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Special Report FINOLOGY.IN

SPECIAL REPORT
The Art of Picking Great Stocks
Great investors develop a habit of picking one good stock after another. lt becomes
second nature to them. They can almost instantly differentiate between a great
and a not so great company. Great investors don't necessarily spend a lot of time
doing the research. Instead, they develop a framework to help them zero in on the
kind of businesses they like. So, let's discuss how you can develop your own stock
picking framework.

Stocking picking involves two primary kinds of analysis -

A) Quantitative analysis

B) Qualitative analysis

Quantitative Analysis

Picking Stocks can be a tedious process. With more than 4,000 listed entities, it's a
huge task to simply shortlist the companies that are worth analyzing. No one has
the time or the zeal to read about each and every listed company.

ln the market, it's important to have certain filters that minimize the chances of
wrong stock selection. If you have a mechanism through which you filter out the
bad companies, your chances of success increase exponentially.

Before we discuss the art of shortlisting stocks for further research, here are a few
caveats that you need to keep in mind.

1) No stock screening method is perfect, if investing was as easy as having a

formula, then computers would have been the best investors. Thereby, stock
picking is an art and not science. There is no fixed formula

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2) Having said that, qualitative filters can help in saving our time and effort by
providing us a list of companies that we can analyze on a priority basis

3) Never rely solely on any stock screener for your investment decisions.

Now, Here is the link to my stock screening formula. I use screenr.in to shortlist
companies for my research and you will find a shortlist of companies based on my
parameters here.

Let's discuss the metrics I use -

1) P/E >O-This ensures that the companies have earnings, it means the parameter
ensures it's not a loss-making company. Mostly, I like to invest in companies that
are making profits consistently.

2) P/E > 35 - This might look high, but I don't mind paying a high P/E if the earnings
growth is also high.

3) PEG< 1- This ensures that I am not overpaying for a company. I will pay a P/E of
30 if the earnings are also growing at a rate of 30% CAGR. So, PEG ensures that I
pay the P/E multiple that the company deserves owing to its growth rate.

4) Return on equity > 15 - in a country where the index has historically given a
return of 15% CAGR, I believe its rational to expect at least that.

5) Debt to Equity < 1 - This ensures that the company is not generating higher
returns by taking excessive debt. Also, a company with lower debt is less likely to
go bankrupt when the tide turns against it.

6) 3 year sales Growth of more than 10% - ln a country where the GDP itself is
growing at north of 6%, it's reasonable to expect your company to grow its sales at
least 10%.

Qualitative Analysis
Often, qualitative analysis is much more important than qualitative analysis. Sadly,
this is aspect that investors often ignore. While qualitative analysis involves a lot of
research, here is one power tip that has helped me in selecting the right stocks -

Buy aspirational brands with pricing power that sells in volumes

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Ever wondered why Apple is the most valuable company in the world? It's because
it has the following characteristics :-

• Aspirational Brand

• Premium Pricing

• Sells in Volumes

• Switching Cost

Everyone wants to buy an Apple product, more importantly, everyone is willing to

slightly overshoot their budget for it. lt has huge aspirational value. Often, the first
thing that a person buys after a promotion or salary hike is an iPhone, as a
testimonial of his success. At the same time, its pricing is such that the company
earns a higher profit per unit, without compromising on volumes. It's one of the
highest priced mainstream phones, and yet it is the world's largest selling phone.

Contrast this with other categories, wherein usually the best-selling product is the
one that is one that is priced for the masses. Budget hatchback cars are usually the
bestsellers, lOOCC commuter bikes sell in volumes. Most companies either need to
sacrifice on the price or the volume.

Think About this ....

Apple is one of those rare companies that sacrifices neither margins nor volumes.
This is what makes it the world's most valuable company. Imagine what would
happen if Maruti Suzuki Swift can be sold at the price of a BMW, while maintaining
the volumes of Swift. The profits would be unimaginable!

That's Apple for you.

Maruti sells a lot of cars, but the margins are slim. BMW sells few cars, but the
margins are high. The companies that combine the two qualities of high margin and
high volumes is almost a certain Multibagger.

The Power of Google

One simple check that a lot of people fail to do is to google about the management
track record and their integrity. If the companies' management has ever been
involved in a major legal battle wherein their integrity or ethics were in question,

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its best to stay away from such companies. Buying a stock is becoming a partner in
a company. Ask yourself, would you like to become a partner in a company wherein
the owner is an alleged thief? Especially when he holds the key to the bank locker.

Disclaimer - This document should not (directly or indirectly) be reproduced or

further distributed to any person or published, in whole or in part, for any purpose
whatsoever. lt is meant for educational purposes only. Nothing in the Report
should be construed as investment advice. Companies mentioned in the report are
for illustrate purposes only, it should not be deemed as investment advice. Do your
own research or consult your investment advisor before investment.