Dr. Vikas V Gupta of ArthVeda has written an article in the ET titled Want to ride the bull market? Here’s how you can do by Graham-and-Buffett way in which he has explained how we can find “value stocks” i.e. stocks available at a “significant discount” to “intrinsic value”.
The method requires the creation of a screen with the following criteria:
(i) Select companies with sales equal to or greater than INR 250 crores;
(ii) Of these, select companies with debt to equity less than 30%;
(iii) Of these, companies with interest coverage ratio of more than 4;
(iv) Of these, companies with ROE more than 15%;
(v) Of these, select companies with PE ratio less than 25.
Note: A list of such companies applying The Benjamin Graham Stock Screener is available at http://india.serenitystocks.com/
Dr. Vikas Gupta suggests that the resultant pool of companies can be further refined by excluding companies with high debt, price-to-book etc.
After that, one has to apply subjective criteria to short-list winning stocks on the basis of:
(a) lines of business;
(b) product or service lines;
(c) geographic exposure;
(d) customer segments;
Dr. Vikas Gupta also advices that investors should pay attention to factors like the product-customer mix, the business model, i.e. what are the margin drivers and profitability drivers. Investors should also be able to understand their market share and competitive strengths in the market place including their primary competitors and peers.
He also suggests that investors should look at the past several years of sales and profits over a full business cycle, i.e. in good macro-economic conditions and bad ones, and be able to estimate their normal sales and earnings.
This process would enable the investor to arrive at a reasonable estimate of the stock’s intrinsic value and evaluate whether it is available at a significant discount and consequently whether that investment enjoys a margin of safety.
It may be recalled that Dr. Vikas Gupta had on an earlier occasion identified Seven Safe Haven Stocks As Per Benjamin Graham Principles.
A more recent attempt has been attempted by Sanjoy Bhattacharyya of Fortuna Capital. He created a Model Portfolio of stocks which have a high margin of safety.
Yet another attempt to find safe stocks, by using Joel Greenblatt’s “magic formula”, has been attempted by Ambit Capital.