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Stock Ideas

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.

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 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.

Cheap Large-Cap Stocks
Markets are back within touching distance of the peak they had scaled in May this year and the price-earning multiple of the Sensex has risen back to over 21. While the markets look set to climb to new highs, we searched for large-cap stocks which are still available relatively cheap. The search was restricted to the set of top 100 companies by market capitalisation. Within this universe, we looked for stocks which are trading at a PE multiple of less than 20. But we further restricted our list to only those stocks whose earnings (as measured by earnings per share) has grown by at least 20 per cent in both of the last two financial years (FY 2004-05 and 2005-06).

In a nutshell, this screen looks for stocks which are relatively cheaper in comparison to the market, but have shown good growth in earnings. Moreover, the focus on only the top 100 stocks ensures that the screen throws up quality stocks, which are among the most widely held and liquid ones. Therefore, the following stocks can be of use to those investors who want to enter the stock markets with a conservative frame of mind. The list is sorted in the ascending order of price-earning ratio.

Contrarian Bets?
The idea behind the contrarian strategy is to buy into the out-of favour stocks, i.e., the stocks which have few takers at the moment, and hold them till the time they catch the fancy of the markets again and bring in handsome gains.

This screen aims to search for such out-of-favour stocks which are available quite cheap, but seem to have a reasonably strong financial position. Therefore, as and when the markets re-discover their potential, they might be in for a significant capital appreciation. The first filter is that they should have a price-earning multiple of not more than 12, which suggests that the markets does not seem to be very optimistic about them at the moment. But a high current ratio (of 2 times or higher), coupled with negligible debt on the balance sheet points towards a potentially strong financial condition. We added another criterion that the stock should have a decent dividend yield (of at least 2.5 per cent) to ensure that at least it yields some dividend income till the time it brings in the capital appreciation. The list is sorted in the ascending order of P/E ratio and it suggests that many banking stocks are currently out-of favour.

Beaten Down Small Caps
While nobody has doubted the growth potential of mid- and small-cap companies, the concern till recently was that their valuations looked over-stretched. However, in the aftermath of the recent market fall, there could be a big opportunity to buy the potential large-caps of tomorrow at attractive valuations.

The May collapse was particularly harsh upon the stocks of smaller companies and many of the high flyers came crashing down. We looked for stocks whose valuations have declined substantially over the last one year, yet they have posted impressive growth in earnings. We screened for stocks whose PE multiple has dropped by over 50 per cent in the last one year, but their earnings per share has been growing at a rate of over 20 per cent in the last two financial years. Additionally, they should also have a low debt-equity ratio, which could come in handy in two ways: one, in negotiating recessions and periods of sudden decline in earnings well, and two, to provide them the flexibility to raise capital in future as and when the company needs funds to fuel its expansion.

In short, this screen can add up some interesting stock ideas to place a bet upon the growth potential of India Inc in times to come. But bear in mind that investing in stocks of smaller companies is a high-risk proposition since they are more susceptible to failure and also suffer from disadvantages like poor liquidity.

The list is sorted in the ascending order of price-earnings ratio.

Low Beta Stocks
Beta is a statistical measure that shows how sensitive a stock is to market moves. For example, if Sensex moves by 25 per cent, a stock's beta number suggests whether the stock's returns are expected to be more than this or less.

The beta value for an index itself is taken as one. Stocks can have beta values, which can be above one, less than one or equal to one. A stock with a beta of more than one is expected to rise more than the market and also fall more than market. Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. This means that high beta stocks are meant for aggressive investors who want to beat the market on the upside, but do not mind taking the risk of higher losses if the markets fall. On the other hand, for conservative investors who want higher insulation from losses, a stock with a beta of less than one is a better option.

Our search criteria filtered for stocks with a beta value of less than or equal to 0.65. To add another dimension of conservatism, we restricted the list to the stocks whose market capitalisation is Rs 5,000 crore or more. This is because large-caps happen to be more liquid and have a tendency to fall relatively lesser. Our search for low-beta stocks led us to a list of 17 stocks. Interestingly, a lot of FMCG majors have found a place in it. This includes stocks of ITC, Dabur, Nestle, HLL and Colgate-Palmolive. But please remember that a list of stocks filtered on the basis of beta values can be simply be a starting point in search for defensive stocks, not the last word. The list is sorted in the ascending order of beta value.

Fund Action
This regular feature of the Stock Ideas section enumerates the list of hottest stocks on the buying as well as the selling lists of domestic fund managers.

The list of the most bought stocks boasts of diversity - from the recently-listed Reliance Communications, which is flying high with a PE ratio of over 1,500, to the value oriented GE Shipping with a PE multiple of just 6.5. Stocks of SBI and Zee Telefilms continue to be in this list for the second consecutive month. Oil major Hindustan Petroleum seems to be in for a change in fortunes. As many as 16 funds bought the stock during the month of August to take the total number of funds invested in it to 58.

On the other hand, share price of Hero Honda and Bajaj Hindusthan seems to be running out of steam, as fund managers continued to exit from them in big numbers for the second consecutive month. The legal battle with Air Sahara is having an impact on Jet Airways as fund managers are cutting exposure to this aviation major as well. Together, fund managers sold close to 7 lakh shares of the largest domestic carrier. The lists are sorted in the descending order of the change in the value of investment.