VR Logo

Stock Ideas

A stock screen is a filtered list of stocks which is arrived at according to some criteria that is likely to remove less investment-worthy companies from the list. They throw up investment ideas which can then be evaluated closely. Membership of BSE 500 index is basic qualification for our screen.

A stock screen is a filtered list of stocks which is arrived at according to some criteria that is likely to remove less investment-worthy companies from the list. They throw up investment ideas which can then be evaluated closely. Membership of BSE 500 index is basic qualification for our screen.

Relative Value
The followers of value investing believe that stocks often tend to trade at less than what they are really worth. The most common tool used to identify undervalued stocks is their price-earning ratio (PE ratio). Value investors search for stocks trading at a low PE ratio. But the question arises- what should be the threshold level for a low PE ratio?

Companies operating in different sectors tend to trade at different valuations. Some sectors have generically high PE ratios while some have generically low PE multiple. For example, technology stocks generally trade at high PEs, while the oil stocks have a tendency to trade at lower PEs. Therefore, using an arbitrary figure of, say 12 or 15, as the threshold to find low PE stocks across the entire market would be inappropriate. For the technology sector, a PE ratio of even 30 times might be low, while for oil sector, even 15 might be on a higher side. The solution is to compare PEs of stocks with their respective industry averages. And this is exactly what our screen does. Our criteria requires that the PE ratio of a stock should be less than that of industry average, while the three-year average annual growth rate of EPS should be higher than the industry average. Further, there should have been a continuous increase in earnings through the last three financial years without a decline in any year.

To make the screen more robust, we further decided that there should be at least 25 companies in an industry. Lastly, while calculating average PE ratios, we excluded stocks with exceptionally high valuations as they would have distorted the industry averages. The result is a list of stocks whose earnings have grown at a faster pace than an average peer while they still trade at a discount on a relative basis. Institutional Picks
Though fundamental analysis lies at the heart of smart stock selection, but it cannot be denied that the price movements are largely governed by the mechanics of demand and supply, at least in the short-run. Stocks which witness a sharp surge in demand can gather momentum in no time. And this is likely to be the case when there is active institutional interest in a stock.

Moreover, institutional investors are usually expected to conduct a rigorous analysis before betting upon a stock, and therefore bulk institutional buying can be taken as a positive indicator about the prospects of the company. In this screen, we provide you with the list of BSE 500 constituents in which institutional investors had increased their equity holding by 5 per cent or more over the quarter ended September 2006.

But you have to be extremely careful. An already high institutional ownership would mean that the big money has already arrived and there would be little upside left in the stock. In such a case, you would be too late to join the party and would end up buying a stock at its peak. And remember, if institutions start exiting a stock, its price can fall as quickly as it rose.

Therefore, you should ideally use institutional buying as a confirmation to your own positive assessment about a particular stock, rather than just blindly following them. The list is sorted in the descending order of institutional holding at the end of September 2006.

Strong Quarterly Results
Earnings growth is considered to be the litmus test for a company's potential. Stock prices tend to rise and fall with the earnings. If a company clocks good earnings growth, then sooner or later, markets are bound to identify its potential and attach higher value to it.

This screen aims to identify companies whose earnings have grown at a healthy pace during the quarter ending September 2006. The list includes companies that have significantly improved EPS for the quarter ending September 2006 on a quarter-on-quarter basis (in comparison to quarter ending June 2006) as well as on year-on-year basis (in comparison to quarter ending September 2005). The list is sorted in the descending order of EPS for the quarter ending September 2006.

Fund Action
Infrastructure continues to be the favourite theme of the fund managers. They seem to have an insatiable appetite for stocks like Siemens (Idirect Code: SIEMEN) and Jaiprakash Associates (Idirect Code: JAIASS). IVRCL Infrastructures (Idirect code: IVRINF) and Alstom Projects were among other infrastructure picks. Funds also showed active interest in tech stocks. In October, they shopped for IT stocks across the market caps- from giants like TCS (Idirect Code: TCS) (it was also among the most bought during September), to relatively smaller Mphasis BFL (Idirect Code: BFLSOF), to still smaller NIIT Technologies (Idirect code: NIITEC) and Northgate Technologies (Idirect Code: NORTEC).

Among the most sold stocks, fund managers had clearly turned bearish on automobile stocks. The three auto giants - Tata Motors (Idirect Code: TELCO), Maruti (Idirect Code: MARUTI) and Bajaj Auto (Idirect Code: BAJAUT) - came under the hammer as funds offloaded investments worth Rs 100 crore or more in each of them. Their decision appears prudent, at least in the short term, as auto stocks have failed to perform. During the month ending November 24, 2006, BSE Auto delivered a meagre 0.44 per cent, while the Sensex surged over 9 per cent. Media stocks also slipped on fund managers' ratings as the month saw heavy selling in Sun TV (Idirect Code: SUNTV), NDTV (Idirect Code: NDTV) and TV Today (Idirect Code: TVTNET).

Fund managers also sold retail stock Trent (Idirect Code: TRENT). Retail could be an interesting space to watch out for in the coming months. Bharti's (Idirect Code: BHATE) tie-up with retail major WalMart is already causing a flutter among the prominent retailers operating in the domestic market.