Wednesday, May 11, 2016
10 Rules to follow...to select stocks for Investing
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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