocks from large-cap space than mid or small cap. And that is the main reason we prefer to stick with large cap stocks. 🙂
But if someone does apply Morgan Stanley's method to mid or small caps, we are sure that it will help in shortlisting some great stocks.
As far as recommendations from non-large cap space is concerned, in future, we will try to come up with names which we expect are going to increase our long term returns, without increasing the risk of capital loss.
Stable,
thanks for your response.i am eager to see the list.i am a small and mid cap investor.70% of my portfolio is mid cap and 30% large cap.My mid caps are working really like rockets.But i want to see your research work for future selection.
your initiative really good and rocking…….keep it up.
Hello SI,
About the third filter, won't it be better to use RoE CAGR rather than EPS growth? Using just the reported EPS number becomes confusing as the stock splits etc. change the number of shares without any effect on equity. I think using RoE gives a better picture of capital efficacy that we are looking for in this filter.
@Tiwari
While analyzing data for this list, we adjusted all the stocks for splits & bonuses.
RoE CAGR or for that matter, any other 'Returns' metric can be used, if one knows how to interpret those numbers 🙂
Nice Blog, Good information about stock market, it is very informative
and helpful. I always ready to read this type of blogs.
Regards: Nifty Stock
@anniemishu:disqus
Thanks Anniemishu. 🙂
It is good to have most of these articles around to maintain the regular flow of information. Help people that no one could do it later, good work!
Stocks and investments
http://www.sanasecurities.com
Means Per Annum Or for Total 3 yars of the return?
The low return given by BHEL and Power grid is a Govt.undertaking? Am i right?
Give shortlist for BSE- 500 Company
Its the CAGR figure, which effectively means per annum.
Yes BHEL and PowerGrid are government of Indian undertakings.