Stock recommendations – how we select 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.
- Eliminating poor 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.
- In-house quantitative model: On this resultant universe of stocks, we then apply in-house quantitative filters to rank the entire set stocks. This helps set a basic bar on the fundamental metrics that a company needs, to make it to our shortlist of stock recommendations. 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.
- Qualitative analysis: 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. With this analysis, we arrive at our stock recommendations. We run this quantitative filtering regularly to ensure that we don’t miss stocks.
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’ stock recommendations 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’!
How we review stock recommendations
- 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.
- 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.
- 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 our stock recommendations.
- 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.
- A ‘Hold’ or ‘Sell’ list on stock recommendations we have made: 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.
- Stock recommendations are for long-term investors who wish to supplement their core portfolio of mutual funds, deposits or ETFs with quality stocks. Our stock recommendations are not designed for those looking to build a stock-only portfolio or active stock investors looking for frequent ‘buy’ or ‘reduce’ calls.
- 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.
- 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.
How to use our stock recommendations in your portfolio
In our recommendations and research, our intention is to address the needs of the retail investor. So, we hope our direct stock recommendations will be used in the following manner:
- We will identify select quality businesses where you can take focused exposures. 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. 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 to0!
- 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. 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. 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.