September 14, 2014

Shortlisting Companies for Detailed Analysis



This article is a part of the series of articles "Selecting Top Stocks to Buy". 


In the first article of this series (Getting right perspective towards Investing), we discussed about getting the right perspective towards stock investing and the requisite qualities for becoming a successful investor. In the second article of this series(Choosing the Stock Picking Approach suitable to you), we learned about different stock picking approaches available to an investor and the guidelines for selecting the stock picking approach suitable to her.

The current article in this series, aims to highlight the necessity of shortlisting a few companies for detailed analysis, out of the thousands of companies available to an investor. We would also learn about various tools, which an investor can use for shortlisting these companies.


As per Bombay Stock Exchange website, at September 14, 2014, there are 5,471 stocks available for investing. Each of these stocks represents a company running a unique business. Business of each of these companies is different from all the other companies whether they are from the same or different industries. 

For example, a pharmaceutical company will have a business entirely different from a telecom company. Moreover, within the pharmaceutical companies, a company selling its products in Indian market will have a very different business from another company, which sells its products in overseas markets. Among pharmaceutical companies, which focus on overseas markets, a company, which sells its products in US & other developed countries will have a different business than the company, which sells its products in Africa & other developing countries.Therefore, investing in any company will expose an investor to a business that would be very different from investing in any other company. 

Therefore, investing in stocks of one company will produce very different results than investing in stocks of any other company. Therefore, it is suggested that an investor must be very particular about choosing the companies in which she invests her hard-earned money. 

An investor should analyze a company in detail before adding it to her portfolio. However, it is very difficult for any investor to analyze all the companies available for investment. Their number stands at 5,471 today and is expected to increase in future. Therefore, every investor should use a process for filtering out all the companies that do not meet her requirements. She should then focus on the remaining companies to find out the companies, which she feels are the best. Such companies will prove to be great investment opportunities for her.

The process of shortlisting companies is necessary so that an investor can focus her limited time and effort on a few targeted companies. Shortlisting companies before analysis helps an investor get maximum benefit out of her effort. 

Different methods for shortlisting companies for detailed analysis:


There are many different methods used by investors to shortlist companies for analysis. Some of the common methods are described below:

  • Magazines: There are many magazines that are focused on stock markets e.g. Dalal Street, Capital Markets etc. These magazines regularly publish many articles with basic analysis of companies. If an investor reads these magazines regularly, she can select the companies mentioned in these magazines, which she likes, for detailed analysis. However, an investor should not invest in any company just because it is recommended by these magazines. These magazines should serve merely as a source to select stocks for detailed analysis. Final decision should always be based on investor’s own analysis.
  • Newspapers:  Similar to magazines, many newspapers have business sections and publish stories about different companies. If an investor likes any company based on a news article, she should analyze it further in detail, before making investment decision.
  • Television: Many TV channels have special programs, which give coverage to growing companies. Such programs present good analysis of company’s history, its brands, its customers etc. They also feature interviews with the company’s management. These programs can be a good source of information for selecting companies for detailed analysis.

However, all these methods, which use mainstream media to shortlist companies have a limitation. Mainstream media usually covers those companies, which are famous and the market has already recognized the value of their stocks. Therefore, stocks of such companies usually sell at a premium and potential for future price increase is generally limited. 


Therefore, many investors try to use sources where they can find companies, which have potential for high growth in their business and whose stocks are not yet recognized by the markets. Some of such methods are mentioned below:

  • Local Marketplace: Many investors try to find companies suitable for investment by focusing on bestselling products in the local markets. They visit malls, shops etc. to find out about the most selling products and the shops that sell them. One of the successful investors, Peter Lynch, has written that he had taken many investment ideas by observing the products bought by his wife and children. If an investor decides to follow this approach, she should find out whether the companies, which make the highly demanded products, are available for investment on any stock exchange. If yes, then she should analyze these companies in detail. This approach is best for identifying companies in consumer goods industries.
  • Online Stock Screeners: Stock screeners are tools provided by different websites, which allow investors to search for companies that meet their investment criteria. Once an investor mentions her stock picking criteria, these websites show her a list of companies meeting her search criteria. Then, the investor can analyze these companies further. An investor should select her stock picking criteria based on the investment approach that she finds suitable to her as detailed in the part 2 of this series. 

 

My Method of shortlisting companies for detailed analysis:


I follow a bottom-up fundamental analysis approach in which I look for high growing companies available at attractive stock prices. After reading books of successful investors and based on personal experience in stock investing, I have prepared a list of stock picking criteria. These criteria can be used with the stock screening tools of different websites. These criteria help me in shortlisting companies for detailed analysis, which are growing fast but are yet to become famous.

I am confident that at the end of this series of articles “Selecting Top Stocks to Buy”, all the readers would be able to make their own stock picking criteria, which would help them select stocks based on their stock picking approach. Such criteria would reflect the personal approach of every reader and will help her proceed on her stock investing journey.

Online Stock Screeners available to Investors:


Once an investor has formed her stock picking criteria, all she needs is a tool for searching companies based on these criteria. Now a day, there are many websites, which offer online tools to investors for shortlisting companies based on their criteria. These websites are paid as well as free ones: 

  • Paid Websites: E.g. CMIE, Capitaline. These paid websites charge an annual fee of a few lakh rupees for providing their services.
  • Free Websites: E.g. screener.in, equitymaster.com, askkuber.com

Paid websites offer more features than the free websites. However, an investor should consider paid websites only if she has a very large portfolio. Free websites are good enough to meet analysis requirements of an individual investor. I believe that if an investor's portfolio is smaller than INR 10 cr, then she should not use paid websites, as annual charges of paid websites would be a significant cost to her portfolio.

My favorite online stock screening tool is www.screener.in. It is a very simple to use website. It has very elaborate instructions for helping the first time uses. 

I have given below a few screenshots demonstrating the step-by-step approach for using its stock screener. I have used a sample set of stock picking criteria for this demonstration.

shortlisting companies for equity analysis research using screener.in

In the above screen, I have searched for companies where:
  1. Sales have grown by a compounded annual growth rate (CAGR) of 15% for last 10 years.
  2. Price to earnings ratio is less than 10
  3. Debt to Equity ratio is less than 1
  4. Cash generated from operation is positive and
  5. Market capitalization is greater than INR 25 cr.
Once an investor clicks on “Run this screen”, the website will provide her with a list of companies whose stocks meet the criteria specified above.

shortlisting companies for equity analysis research using screener.in


One can see that there are 56 companies out of the total 5,471 companies, which meet the sample shortlisting criteria. Now an investor can focus her time & effort on analysis of these 56 companies and ignore the balance 5,415 companies. 

An investor can click on each company's name to find out more details about each company in the search results.

Company Snapshot:

shortlisting companies for equity analysis research using screener.in


Profit & Loss details for last 10 years:

shortlisting companies for equity analysis research using screener.in


Balance Sheet details for last 10 years:

shortlisting companies for equity analysis research using screener.in


Cash flows details for last 10 years:

shortlisting companies for equity analysis research using screener.in


Thus, we can see that now a day, some very useful tools for information on stocks & companies are available to every investor. Stock selection is no longer a field reserved for only a few big investors. Any common investor, including you and me, can search for great companies and analyze them in detail. 

In current era, to become a successful investor, all we need is the right approach towards stock investing, some amount of hard work and an internet connection!


In next part of this series, I will elaborate on the detailed analysis of shortlisted companies. In the future articles in this series, we shall learn about deciding whether the shortlisted companies are good investment opportunities.

It would be great if you could share the tools you use for shortlisting stocks for detailed analysis.