A stock screen is a filtered list of stocks. The filtration is done according to some criteria that is likely to remove less investment-worthy companies from the list.
01-Nov-2006 •Value Research
A stock screen is a filtered list of stocks. The filtration is done according to some criteria that is likely to remove less investment-worthy companies from the list. For example, a (very) simple stock screen could be a list of companies whose profits have increased during the last year. Normally, most screens are a little more complex and apply many criteria simultaneously to arrive upon a list of stocks that may be worth investing in.
It is important to understand that stock screens are not the final step in choosing investments. If you just buy stocks listed in a stock screen, you could well end up buying a bad investment. Instead, stock screens are the first step in the process of choosing stocks. They throw up investment ideas which can then be studied and evaluated by a closer study of the companies.
The following pages give you a series of stock screens. Each has a description of the screen used along with the companies that were thrown up by the screen. All these screens were applied after applying the basic filter of membership of the BSE 500 index.
High Growth Companies
The key to the success of a company lies in its ability to sell its products. And growth comes when it is able to continuously expand sales. But often businesses can falter in managing growth and inflict themselves with higher costs. If this be the case, the growth in the top line will not translate into higher profits and the benefits of growth won't go to the shareholders. An ideal growth company would be the one which is not only able to maintain a high growth rate of revenues but also manage it well so that the growth in the bottom line also keeps pace with it.
This is precisely the premise for this stock screen. We searched for stocks which have put up an impressive growth in sales as well as profits after tax (PAT) over the last three financial years. To be specific, we looked for stocks which figure among the top 50 in terms of the compounded annual growth rate of both - sales as well as PAT - over the last three financial years. The search was restricted to the constituents of BSE 500. The list has been sorted in the descending order of the compounded annual growth rate of PAT. The PE ratios suggest that many of them are available quite cheap, while some of the others already command a very high valuation.
This screen is quite similar to the previous one. Here we looked for companies which have grown at an exhilarating pace in terms of sales and profits over the last three years. However, we did not restrict our search to the BSE 500 stocks here, but included the entire universe of listed companies.
The objective was to delve deeper to pick out stocks which have grown impressively but so far have largely gone unnoticed. The search criterions go as follows. These should be among the top 100 companies, out of the over 4,000-odd listed stocks, in terms of compounded annual growth rate of sales as well as PAT over the last three financial years. But they should have a PE multiple of less than 15 which means that their valuations have not already gone through the roof. Finally, they should have a market cap of at least Rs 25 crore and sales of at least Rs 75 crore to ensure that they do have a certain level of operation and are not penny stocks.
We also checked mutual fund holdings in these stocks and found out that only Mercator Lines (Idirect Code: MERLIN) is held by fund houses, and that too by only four of them. On the positive side, this could be because of the fact that they have remained unnoticed or are at present too small for a fund manager to be able to invest in them. But on a negative side, it could also be because of the fact that fund managers do not find them investment worthy. If the former be the reason, then some of these stocks could be in for a re-rating as and when their potential gets recognised turning them into multi-baggers. But if latter be the reason, the small wonders can easily turn out to be big blunders!
Therefore, even though their impressive growth rates coupled with cheap valuation make them look promising, do not forget that they are still small companies and are risky investments at the moment. Hence, do not commit substantial amount of funds to any of them even if you find them attractive. Momentum Stocks
The objective of this screen was to search for stocks which have zoomed at a furious pace after the May collapse. For this, we sorted the constituents of BSE 500 in the descending order of their three-month returns. Originally, this list included stocks with far higher returns than the ones you see at present. But a review of their valuations prompted us to give them a second thought. With sky-high PE ratios, the momentum in those stocks looked too fragile to be sustainable. Therefore, we revised our criteria.
The list includes stocks which have delivered returns three times or more than that of the Sensex (which delivered 25 per cent over the period), but their PE ratios are still below the benchmark's PE multiple of 21.34 times. Surely, some of the top gainers were shown the door as a result of the revision, but we were also able to eliminate insanity out of our list. Many of them had fallen significantly during the market crash of May and their six-month returns are still in the negative territory. But now, they seem to be recovering the losses at a breath-taking pace. The list is sorted in the descending order of three-month returns. Fund Action
The regular readers of this space would know that every month, we provide the details of the 10 most bought as well as the 10 most sold stocks by fund managers over the previous one month. But we often end up with only the large-cap stocks in which fund managers are generally most active. Therefore, this time we thought of picking the most bought and the most sold stocks across the large-cap, mid-cap and small-cap categories so that we are able to unearth some interesting stock ideas that fund managers are buying into as well as ones in which they are losing interest.
Telecom stocks seem to be hot on the buying list of fund managers. Collectively, they invested over Rs 200 crore each in Bharti Airtel (Idirect Code: BHATE) and Reliance Communications (Idirect Code: RELCOM). The former has also declared excellent results for the quarter ended September. Net profits stood at Rs 934 crore clocking a growth of 79 per cent to beat the market expectations. Fund managers bought over 12 lakh shares of Kalpataru Power (Idirect Code: KALPOW). You can read an in-depth coverage of this stock in the October 2006 issue of this magazine. Among others, the recently listed Voltamp Transformers (Idirect Code: VOLTRA) has been picked up by 23 funds.