Final Checklist for Buying Stocks

The current article is a summary of the key aspects of stocks analysis learned by us until now and puts them together in the form of a checklist for buying stocks. This article also provides further clarifications on the checklist by answering investors’ important queries like:

• What to do when no company/stock meets all the checklist parameters
• What weights to be given to different parameters in the checklist for buying stocks.

In previous articles, we have provided readers with key takeaways in form of crucial parameters that an investor should use while analyzing stocks. Articles on financial analysis, valuation analysis, business & industry analysis and management analysis contained summary checklists that can be very handy for any investor. 

In the current article, we have compiled all the parameters that an investor should check each stock, before investing her hard-earned savings. This article can serve as a guiding checklist for buying stocks for any investor, which will become very useful while doing a detailed analysis of stocks.

The Final Checklist for Buying Stocks

Financial Analysis:

Valuation Analysis:

Read: 4 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors

Business & Industry Analysis:

Management Analysis:

Other Business Parameters:

Margin of Safety:

Credit Rating Analysis:

We have conducted an in-depth fundamental analysis of many companies using the parameters from the above checklist on our website. You may read them to improve your stock analysis skills. These company analyses are available on the following link: Read In-depth Fundamental Analysis of Companies

Investors should always keep in mind that, no checklist for buying stocks could ever be complete for doing stocks analysis. However, the parameters in the above checklist test any company and its stock on some of the tough performance parameters. Hence, an investor can be reasonably certain that the stocks, which pass the above checklist for buying stocks, will have sound fundamentals and are available at reasonable valuations. If she diligently follows these parameters, invests only in stocks that promise good fundamentals and never overpays for them, then she can be reasonably certain of good returns from her portfolio over the long term. 

Temporary periods of stock price fluctuations, business cycles where even good companies would not be able to maintain sales growth & profitability, would definitely come in between. However, the investor should keep her patience and not act on impulse and stay invested in a company until the time inherent business strength of the company is intact. She would reap great benefits from such investing behaviour.

No checklist for buying stocks is paramount. Hence, an investor should not restrict themselves to the parameters mentioned above. She should read further about investment analysis and add/remove parameters from the above list as per her understanding. She may even edit these parameters as per her preference.

Monitoring stocks in an investor’s portfolio is also equally important. An investor should delineate her monitoring activities into ongoing activities, quarterly activities and annual activities. (Read: How to Monitor Stocks in Your Portfolio)

Let us now address the key queries asked by investors about the checklist for buying stocks, which are essential for further clarification on the use of the checklists.

What to do when no company meets all the investment checklist parameters?

What to do in overvalued markets/when no company meets the investment checklist parameters?

Dr Vijay.

I read your e-book “Peaceful Investing: A Simple Guide to Hassle-free Investing”. It is a very nice job.

I am a new investor. I have some basic queries:

For investments, it is very difficult for a single company to fulfil all parameters in the checklist.

So please let me know your priority or the percentage weight on the parameters, which are most important and the parameters where you believe that some compromises can be made.

If you have written an article on it, then please let me know.

Author’s Response:

Hi,

Thanks for writing to us!

In case, an investor is not able to find any company, which meets all the parameters and the investor still wishes to make investments by relaxing the selection parameters, then we usually advise investors to follow the following approach:

Out of the key analysis parameters: financial, business, valuation, management and operating efficiency parameters, if the investor wishes to relax, then the parameter, which may be relaxed is the valuation parameter. Retaining all other parameters indicates that the companies, which the investor will consider for an investment, will have good fundamentals. Nevertheless, she may try to edit the parameters as per her preference and see if she gets good results.

However, an investor should keep in mind that by relaxing the valuation parameter, i.e. by investing at the higher price (high P/E ratio); the probabilities of future returns would be lower. Therefore, it may happen that the business of the company is doing good but the stock price is not moving higher because it had already reached a very high level when the investor initially purchased the stock.

An investor should read the below article to understand the risks that she may face when she invests in companies at a high valuation.

Further advised reading: Hidden Risk of Investing in High P/E Stocks 

Further advised reading: 3 Principles to Decide the Investable P/E Ratio of a Stock for Value Investors

Therefore, an investor needs to tone down her future return expectations accordingly when she invests in stocks at a high price.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Related Query:

Hello Vijay sir, I tried to find some companies using the fundamental analysis so that I can start investing in them. I started with Screener with the search criteria mentioned in the above checklist. But after applying even only 5-7 filters from Financial Analysis, I couldn’t find even a single company.

Does that mean:

1. Presently no single company is worth investing in?
2. Or sometimes is it ok to ignore some parameters from the above checklist?
3. I feel that it is really hard to find a company that passes all the above parameters from the checklist, then how to choose stock for long-term investment?

Regards,

Author’s Response:

Hi,

Thanks for writing to us! We are happy that you are working towards your own stock analysis and selection.

If an investor finds that as per the parameters being used by her, she is not able to find any company, then she may keep tweaking the parameters as per her preference and keep checking the outcome (i.e. results from screener). In case she is ok with the relaxed parameters, then she may choose to study the companies ahead.

Further advised readings: How to Use Screener.in “Export to Excel” Tool

We advise that you keep tweaking different parameters, which are acceptable to you.

All the best for your investing journey!

Regards

Dr. Vijay Malik

How to decide about existing stocks in the portfolio: buy more/hold/sell?

I wanted to understand how to value a stock that is already in your portfolio and has reached a slightly stretched valuation – I am referring to Kajaria Ceramics Limited (KCL).

If you want, then I can share the detailed thesis on KCL, but that would be more from a “Buy” perspective, which I don’t intend to do. The gist is:

• It is the market leader.
• The tiles industry will continue to grow at a decent rate for the next 3-4 years.
• It has good distribution. It is spending a good amount of money on branding (60+ cr consistently for last 3 yrs.), which is more than the PAT of some of its listed peers and branding is kind of reflected in good numbers (improving ROC, NPM etc.).
• It is launching new designs. But I am not weighing that in.

Everyone knows it and the market has provided a high valuation for it. Although, when compared to some of its peers (NITCO, Somany, Bell, orient, Asian Granito), KCL does stand out in terms of business quality and financial with good able management running it. Unless they do something wrong or any irrational competitor comes into the market, KCL should continue to do better than the average market growth.

Now, my question is:

• How should I value a stock, which I already hold in the portfolio and for which I am hopeful that business will continue to do well but I am not sure how much of that is already priced in?
• Does it make sense for me to continue to own this business?
• Should my valuation of the business for buying and a new stock and holding an existing stock not be different?
• How should I go about doing a valuation for this and similar stocks?

Mr Bakshi’s example on Asian Paints (AP) does provide some insight but for every AP there might be thousands of failures as well.

• What key things I should look to ensure that I am holding a high-quality business, which still has upside potential from a 5-year perspective at current valuations?

I have a conflict in my mind. I have a feeling that KCL is a good business but is it the right investment at a current valuation to continue to hold for 3-5 years?

If you can share your experience or a post on this, then it will be great. If you have come across any great book on this please do let me know.

Looking forward to enhancing my learning. 

Author’s Response:

Hi,

Thanks for writing to us!

The criteria for buying new stock for the portfolio and holding a stock in the portfolio are different.

We would advise seeing each buy decision as a separate decision independent of what price the investor has paid for the stock in the past. The P/E ratio at which an investor should buy a stock depends upon the margin of safety in the stock price and the business. I have elaborated on the margin of safety in the stock price and the business in the following article:

Read: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

If after the initial purchase, the interest rates have gone down, then the investor can think of purchasing the stock at a higher P/E ratio.

Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

If the self-sustainable growth rate (SSGR) of the company is very high than the current sales growth rate and the capex needs are very low in comparison to the free cash flow being generated by the company, then the investor can think of paying a higher P/E to the stock. However, it is not objectively defined that at what level of SSGR in comparison to sales growth or at what level of Capex as a percentage of free cash flow (FCF), what should be the maximum P/E ratio that the investor pays for the stock. Nevertheless, let’s suppose that the investor decides that looking at the interest rates, SSGR, Capex/FCF levels that she would be willing to pay a P/E ratio of 14 for the company, then she can accumulate the stock up to a P/E ratio of 14 irrespective of her initial purchase price P/E ratio.

Read: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

Moreover, the fact of being invested in a company after doing analysis brings in additional knowledge about the company, its products, its industry etc., which deepens the understanding of the investor about the company, therefore, an investor can think of paying a little higher P/E to the existing stocks of the portfolio for accumulation than adding altogether new stock.

We hope that the above argument is able to guide you in the direction of deciding the maximum amount to pay for stock while buying and accumulating. I understand that the answer is not giving you objective answers. However, it would definitely help to take a step in that direction, which is the “art” aspect of investing.

Moreover, we keep stocks in our portfolio until the fundamentals are intact or until any of the selling criteria is triggered. You may read about our thoughts on selling criteria here:

Also read: When to Sell a Stock

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Are buying and holding criteria different?

Dear Dr.

You have told us that we should invest in a low PE ratio good business to get the benefit of earnings and PE expansion and keep holding the stock until the business gets worse.

My doubt is:

1. Can we invest in the stocks which are in the early phase of PE expansion, means whose PE ratio is ~15?
2. Why we focus on the margin of safety only while investing, why not during the holding period?

Please clarify.

Author’s Response:

Hi,

Thanks for writing to us!

1) We should decide about investing in any stock after assessing it from all the perspectives like financial, business, management and valuation. Only looking at valuation would be taking a myopic view.

Advised reading: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

In case, an investor is satisfied with all the fundamental aspects of any company and is ok with paying the price at which it is available in the market, then she may choose to invest her money.

2) We keep the buying and holding criteria different. Once we buy a stock in our portfolio, then we usually hold it until the fundamentals are intact and in fact, add more until the price is in our buying range.

Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

All the best for your investing journey!

Regards

Dr. Vijay Malik

Are buying and accumulating criteria different?

Read: When to sell a stock

Hi Vijay,

You have mentioned the criteria to Buy and Sell. What about Accumulate? When should an investor accumulate?

Say I buy a particular stock whose PE is 8 (and assuming other factors as elaborated by you are also good). 1 year later, say the PE is 15 while other factors continue to stay good. Should I accumulate more of the stock or not?

The reason I ask is, when we identify a stock, we may have only so much capital with us. A few months down the line, when we get more capital, should we reinvest in the stock already discovered or not? There are only so many good stocks in the market whereas capital availability happens numerous times over any reasonable time period.

I guess another way of asking is should the criteria for Buy and Accumulate be the same or not?

Author’s Response:

Hi,

Thanks for writing to me and asking a very intuitive question!

Buy and Accumulate criteria:

We would advise seeing each buy decision as a separate decision independent of what price the investor has paid for the stock in the past. The P/E ratio at which an investor should buy a stock depends upon the margin of safety in the stock price and in the business. I have elaborated on the margin of safety in the stock price and the business in the following article:

Read: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

If after the initial purchase, the interest rates have gone down, then the investor can think of purchasing the stock at a higher P/E ratio.

Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

If the SSGR of the company is very high than the current sales growth rate and the capex needs are very low in comparison to the free cash flow being generated by the company, then the investor can think of paying a higher P/E to the stock. However, it is not objectively defined that at what level of SSGR in comparison to sales growth or at what level of Capex as a percentage of FCF, what should be the maximum P/E ratio that the investor pays for the stock. Nevertheless, let’s suppose that the investor decides that looking at the interest rates, SSGR, Capex/FCF levels that she would be willing to pay a P/E ratio of 14 for the company, then she can accumulate the stock up to a P/E ratio of 14 irrespective of her initial purchase price P/E ratio.

Read: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

Moreover, the fact of being invested in a company after doing analysis brings in additional knowledge about the company, its products, its industry etc., which deepens the understanding of the investor about the company, therefore, an investor can think of paying a little higher P/E to the existing stocks of the portfolio for accumulation than adding altogether new stock.

I hope that the above argument is able to guide you in the direction of deciding the maximum amount to pay for stock while buying and accumulating. I understand that the answer is not giving you objective answers. However, it would definitely help to take a step in that direction, which is the “art” aspect of investing.

If you have any additional queries on this topic, then please feel free to ask. It would be my pleasure to answer it.

All the best for your investing journey!

Regards,

Dr Vijay Malik

Making investment decisions amid uncertainties

Is it possible to find any company which ticks off all parameters and is also available cheap? There is always something or the other missing from any prospective investment. Taking a decision becomes difficult, how to go ahead mentally?

Author’s Response:

Hi,

Thanks for writing to us.

We have been continuously investing in the markets in the stocks that we find are good and cheaply available. Our transactions are available to premium subscribers.

If an investor finds that any stock, which she likes is doing well on many of her favourite parameters, then she may make a tradeoff. This might be a case where the investor would be investing while being conscious of the issues being faced by the company. Known issues are better than unknown issues as the chances of negative surprises are low and the investors tone down their expectations accordingly.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Should one wait for markets to correct to invest?

Is it a wise decision to wait for bear markets and until then park the money in liquid funds?

Author’s Response:

Hi,

Thanks for writing to us!

We do not give a lot of weight to the overall market levels while making investment decisions. If the stocks that we like are within our buying range, then we invest without looking at Nifty or Sensex levels.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Lumpsum or Staggered Investments

Can you enlighten me on how to go about buying such shares, which are hidden from major market players? Please also tell in what proportion of one’s capital, should these shares be bought.

I know it depends upon individual risk appetite. But suppose for an aggressive investor with capital (say about ₹500,000), how to do it?

Also if one decides to allocate say 20% of capital so about (₹100,000), how much quantity one has to buy at one go in the first purchase?

Author’s Response: 

You have rightly pointed out that the investment pattern would depend upon the risk appetite of the investor.

There cannot be any fixed rule, which may meet the requirements of all the investors. I believe that an investor should invest only that much in markets so that she does not lose her night’s sleep.

However, fund manager Peter Molluck recommends that while investing in stock markets, an investor should invest her entire money in one shot. He has cited many studies in this aspect. You may read my review of his book “The 5 mistakes every investor makes and how to avoid them” here:

Book Review – The 5 Mistakes Every Investor Makes and How to Avoid Them

Hope it helps!

Related Query:

Hi Vijay,

I have a question about investing in a stock. If you have decided to invest ₹1 Lakh in a stock of your selection, do you put the entire ₹1 lakh in hat stock in one go or do you segregate the purchase over time?

Thanks.

Author’s Response:

Hi,

Thanks for writing to me!

The answer would differ from person to person depending upon her risk-taking appetite. However, as you have asked what we would do if we have to invest ₹1 Lakh in a stock, we would invest this amount in one go.

Regards,

Investors’ queries on the checklist for buying stocks

Clarifications about values of checklist criteria

Hello Mr. Vijay,

Your blog is really good. You have made things very simple. I have a query:

• Why do you take the minimum net profit margin (NPM) rate like 8%?
  • I mean why you consider 8%.
  • Does it have any correlation with 15% sales growth?
• Why is minimum NPM rate almost half of minimum sales growth rate?
  • Why is there a big gap?
  • Does such a gap exist in all industries?

Author’s Response:

Thanks for writing to me!

There is no correlation. These are the levels that I like in the companies in which I feel like investing.

An investor should have her own criteria for selecting stocks. Depending on her preference, I suggest that the investor should tweak these parameters to the levels that she feels good about.

Regards,

Weights of different parameters of the checklist for buying stocks

Dear Dr. Vijay

I follow your blogs/tweets and have learnt a lot. You are doing a great job in educating people who aspire to be value investors.

I saw your tweet where you had mentioned promising stocks in the 150/150 segment. I refer to the checklist for buying stocks that you had posted, which had the list of criteria’s one should look for when choosing a stock, esp. for long term investing (e.g. PE ratio of < 10, Avg 5 yrs. Sales CAGR of > 20%, PAT margin > 10% etc.,).

I wanted to understand your thought process when you hunt for small and emerging companies (in 150/150 segments):

1. which of the checklist criteria would you give more weightage than others while looking at such micro-caps
2. which one’s you may ignore (as I’m not sure if there’ll be micro-cap companies which would satisfy all the criteria mentioned in the checklist)

Note: By the way, I use Screener to search for companies for further study (reading annual reports, company presentations etc.,) based on the checklist you had blogged beginning of the year

Regards,

Author’s Response:

Hi,

Thanks for your feedback & appreciation! We are happy that you found the articles useful!

Thanks for asking the query on this section as here your query and its response would be helpful for other readers of the website as well.

We have mentioned that the 150/150 segment (₹150 cr. market cap / ₹150 cr. sales) has surprised me with promising stock picks. This is because whenever we have searched for stocks, I noticed that most of the stocks meeting my criteria have been from this segment and have given good returns to me.

Another point to be stressed here is that I do not specifically put filters of sales=₹150 cr. or market cap = ₹150 cr. while searching for companies. It’s just that most of the stocks that pass the filters are incidentally from 150/150 segment.

Coming to your specific queries:

1. All the criteria are equally important. No parameter is more or less important than others. An investor should analyse the stocks and satisfy herself on all the parameters.
2. An investor should not ignore any parameter. It might be difficult/time consuming to find stocks meeting all the parameters. However, an investor does not need to find hundreds of stocks meeting all the parameters. Finding one or two stocks in a year is good enough.

However, once an investor has spent enough time in the market and has analyzed many companies, then she would have formed her own approach to stock investing. She would have created her own set of criteria to select stocks that would suit her investing style and temperament. Then she would realize that her criteria might or might not be the same as the checklist shared by us on this website.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it clarifies your concerns.

Regards,

Vijay

Can only a few ratios predict future stock performance?

Hi Vijay/Chetan,

The asset turnover ratio/inventory turnover ratio for both Suven Life Sciences Limited and Alkyl Amines Chemical Ltd are comparable but I can see Suven is showing an upward trend while Alkyl is showing some down/recovery trend.

Then, how with how much confidence we can say that these ratios are very much correct to identify a potentially good stock?

Although, I can see that Alkyl is having a D/E ratio (0.97) greater than Suven Life Sciences (0.25). And also what can be a safe/good value for this ratio (around 10)? Thanks in advance.

Author’s Response: 

Thanks for writing to me!

Stock analysis is a never-ending process. Every parameter gives some information about the stocks. No parameter is complete in itself. An investor should use multiple parameters in conjunction to identify good stocks and then take a comprehensive view to make an investing decision.

As far as analysing price movements of any stock is concerned, it is always guesswork. It can’t be said with certainty, what parameters the market is weighing more while giving certain value to any stock.

Regards,

Should we avoid a good stock whose price has recently increased a lot?

Hi Sir, the series of your articles has given great insight for analyzing stocks along with available sources for further reading. Thanks a lot for that.

I would like to have your views on a stock, which fulfils most of the parameters for being a good investment like ROCE/ OPM/NPM/ Sales growth etc. But the stock has appreciated approx. 10-12 times in the last one year.

Should the investor consider it for investment, because it seems that 10-12 times appreciation has left little scope for the near future (2-3 Years) gains?

Regards

Author’s Response: 

Thanks for writing to me! I am happy that you found the article useful.

The history of price rise or fall is not relevant till the time a stock is available at reasonable prices when compared to its fundamental strengths. Stock prices do not have any ceiling.

Regards,

Related Query:

Hello Dr. Malik. Thanks for this outstanding piece of work.

I have a few questions:

• We have analyzed data of the company for the past 10 years e.g. from 2004-2014 and bought in 2014, is it that we would be buying too late?
• The reason that I am asking is: suppose we analyse a company financially for the past 10 years, it’s quite likely that the stock price would have run up a lot already. And since it is making profits since the past 10 years, one loss-making year won’t affect it financially but the stock price may drop.
• Are we having the odds in our favour in such a case?

Author’s Response:

An investor should buy a good stock whenever she comes across it. There is no such thing as early or late. We analyse stocks with a history of 10 years because the period of 10 years provides us with enough history of the company’s performance over one or more business cycles and we can see the decisions taken by the management during different situations and the impacts of their decisions on the company.

If after 10 years of good performance, the stock price is within our investing range, then we invest in the stock.

Read: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors

Moreover, if a company reports a loss after many years in profits and the loss is not due to any permanent factor, then the stock price fall is the best opportunity to buy more stocks.

Read: How to Monitor Stocks in Your Portfolio

Regards,

Related Query:

Dear Sir,

I am very thankful to you for presenting good points in a very lucid manner.

How to do Business Analysis of a Company

I have a query with regards to this chapter.

All the analyses that you have shown compare a company after 10-15 years of growth but by this time Mr. Market might have already assigned it its correct valuation. These companies might look really good in hindsight but the trick is finding good companies in the early stages and believing that these companies are capable of such high valuations at a later stage.

How do we do this in industry/business analysis as there are no forecasts provided in the above analysis?

Once again I am very happy that I stumbled upon your website.

Regards,

Author’s Response:

Thanks for writing to me! I am happy that you found the article useful.

It is not always true that Mr. Market assigns a true valuation after 10 years of good performance. Undervalued opportunities are always there in markets. An investor should keep looking.

We, as an investor, get comfort only when a company has been around for long (say 10 years) and has proved that it can generate profits. I advise the same to other investors including the reader of www.drvijaymalik.com.

We believe that this approach would work for individual investors who work with limited capital, have a limited risk appetite and can spend limited time for stock analysis. I say this because while investing in early phase/start companies, which venture capital or private equity funds do, the investors invest in a large number of companies expecting that a few of the bets would go right and cover the losses on those that did not go right.

No one knows the future with certainty and institutional investors mitigate it by having a large portfolio with many investee companies.

If an investor believes that she has the skill to analyse businesses in an early phase and has the requisite risk appetite, then she should invest in companies with a short history.

Hope it clarifies my point of view!

Regards,

Do a high FII shareholding and the presence of multiple business segments make a company a safe bet for investors?

Hi Sir,

I read your article. Almost all the criteria mentioned above in the checklist are good. However, I am a bit confused regarding two criteria:

1st is FII shareholding: Most experts and the available information on the internet claim that a higher foreign institutional investor (FII) holding means that a stock is a good stock. This is because the FIIs do better research than retail investors. So it is a safe bet if FIIs are increasing stakes in a particular stock.

2nd is diversification: Pure play company is a good bet to rely on. However, if a company has a diversified business, then it is unlikely that all of the diversified products would have negative returns at any one point in time. Therefore, safety increases with diversified products as they won’t witness a fall in sales at the same time.

Thanks for sharing good information.

Regards,

Author’s Response:

Hi,

Thanks for writing to us and sharing your inputs.

1) FII Shareholding:

We do not believe that as a rule, all the FIIs do better research than retail investors. We believe that the quality of research work in both the segments of FIIs as well as retail investors vary across a huge spectrum. Effectively in parts both FIIs as well as retail investors do quite good research. However, simultaneously, we notice that many times the quality of research work by both FIIs as well as retail investors leave a lot to be desired.
Therefore, we do not believe that the mere presence of an FII indicates that the company/stock is a safe bet. We believe that investors should take investment decisions based on their own research and not rely on inferences from the presence of FII shareholders in any company.

2) Diversification:

We believe that both the following scenarios bring diversification benefits to the investor:

1. the presence of diversification of different businesses within a single company as well as
2. the presence of multiple pure-play business companies in the portfolio.

However, out of these two scenarios, we prefer (ii). This is because it is simpler and easy to analyze and understand a pure-play company. Analyzing a company, which has many businesses becomes difficult as we find it comparatively difficult to understand all the parameters, which may influence its business.

Therefore, we prefer to get diversification benefits in our portfolio by investing in many pure-play companies, which are simpler to analyze and understand.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Assessing investment in companies with falling share price/business performance

Hello Sir, Thank you so much for educating us with valuable knowledge about investing. Can u pls clear my doubts?

1. After the fundamental analysis, we invest in a company. After some time the company produces poor sales from the previous years and so the price falls down. In that situation since we are invested in the company do we prefer to add to our positions or we hold or exit the stock. How long we can give time for a company to recover from its position since it has good past records, considering how the company is performing in the sector with its peers.
2. In most of the analysis, I find the sector leader has good moat advantage and sure they have high PE at which we r not going to invest.

So what if the moat of the company is avg but it has good fundamentals with all the criteria that tick our box to buy. I do accept if there is a moat advantage that the company is going to have considerable growth apart from the others in the future. But what if we cannot find a moat but has good fundamentals and how do we react to this situation

Author’s Response:

Hi,

Thanks for writing to me!

1) It is advised that investors should keep on buying stocks of a company, even when the stock price is falling, until the time they are convinced that the problems being faced by the company are temporary in nature i.e. are because of the external factors and not because of the poor management decisions. Such an opportunity provides great investment avenues.

2) Usually good fundamentals and moat go hand in hand. Rarely, an investor would find that a company has good fundamentals but no moat. Therefore, I would suggest that an investor should invest in a company with good fundamentals even though she is not able to find out the sources of its moat. She should rest assured that if the company has good fundamentals, then it would have some advantages over its peer, though these advantages may not be visible in the cursory analysis.

Read: Business & Industry Analysis Of A Company (Assessment of Moat)

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

Any separate checklist for investing in cyclical businesses

Sir, do you use the same checklist while investing in cyclical and commodity businesses since they have varying sales and profits all the time? And how do you analyse such companies?

Thank u for answering my earlier query.

Author’s Response:

Hi,

We do not follow any separate criteria designed specifically for cyclical stocks. We believe that fundamentally sound stocks, which are conservatively financed if bought and held for a duration long enough that cover many business cycles would help an investor in seasonal stock price variations.

You may find my criteria for stock selection in the following article:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Regards,

Vijay

Should we consider companies with low growth and corporate governance issues?

Hi Sir,

I would request your inputs and views.

(1) I am tending to prefer a Hero Motocorp or Bajaj over Eicher because of the established business and comparatively lower valuations; same time (2) I am preferring a Kotak/ HDFC bank over PSUs or Axis or ICICI because of its track record and a long road ahead; same is the case with a Gruh over LIC housing or Indiabulls Housing.

If avoiding low-growth and non-governance companies have a cost, then shouldn’t we be taking that cost (not in all cases, but most cases)? Because that cost in long-run would protect our capital.

Is even looking at low-growth (in foreseeable future) and misgovernance companies, right, considering they are the ones predominantly trading at low PEs now.

Author’s Response:

Hi,

Thanks for writing to me!

We believe that every investor should have her own stock selection strategy as the market is a place for different investors to come together and enter into a transaction, which reflected their individual views. There are investors who follow arbitrage, technical, fundamental, low P/E, high P/E, turnaround etc. among many prevalent strategies.

However, we advise investors to focus on companies that have achieved a growth rate of 15% or more over the past 10 years, are conservatively financed, managed by competent personnel with integrity and available at a low P/E ratio.

We do not believe in investing in low growth companies. Moreover, companies with governance issues must be avoided whether these are low growth or high growth.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

All the best for your investing journey!

Regards,

Vijay

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.