Every one who are in Equity Market wants to invest in value stocsk.
But how one can identified the value stocks.
Today we can understand 10 basic rules to follow to select a stocks...
1) Earnings Per
Share : The First rule states that earning per share(EPS) of a particular stock must be twice that of the triple-A rated
bond. For ease of calculations, the yield of 10 year SBI bond is
taken as the rate of the AAA bond which is around 8, Graham says the stock
should have EPS should be 16 or above. For ease of calculations, the
yield of 10 year SBI bond is taken as the rate of the AAA bond which is
around 8%.
For example, The EPS of Coal India is around 21 on 10 th april 2016 while the
10-year yield is in the range of percent and therefore meets the above
criterion.
2) PE Ratio : The second rule refers to the Price to earnings ratio.
Which is also popularly known as the PE ratio. Let’s
understand the PE ratio first,
As the name says its calculated by dividing
market price of the share with the earnings per share i.e.,. If the market
price of a particular company is 100 and the per share earnings is 10 then the
PE ratio would be 100/10=10. (The earnings yield i.e.,
EPS is the reciprocal of the price earnings ratio.)
It, however, takes the historical data of the
previous years into consideration. The rule states that the present price to
earning ratio must be at least 4/10th (40 percent) of the highest average P/E ratio attained by the stock during the
immediately preceding five years.
.
4) If the stock prices (market value) are down to 2/3 times the book value, the stock is a good
candidate for further investigation prior to making the investment decision.
This particular point is often considered as a yardstick on which to identify
and shortlist potential scrips for investment. (What is Book Value ? – Book value refers to the total amount a
company would be worth if it liquidated its assets and paid back all its
liabilities. It is the value of a security or asset as entered in a firm’s
accounting books.)
5) When stock prices plummet to 2/3’s of the “net current asset value“, then it is a good idea
to include them in the stocks to be considered for investment. Net current
asset value, also called the net quick liquidation
value is calculated by reducing
total debts from current assets. Fixed assets are not a part of this
computation.
6) Any stock with total debt, lower than the book
value of the scrip is a candidate that can be included in the shortlist.
7) A current ratio greater than or equal to 2 is considered important for profit
making while investing.
8) A continuation of point
no 5 above, this rule too is based on the net quick liquidation
value.
The criteria state that total debt must be equal to lesser than two times the
net quick liquidation value.
9) Stock that has doubled itself over the last ten year period is a good bet.
Amruthanjan fits this criterion as well. So, the earnings growth of prior 10
years should have been atleast at a 7% annual compound rate.
10) The final commandment refers to the growth in earnings of the stock. Intelligent investors
look out for stability in growth. In other words, a maximum of two declines
that is greater than 5 percent in the immediately preceding ten-year period.
~
Source : Benjamin Graham
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