Theory coupled with practicals
Novice investors like you and me have onerous responsibilities. It is not sufficient that we are free-loading on multibagger stocks that are generously handed over on a platter to us by eminent gurus.
Instead, we are expected to also study the theoretical aspects of finding multibagger stocks.
Thankfully, the Gurus are ensuring that we get an appropriate dosage of both.
(Image Credit: Bloomberg)
Best stocks to buy for 2017
A few days ago, we were rewarded with 17 top-quality stock recommendations from four well-known stock pickers. The stocks have been chosen carefully to ensure that our capital is not put to unnecessary risk whilst simultaneously compounding gains at a reasonable pace.
It is notable that some of the stock recommendations for the year 2016 have yielded magnificent gains of up to 89% with no risk to the capital.
The stock recommendations for 2017 are of the same mettle and can be expected to shower hefty gains on us.
“Grandmother of all bull markets” is coming. Invest now to avoid “massive regret” later
Ridham Desai has already issued the inspiring battle cry that “India is on a structural upward path” and that “the next 10-15 years are likely to be a golden period for India”. He has also assured that the “Grandmother of all bull markets is coming” and issued the chilling warning that investors who defiantly stay out of stocks will “massively regret” their foolishness.
“Secret Mantras” for finding multibagger stocks
Ridham Desai has now written an article in Bloomberg Quint titled “How To Be An Ace Stock Picker” in which he has explained in the simplest possible language all the techniques for finding multibagger stocks. He has referred to the techniques as “secret mantras”.
(Image Credit: Bloomberg)
Ridham’s “secret mantras” can be summed up as follows:
(i) Don’t be dogmatic about adopting a single investment strategy such as buying only “quality” stocks or buying only “deep value” stocks. Instead, adopt a strategy which straddles all investment strategies such as quality, growth, value, and momentum;
(ii) Avoid stocks with excessive financial leverage (debt);
(iii) Avoid “high beta” stocks. High beta stocks are popular amongst the hoi polloi which leads to the hurdle rate being raised and the returns being lowered;
(iv) Find stocks that combine the following attributes:
(a) Strong growth – EPS, book value, and dividend growth;
(b) Positive change in return on capital ratios (return on equity and return on capital employed);
(c) Low EV/EBITDA;
(d) Conservative capital structure;
(e) Falling financial leverage (if it has been high);
(f) Positive free cash flows;
(g) Beta < 1.1;
(v) Focus on stocks that exhibit “sustainable growth” instead of obsessing only on quality, low financial leverage, positive free cash flow, positive change in return on capital (RoE, RoCE) etc;
(vi) Bear in mind the following mantras:
(a) Starting level of RoE and RoCE does not affect returns; what matters is the positive change in the level of the two ratios;
(b) Dividend payout is an important signal of a company’s growth strategy and authenticity of profits, but it does not necessarily help predict stock returns;
(c) At different levels of positive FCF/sales, returns do not vary. That said, when FCF/sales is negative, there is a positive correlation between the level of FCF/sales and returns;
(d) Fall in financial leverage matters more than its level;
(e) Starting points of price-to-equity and price-to-book did not affect returns;
(f) Starting point of beta matters for long-term returns;
(g) Small-cap stocks give the maximum returns.
Ridham adds that to win at stock picking, we need the stock of a company with a moat, good governance, supportive macro environment, robust corporate strategy, and execution leading to above-average return on capital and growth, all available at a reasonable price. If any of these are missing, making money becomes onerous, he states.
He cautions that the “secret mantra” presumes that the financial performance of companies will be accurately forecast. Forecasting financials is tougher than forecasting almost anything else in this world and this is where the struggle begins, he adds.
The criteria stipulated by Ridham for a stock to be investment-worthy appear difficult to satisfy at first glance. There are a number of daunting requirements. However, it is certain that there are actually several stocks which meet these criteria. We need to roll up our sleeves and start hunting for them ASAP!