Stock Picking Formula

Picking gems that can turn out to be true multi-baggers:

Gems are those stories that has a long way to go because of strong order book and execution capabilities or strong business model or a hidden gem in the balance sheet that will be recognized once it nears its fair value. It is always good to pick stocks that will be the flavors of tomorrow rather than chasing stocks that has hogged limelight and once thing works out as expected a fair value on clear picture can be estimated. The return these stocks can give is tremendous, with sentiments towards equity markets not being positive such investments provide cushion to the investors.
The logic behind picking stocks:

• Pick a stock in a category that’s under-owned by financial institution: An under owned sector hogs limelight and gives good returns as financial institutions try mopping up stocks in the sector, once outlook on the sector changes. These sectors go through re-rating and gems identified in the sector can give returns that are much higher than index leaders. IT companies a classical eg in the case
• In addition to it, the stock has to be Low on valuation to its peers, preferably sectors that are beaten down in terms of scenario they are into and going forward a slight positive can result in faster re-rating of stocks.
  Principle of investment: PEG ratio<0.3>
• Price Earning (P/E) in single digit: It reflects the market price divided by EPS of the company. Companies of similar size and similar earnings, a stock with lower P/E will be preferred. However some sectors do not command high P/E, it is always good to compare stock with large players and similar peers.
• Growth potential of close to 20% CAGR: A company having visibility of 20 % y-o-y will always have some interest either by financial institution or large players. A clear cut accumulation can be seen in such stocks during market corrections.
• Other factors that needs to be considered: Large players in the range of 13-15 times forward. Strong order book and execution capabilities, management track record and uniqueness in business model and low on risk. Look for cushion in these stocks in terms of price to book value or EV to sales or other financial ratios that can justify its potential going forward.

This is just a brief guideline and one of the way of picking stocks.

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SPL Investments

Another Venture from SPL Group