March 8, 2007

My Stock selection approach

I follow a simple approach to stock selection. The first step involves using a stock filter (see links in the side bar under useful links). I typically use a simple filter criteria of PE<15,> 10-12%, Debt to equity of less than 0.7 and a market cap of greater than 100 Cr.

In addition to the above source, I add to the initial list based on recommendations on other blogs, analyst reports etc.

The next stage involves doing a quick analysis of the company’s statements such as Profit and loss, balance sheet, financial ratios etc. I end up eliminating almost 70-80 % of the stocks in the original list. The reasons can range from low PE due to one time gains in the previous year (and normalized PE being high) to lack of transparency in the annual report.

I am fairly ruthless in eliminating companies at the above stage. If I am not comfortable with the economics of the business, or find that the level of disclosure is inadequate, I tend to give the stock a pass. I have ended up passing over stocks which have done well later, however I prefer the risk of omission than commission.

Once the numbers check out and I have the necessary AR and other documents, I initiate a deeper analysis. I have a detailed excel document and checklist which I use to analyse the company in terms of competitive position and competitive advantage etc. As a last step I do a 3 scenario DCF analysis ( optimistic, pessimistic and base case scenario) and a relative valuation exercise.

If at the end of the above exercise , the company checks out in terms of the qualitative analysis and the stock price is 60% of Intrinsic value, I initiate a buy on the stock. However I tend not to buy in one shot. I tend to buy in 5-6 orders spaced by a few weeks each. This allows any excitement or irrational attitude towards the stock to cool down. I also try to look at my notes again with a fresh mind and reanalyze my assumptions.

The above takes atleast 4-6 weeks of time. However the above analysis does not involve any peter lynch style study of the company’s products at stores or talking to customers or suppliers.


Prem Sagar said...

Thx for the post. enjoyed reading it.

Guest said...


Which sites do you use for stocks screening? I coudnt find the "useful links" in sidebar.

Do do I reach "useful links"?


Rohit Chauhan said...

i have removed the useful links section. you can use to screen for stocks


rmathew said...

In the sentence "I typically use a simple filter criteria of PE<15,> 10-12%, Debt to equity of less than 0.7 and a market cap of greater than 100 Cr.", what did you mean to insert before "> 10-12%"?

Do you still use I've found their data inconsistent even within the same site (e.g. dividend yield for a company would be X% in one place and Y% for the same company in another place), so it doesn't fill me up with confidence.

Before you removed it, did the "Useful Links" section have links to stock screeners better than