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Generating a stock investment idea
Now before we proceed further and generate a checklist, we must address a more basic issue.
The process of investing requires us to first select a stock that looks interesting.
After selecting the stock we must subject it to the checklist to figure out if the stock matches all the checklist criteria, if it does we invest, else we look for other opportunities.
So in the first place, how do we even select a stock that looks interesting?
In other words, how do we generate a list of stocks that seems interesting enough to investigate further?
Well, there are a few methods to do this –
Todays lesson deals about getting stock ideas
There are around 5 to 6 sources of stock ideas
The first one is by general observation
You go to a bank, you go to a shopping mall, you buy groceries.. almost everywhere you see brands
Which is your favorite brand from a listed indian company?
1. General Observation
This may sound rudimentary, but believe me this is one of the best ways to develop a stock idea.
All you need to do is keep your eyes and ears open and observe the economic activity around you.
Observe what people are buying and selling, see what products are being consumed, keep an eye on the neighborhood to see what people are talking about.
In fact Peter Lynch, one of the most illustrious Wall Street investor advocates this method in his book “One up on Wall Street”. Personally I have used this method to pick some of my investments – PVR Cinemas Ltd (because I noticed PVR multiplexes mushrooming in the City), Cummins India Limited (because I noticed most of the buildings had a Cummins diesel generator in their premises), and Info Edge Limited (Info Edge owns naukri.com, which is probably the most preferred job portal).
Which is your favorite brand from a listed indian company?
Where did u see Eicher?
Tractors and bikes .. Showrooms
Why do you think it is a superior brand?
The quality of product it makes that too so cost effective wen compared with peers
Indeed. A superior brand always gets due recognition
Needless to say, Eicher is one of the most sought after share in the stock market. Their tractors attract rural population ... while bikes cater to rich / premium / urban youth
Similarly when you go to some banks
You will notice that the way bank employees talk, it will be cordial
while others talk in such a way to get rid of you.
For instance, Kotak Mahindra Bank appears to be cordial.
When you compare to ICICI Bank which now looks like a mass bank.
So, one would get stock investment ideas just by observation.
My frnd said me d same thing once, he went to mindtree ofc once 5 8 years back
And saw that they used plastic chairs n furnitures
So he got an idea then n there n invested thinking abt their cost cutting
Similarly, we get stock ideas by observing trends.
For instance, we observe that these days everyone is shopping from mobile phones and computers using net banking or credit cards.
So, internet payment gateway companies revenues will be more.
And yes. we have some listed companies that are into payment gateway transactions.
2. Stock screener
A stock screener helps to screen for stocks based on the parameters you define and therefore helps investors perform quality stock analysis .For example you can use a stock screener to identify stocks that have a ROE of 25% along with PAT margins of 20%. A stock screener is very helpful tool when you want to shortlist a handful of investment ideas from a big basket of stocks. There are many stock screeners available; I personally like the Google finance‟s stock screener and screener.in.
We can use stock screeners to pick companies
For instance, you can use screener.in to identify stocks that are giving profits in the last 3 years
Or may be you can write a query in screener.in to see only profit making companies
Or may be turn around companies i.e companies that are turning from loss to profit
3. Macro Trends
Keeping a general tab on the macroeconomic trend is a great way of identifying good stocks.
Here is an illustration of the same
As of today there is a great push for infrastructure projects in India.
An obvious beneficiary of this push would be the cement companies operating in India.
Hence, I would look through all the cement companies and apply the checklist to identify which amongst all the cement companies are well positioned to leverage this macro trend.
Macro trends are aspects that impact on a large scale.
For instance, we heard about the Jan Dhan Yojhna. Right?
The scheme where everyone can open a bank account. And it is very popular as well.
With that several crores of new bank accounts are created.
And with every bank account, we get a free ATM card.
So more people, particularly rural population, will start flocking to ATMs for money.
This is a macro trend
Now, here is the stock idea.
How about setting up an ATM company that will accept cards of any bank?
Its called a white label ATM
We must have seen Indicash ATMs. Right?
IndiCash is a subsidary of Tata Communications.
So, everytime, IndiCash ATM is used, banks pay a small processing fee to IndiCash and there by to Tata Communications
So, Tata Communications revenues (from ATM business) would grow.
So, observing macro trends helps us get stock ideas. Got it?
4. Sectoral Trends
This is sector specific.
One needs to track sectors to identify emerging trends and companies within the sector that can benefit from it.
For example the non alcoholic beverages market is a very traditional sector.
Mainly, three kinds of products are sold and they are coffee, tea, and packaged water.
Hence, most of the companies manufacture and sell just these three products. However there is a slight shift in the consumer taste these days – the market for energy drink is opening up and it seems to be promising.
Hence the investor may want to check for companies within the sector that is best positioned to leverage this change and adapt to it.
The best example for this the Sugar sector.
There is a global shortage of sugar
And substantial fall in sugar produce across the globe.
So, even the top sugar producing countries are now importing sugar.
So sectoral trends are great sources of stock picking.
Of course, we need to study deep about the sector and identify the trends properly
5. Special Situation
This is a slightly complicated way of generating a stock idea.
One has to follow companies, company related news, company events etc to generate an idea based on special situation.
One example that I distinctly remember was that of Cox & Kings.
You may know that Cox & Kings is one of the largest and the oldest tour operator in India.
In late 2013, the company announced inclusion of Mr.Keki Mistry (from HDFC Bank) to its advisory board.
Corporate India has an immense respect for him as he is known to be a very transparent and eff icient business professional.
A colleague of mine was convinced that Cox & Kings would benefit significantly with Mr. Keki Mistry on its board.
This alone acted as a primary trigger for my colleague to investigate the stock further. Upon further research my colleague happily invested in Cox & Kings Limited.
Good for my him, as I write this today I know he is sitting on a 200% gain.
For instance, we have seen that private sector is now allowed entry into Indian Defense sector.
We have seen several companies trying to get some defence businesses.
ADAG group for instance bought PipavavDoc that is into ship building and named it Reliance Defense.
We can take serveral examples in this.
Special Situations gives up some interesting stock opportunities.
6. Circle of Competence
This is where you leverage your professional skills to identify stock ideas.
This is a highly recommended technique for a newbie investor.
This method requires you to identify stocks within your professional domain.
For example, if you are a medical professional your circle of competence would be the healthcare industry.
You will probably be a better person to understand that industry than a stock broker or an equity research analyst.
All you need to do is identify which are the listed companies in this space and pick the best based on your assessment.
Likewise if you are banker, you will probably know more about banks than the others do. So, leverage your circle of competence to pick your investments.
The point is that the trigger for investigating stocks may come from any source.
In fact, as and when you feel a particular stock looks interesting, just add it to your list.
This list over time will be your "Watch list‟.
A very important thing to note here is that a stock may not satisfy the checklist items at a particular time, however as the time progresses, as business dynamics change at some point it may match up to the checklist.
Hence, it is important to evaluate the stocks in your watch list from time to time.
- Open your list of stocks that you have invested. What is the source or pricipation for investing in that particular company.
- Have you exited any company and moved the funds to another company? What is the reason for the switch?
- List out few companies who suffered from a recent Government policy change.
- Fundamental Analysis and Technical Analysis
- Setting up Investing Rules: Rule 1 and 2
- Stock Financial Trend Analysis
- Taxation for the Trader and Investor
- ROE and ROCE (Rule 38)