On the face of it, there's little similarity between picking stocks and shoes. But in both cases if you know what you definitely don't want, your job becomes relatively easier. Think about how you buy a pair of shoes. When you walk into a showroom, there are literally hundreds of pairs vying for your attention. How do you choose one? Do you try each one of them? Of course not. Instead, you reduce the number of options by filtering out the ones that don't match your preferences. Your elimination could be based on the style of the shoe (Oxfords, loafers, etc.), material (leather, suede or canvas), colour (black, tan or beige), price range or any other parameters you may have. Just like you wouldn't buy a pair of sneakers to wear to work, you wouldn't want to buy a stock that has strained financials or poor growth prospects.
Any stock-investing journey typically begins with sifting through over 4,000 listed companies in India. Surely, you cannot go through the financials of each one of them. How do you pick a handful of promising ones then? While there are no cookie-cutter rules to identify stocks, evaluation becomes easier when you know what your red flags are: high debt, low return ratios, low growth or an industry where competitive intensity is very high. You should prune your universe of stocks through a set of quantitative filters followed by a rigorous evaluation of the handful that remain.
The figure below mentions the filters that we apply at Value Research Stock Advisor. As a subscriber of this service, you can set your own filters or use pre-defined screens based on the parameters used by some of the world's greatest investors such as Warren Buffett and Peter Lynch.
A sample view of the screener page on the Value Research Stock Advisor website
Vikas Vardhan is Senior Equity Analyst at Value Research Stock Advisor.