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10 quality picks in a pricey market

10 quality picks in a pricey market


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Balancing the imperatives of sound business propsects and reasonable valuations, we offer 10 stocks. Take your pick.

Normally when trying to pick up stocks, we try to balance two imperatives: reasonable valuations and sound business prospects. With the Sensex trading in the 20-21 (12-month trailing) PE zone, fulfilling the first objective has become a challenge.

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For this issue, our analysts worked hard to develop a rigorous set of filters that would only allow stocks with robust long-term track records to pass through. Some of the criteria we used are: stocks whose net worth has been growing consistently over the last five years; whose earnings per share (EPS) has grown consistently (and if in any year it has declined, the decline should not have been of more than 10 per cent).

Peter Lynch said that as far as possible one should avoid high-PE stocks. A high PE, he said, is a handicap for earning good returns. We have kept that counsel in mind, limiting our selection to only those stocks that (at the time of choosing) were trading at a PE less than the market level.

The final list represents a range of industries: two-wheelers, cement, pharma, pipes, steel, utilities (gas), high-tech, infrastructure and vehicle finance. They will all participate in - and help you profit from - the consumption story that continues to hold good, and the investment story that will unfold over the next few years. Read on, and if you like the story of any of these players, invest in it. But only, as we constantly admonish, for the long term - at least three to five years.


TEN PICKS
Company  Market Cap  5-yr avg RoE (%)  3-yr median PE  PE#  Debt-equity Ratio*  5-yr EPS growth(%)@
ACC Large 33.53 10.24 10.55 0.10 38.55
Bhushan Steel Mid 24.99 8.88 10.96 3.31 36.97
Era Infra Engg. Mid 26.82 10.78 13.00 1.96 68.23
Grasim Industries Large 23.62 11.35 11.83 0.36 18.42
Hero Honda Large 45.72 16.64 16.65 0.02 20.09
Indraprastha Gas Mid 31.40 10.96 15.76 0.00 18.67
Maharashtra Seamless Mid 28.93 9.13 10.20 0.06 23.39
Rolta India Mid 18.58 8.56 8.28 0.53 30.44
Shriram Transport Finance Mid 27.97 12.82 15.97 8.99 33.63
Torrent Pharmaceuticals Mid 23.84 10.13 16.47 0.66 35.82
*31/03/2009
#27/04/2010
@December 2009


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