The PrimeInvestor approach to stock recommendations

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Our overarching philosophy in stock recommendations is not to make the highest returns or the quickest buck. It is to prevent capital erosion FIRST and seek growth NEXT. So our stock picks may be boring and sometimes too defensive. 

Direct stock investing is enticing, exciting, exhilarating for the returns it can offer and the rollercoaster journey while making them. But that doesn’t mean stock investing needs to be the domain of only the market-savvy or those who watch markets 24/7.  Stocks can be used by any investor with a risk appetite, to create long-term wealth.  Through Prime Stocks, our stock recommendation and research service, our aim is to make your task of direct equity investing easier, by identifying a few portfolio holdings that can be long-term wealth creators based on fundamental analysis.

Stock recommendations

Here, we outline the assumptions that underlie our service, so that you can decide if it suits you. In the table below, click on the section you’re interested in if you want to directly skip to it.

Role in your portfolio

In our recommendations and research, our intention is to address the needs of the retail investor. Most retail investors have neither the time nor the expertise needed to build and maintain a stock-only portfolio. So, we hope our direct stock investments will be used in the following manner:

  • We will identify select quality businesses where you can take focused exposures. Investing directly in stocks gives you the ability to take focused exposures to promising businesses.  Since you don’t have control over how a fund may allocate to individual stocks and you may own multiple MFs, your exposure to promising companies may be too low to make a difference to your wealth, in the MF route. Investing directly in a few quality stocks will let you capitalize on wealth creators. Of course, you should never lose sight of the fact that this means higher exposure to the risk of losses too! This is why stock investing is not a must and is not for everybody. You need to recognize your ability to stomach such risks; else stick to the mutual fund route.
  • We don’t advocate frequent buying and selling of stocks. The idea is to own businesses that can create stock price returns from earnings compounding over many years. This also gels with the reality that few investors have the time or ability to keep a constant watch on stock prices, to time their entries and exits to a tee.
  • We look at stocks as good additions to a long-term portfolio that is already asset-allocated and built using mutual funds. The fund portfolio forms the core of your investments, where you run your SIPs or make your regular investments. Remember this ensures disciplined savings to meet your goals. Adding on stocks to this will give you diversification and your returns a leg up. Using both stocks and funds in your portfolio helps you mitigate risks and limit the impact of stock calls going wrong.
  • You don’t have to sink huge amounts into a stock at a single shot. As long as valuations are in line with fundamentals, the companies we like will remain on the buy list so you can accumulate your holdings over time.
  • While we advocate an investment horizon of 5 years plus, we don’t believe in buy and forget. We do think a stock portfolio needs nurturing and weeding, like a well-maintained garden. You will need to book profits in quality stocks if valuations soar to unrealistic levels and exit holdings in value stocks if fundamentals deteriorate.

Our stock recommendations are built along these lines. Essentially, we look for stocks that score on balance sheet strength and growth prospects and where valuations are reasonable.

We look at stocks as good additions to a long-term portfolio that is already asset-allocated and built using mutual funds. The fund portfolio forms the core of your investments. Adding on stocks to this will give you diversification and your returns a leg up.

How we pick stocks

To us, quality, growth and right price for the business – all matter. We also believe that good businesses can spring up in any market cap segment. Therefore, we don’t have defined allocations to large-caps, mid-caps, and small-caps or defined allocations to sectors in our stock recommendations. Here’s how we build Prime Stocks.

To start with, we consider the entire Nifty 500 basket – given that this covers almost the entire listed market cap, it throws up all available opportunities. To this, we apply basic filters to remove the very illiquid stocks so that you’re actually able to invest the amounts you wish to. Our liquidity filter applies regardless of the stock’s market cap. Then, we do a further round of elimination to weed out those with very shaky fundamentals – such as the severely loss-making, negative net worth, heavily indebted, and more.

We believe that good businesses can spring up in any market cap segment. Therefore, we don’t have defined allocations to large-caps, mid-caps, and small-caps or defined allocations to sectors.

On this, we then apply in-house quantitative filters to rank this universe of stocks. This helps set a basic bar on the fundamental metrics that a company needs, to make it to our shortlist. Our model considers over 20 different metrics to measure quality and growth alone, besides a series of other metrics to understand stock risks, volatility, and valuations. The model we have developed measures balance sheet strength, growth in revenue and profitability, as well as the quality of this growth. We combine both short-term and long-term averages to ensure that we’re not overtly influenced by the latest numbers.

For example, while we look at revenue or earnings growth, we also look at how strong or stable this growth has been, whether or not it leads to cash flows, whether or not it is real growth. While we look at debt levels, we also look at ability to service interest and whether the debt has been put to good use. While we look at NPAs, we also see what the loan book is like and trends in NPAs.

From the shortlist our model generates, we dig deeper to understand more about each company, its sector, its growth and profit drivers, valuations, and more. This exercise is an entirely qualitative analysis. This quantitative-qualitative blend gives us the ability to assess stocks and opportunities across sectors and market caps. It also removes any potential bias we may have towards particular sectors. It helps us offer a mix of styles. Our ‘buy’ list can and often will feature growth-style stocks, quality stocks, value or contrarian picks, or even dividend plays.

We additionally have a ‘Watchlist’, where we list stocks that we think hold promise, but are not ‘buys’ because we are watching developments. These could be related to valuations or the business. So, not all ‘Watchlist’ stocks will move to ‘Buys’!

Our quantitative-qualitative blend gives us the ability to assess stocks and opportunities across sectors and market caps. It also removes any potential bias we may have towards particular sectors.

How we review recommendations and communicate

Our stock recommendations will be available on our platform https://primeinvestor.in/prime-stocks/ at all times.

  1. When we see any changes to our view on our call, we will alert you to such changes through mail. We will be updating the changes on the platform at the same time. Do note that we cannot do this at any fixed frequency, unlike our other recommendations where we review every quarter. This is because we’ll be taking such calls based on stock movements and company developments, as and when they happen. So, ensure that you keep tabs on our email alerts at all times.
  2. You will find the investment thesis (our reasoning behind a call) if you click ‘View’ in the ‘Rationale’ column in the Prime Stocks list. For some stocks, we will additionally have detailed reports which will be updated as and when we publish them. Go to ‘Snapshot’ in the coverage page to view and download financials/prices of the company.
  3. We do not provide any results update or news update on the stocks we cover unless this changes our view on the stock.

What to expect from our stock recommendations

Prime Stocks is designed with the objective of identifying stock-specific opportunities to supplement your long-term portfolio. Here’s what you can expect from Prime Stocks.

  1. A ‘Buy’ list, which are stocks you can add to your portfolio. As long as a stock is in this list, you can invest in it. And as explained above, we have a ‘Watchlist’ – but please note that they are not buy calls. Also note that we do not use any technical analysis to pick Prime Stocks.
  2. A ‘Hold’ or ‘Sell’ list on stocks we have recommended: When the thesis on which we based a ‘buy’ call is fulfilled, changes, or fails, we will shift the stock to either a hold or a sell. To this extent, we will be tracking the performance, earnings, and other developments on stocks we cover. We will alert you on the same.  Please don’t expect us to write on or give you updates (through our articles or tickets) on every result or news on the stocks in our coverage.
  3. We do not provide any target price or expected return for our stocks. A lot of missed opportunities for wealth creation from stocks arise from taking a target price approach to ‘booking profits’. Our focus is on making returns through compounding earnings, therefore, as long as valuations are in line with growth, we will be retaining the stocks in our buy list. This renders target prices ineffective and unnecessary. We do not define a specific time-frame (as they are meant for the long term) and you are free to take some money off the table if you wish to. Where we think the valuations are out of sync with growth prospects or there are other governance or regulatory risks, we will issue ‘sell’ calls or ‘book profits’ calls.
  4. Prime Stocks is purely for long-term investors who wish to supplement their core portfolio of mutual funds, deposits or ETFs with quality stocks. Our recommendations are not designed for those looking to build a stock-only portfolio or active stock investors looking for frequent ‘buy’ or ‘reduce’ calls. So, don’t treat our recommendations as the only route to returns, or rely on it excessively. And while we do encourage you to get into direct stock investments for the potential they hold, do understand that it is not imperative that you add stocks to your portfolio of other products we research. You can manage perfectly well with mutual funds alone.
  5. Prime Stocks is a list of stock recommendations and is not a portfolio. You don’t have to invest in all recommended stocks. While we try to give a diversified mix, which stock to hold and in what proportion is a decision you need to take based on your current holding and risk profile.
  6. We will not advise you on the allocation towards the stocks nor how a stock would fit into your existing portfolio. Similarly, we will answer your queries only as far as they relate to our recommendations. We will not respond to individual stock queries, nor analyse stocks based on your request. We’re also not a trading platform, so you will have to execute transactions at the brokerage of your choice.
  7. IPO coverage is part of our stock recommendations, but we retain the discretion on which IPO to cover based on our qualitative assessment of its worth. We won’t analyse every IPO there is, and we don’t look at listing gains in our IPO recommendations.

Stock recommendations in these times

If you are beginner to equity investing, then 2020 is not a year you should use to set your expectations of equity returns or your stock strategy. Market valuations when you start out on your investing journey always influence the returns you make. On this count, with the Nifty 50 PE kissing 40, this is not a good entry point into equities.  When a market is driven by liquidity – as it is now – anything you pick can turn out a winner. There is limited distinction between a quality stock and a sub-standard one (In fact, the latter may rise much faster). Therefore, the out-performing stocks today may not find a place in a multi-bagger list 5 or 10 years from now.

A market such as the present one makes us uncomfortable. It’s hard to call stretched valuations when there’s a flood of money chasing stocks, hard to say when the liquidity will dry up, and what can trigger a correction. However, as stock researchers, we are aware that the markets can remain expensive for extended periods and that good investing opportunities can present themselves in all kinds of markets, if you remain market cap and sector-agnostic.

Therefore, we have attempted to identify stocks where the expectations built into current valuations are not outlandish. We do not believe in growth at any price – valuations need to be justified by business growth potential. To this extent, we’re not pure growth, quality or even value investors. You may see us giving some opportunities fancied by each of these camps, a miss.

It is therefore with much caution that we launch our equity recommendation platform. This is what we’ve done:

  • We have been very careful with the number of stocks we are recommending. Given the broad-based rally, there is no abundance of reasonably-valued stocks where revenue growth and profitability expansion are not already in the price. We will keep watch on earnings and valuations before adding to the list. This is why our buy list is not long now.
  • We have picked two broad types of stocks – some are growth stocks where valuations are above average but not over-the-top when you consider earnings potential. Some others are value picks where the immediate growth is not very exciting, but valuations make a case for investing. These stocks may not see big rallies if markets remain super-heated but will cushion a fall if market liquidity dries up. We have specifically sounded alerts in stocks where we think it’s better that you slowly accumulate your holdings, where a market correction will provide opportunities.

Our job will be both to sound you off on accumulation opportunities and to warn you to cut losses if the situation calls for it. We will not hesitate to reverse our mistakes, without much delay. There will be times when we falter or when we pre-emptively alert you to impending risks.

Our overarching philosophy in stocks is NOT to make the highest returns or the quickest buck. It is to prevent capital erosion FIRST and seek growth NEXT. So our stock picks may be boring and sometimes too defensive. We’re willing to live with this, given market conditions today and our own philosophy that stocks are meant to augment a long-term portfolio made up of funds, bonds, ETFs or deposits.

Also, check out our powerful Stock screener if you are a DIY investor wanting to filter your own stocks.

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Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

18 thoughts on “The PrimeInvestor approach to stock recommendations”

  1. What does the risk value in the Prime stock recommendations imply? I understand the obvious interpretation but since these are fundamentally sound stocks need your articulation. Is it volatility in the medium/long term? or say a probability measure that indicates it may not realize the expected potential?

    1. It’s a combination of these factors – volatility and downside risks are generally higher in these stocks; those that are in turnaround phases or where the industrial cycle is currently down etc entail higher risks. – thanks, Bhavana

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