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5 ways to identify a good stock

Value Research | September 23, 2005

Tridib Pathak Sabharwal became Chief Investment Officer, Chola Mutual Fund, in 2004.

In an interview to Value Research, he shares his views on how he selects stocks. Yesterday, he spoke of stocks as an investment and whether or not individuals should still consider investing in shares in Stocks are still a good bet.

Here he speaks on his stock picking strategy.

On what kind of an investor he is

I don't think it's possible to bracket investors as aggressive or conservative. If aggression means investing in stocks that nobody else is buying, then we are aggressive.

If staying away from momentum investing is conservative, then we are conservative.

We are disciplined investors and follow a stock-specific approach.

Investors look for absolute returns. We too believe that one can generate absolute returns over a period of three to five years irrespective of the markets.

On his stock picking strategy

Large-caps

In large-caps, we break up the stocks into sectors, and then rank the stocks in terms of how much gap there is between the share price and the share value.

For example, we have targets of the P/E ratio or PB ratio or EV / EBITDA, or discounted cash flow based valuation.

Based on this, we have a list of stocks that will do well in every sector. These stocks are listed in descending order and based on the rankings, we pick one or more stocks.

Mid-caps

We do not like to invest in mid-caps that are doing well just because the business cycle is positive.

We would like to put our energies into identifying stocks that will become much larger companies because of opportunities, progress and growth.

We have five filters, and only if a stock passes one of these filters will it enter the portfolio.

1. The first filter is to identify stocks in sunrise industries. These are companies that have the right strategies in sectors that will do well in the future.

One such industry we identified was retail and we invested in Pantaloon Retail last year.

2. The second filter is that the company should be in a niche business. This filter throws up companies that operate in a niche area and are not affected by other players.

One niche stock that we invested in is Hexaware Technologies, which focuses on a particular georgraphy in Europe, where it has become the market leader and operates in human resources and IT services.

3. The third filter is to pick stocks that are leaders in their own businesses and are large-caps of their own sectors. When growth happens, these companies will consolidate their position and become large-cap companies. One example here is Blue Dart, the courier company, which is a leader by far. 

4. The fourth filter is stocks that are proxies to large-caps, in the sense that they are from the same industry and because they are mid-sized companies, there is a discount in valuation. The company's fundamentals do not merit the discount.

When we buy a company like this, we invest in a proxy to a large-cap plus we get the benefit of improved valuation. We bought Shree Cements through this filter. It was a hugely profitable cement company and was available at 40% to 50% discount to the rest of the industry.

5. The fifth filter is picking globally competitive mid-cap companies, which are doing big things outside India. Since these companies are looking at a wider canvas than India only, there is a prospect that as they become more successful in their strategy, they can become much larger corporations. The examples here are Micro Inks and Crompton Greaves.

We religiously stuck to these filters in picking all our stocks.

In any company, there are three to four critical variables that can make or mar the valuation of this company. And, once you get a hang of them, more than half the work is done.

Value Research

 




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Number of User Comments: 3




Sub: nice to have a artical like this !

I would like to thumbs up for the writer of this artical. the information i got from this artical will make substancial change in my ...


Posted by kalpesh pravinchandra choksi





Sub: How is the new offer of Chola

Chola Tax Saver Fund and Chola Fixed Maturity Fund how are they for a investment.


Posted by Alok





Sub: Great insight!

Thank you Rediff, Value Reasearch, Mr. Sabharwal (Cholamandalam). You all have cleared so many doubts and myths from my mind, and have given me a ...


Posted by abhishek deb




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