As a layman, beginner or an average retail investor, you are often faced with the question, ‘which stocks you should own’, from a long-term perspective.
There is a lot of material on the internet that you can refer to, to evaluate stocks. There are many books written on the subject which you can read. And, then there are brokerage houses which regularly come up with their ‘buy’, ‘sell’ or ‘hold’ recommendations.
However, sometimes all this information is too much for a layman to digest.
Why is stock-picking so important? If you train yourself to become an expert stock-picker, you can increase your personal wealth exponentially.
However, it’s not an easy task and it could take years to learn the skill.
Long-term investors use fundamental analysis while short-term traders use technical analysis to evaluate a stock.
In fundamental analysis, you need to examine the company’s management structure, its competitors, industry position, growth rate and prospects, income, profits and losses.
Many ratios such as earnings per share, price-to-earnings ratio, price-to-earnings growth, dividend yield, price to book, beta, etc are used to analyse companies.
You need to analyse among other things: Who are the key members of management, what’s their qualification and track record? What are the products which company makes or services which company provides? How does this company make money? What is the company's business model? What is its market share?
What are the characteristics of its industry, such as its growth potential, demand-supply, regulations, taxation, barriers to entry, etc.? What is the value of the brand? What is the DNA of the company?
All this can be too much work for a layman or average retail investor.
Technical analysis is way too complex for a layman to understand.
All the above attributes manifest in the share price of the company and the returns generated by investing in the same.
One quick method to identify high quality stocks to invest in is to find companies which have consistently delivered a high rate of return compared to the index for a long tenure.
Since wealth generation takes years, one should not look at returns of the last 3-5 years but a much higher tenor of say two decades. Data is available for 19 years for stock prices adjusted for split.
In the last 19 years NIFTY50 has generated a return of 15% per annum.
15 companies which have generated a return of 24% per annum and above for the last two decades, 9%+ more than the index. 8 companies have given double the index returns.
They are better managed, they enjoy market leadership, they have survived through many cycles, they have low leverage, they constantly innovate, they adopt technological changes, they charge premium pricing, they have better margins, they have strong brand value, they churn out new products and services, and they deliver high return to shareholders.
They are what is called as consistent compounders. The table below shows these companies.
These include companies from sectors like cement, auto, FMCG, banking and financial services, beverages, retail, paints, chemicals and consumer durables.
15 stocks whose share price have risen by >=24% per annum in the last 19 years
Source: www.yahoofinance.com, www.politicalbaaba.com
Returns exclude dividends paid out.
Only large cap companies have been considered. Large-cap companies are companies that are big and well-established in the equity market having a market capitalisation of Rs 20,000 crore or more.
Compound annual growth rate, or CAGR, is the average annual growth rate of an investment over a specified period of time longer than one year.
These companies include Shree Cements, Bajaj Finance, Asian Paints, Pidilite, Voltas, Aurobindo Pharma, Eicher Motors, United Spirits, Titan, Kotak Mahindra Bank, Axis Bank, HDFC Bank, Britannia, IndusInd and Bata.
In the post-pandemic world, big companies who enjoy dominant market position, who have low debt, quality management, are agile and adopt technology, are likely to succeed. All the above companies display these qualities.
Disclaimer: This is not an investment recommendation and readers are expected to do their own research before investing.