One way of selecting Good Stocks

It is recommended to trade using a strategy. Although nobody has been able to guarantee making profits in Share Markets, it is still important to adopt a trading strategy and be disciplined to follow it for a reasonable amount of time. By reasonable time, it is implied that the strategy must be given at least 1 year time.

I have realised that it is especially important not to trade purely based on recommendations from the Brokers. In fact, I have had very little success based on recommendation given by my brokers. This is in spite of the fact that these were very big Trading Houses like HDFC Securities Ltd. The research ideas published by them rarely worked out for me.

I am providing below one strategy for selecting Stocks to trade in. It must be noted that in spite of using a strategy, the basics cannot be ignored.

The importance of Diversification

One of the basics is that there should be sufficient diversification in the portfolio to reduce risk. As a thumb rule, the portfolio must contain a well-diversified set of at least 30 stocks. The chances of making loss under this circumstance is very minimal.

The importance of Fundamental Research

Another basic thumb rule is that the fundamental research of the company must be conducted before investing money in that company. I will be post soon on a organised method to conduct Fundamental Research.

The Strategy to select Stocks to Buy or Sell

The measure used to select stocks to buy or sell discussed in this post is based on the SUE Score.

SUE is the acronym for Standardised Unexpected Earning.

SUE Score = (Actual EPS – Expected EPS) / (Standard Deviation of EPS)

  • EPS stands for Earning Per Share.
  • Actual EPS is the current EPS as released in the last year’s Financial Statements.
  • Expected EPS is calculated by finding the Average of the EPS at the end of the last 4 years (before the current year).
  • Standard Deviation of EPS is calculated by finding the Standard Deviation of the last 4 year’s EPS.

After finding the SUE Score of the Stocks of interest, order them in the descending order of the SUE Score.

As a thumb rule, you must sell all Stocks with negative SUE Score.

Also, you must consider selling all Stocks with very low SUE Score.

You must consider buying the Stock with the highest SUE Scores (Which are positive).

When should be strategy be applied?

The strategy must be applied when the annual financial statements of a company are made public.

For how long should you wait for the strategy to work?

For this strategy to work, a minimum of 1 year time should be given.

One of the common mistakes is to sell the stocks in case there is a surge in the prices and there is some profits seen from the same. You must desist from selling the stock which produce some profits at a point of time and hold on to the ones which are currently running in loss.

EXAMPLE

I have provided the working for some Stocks. These Stocks have been selected at random.

Stock  2014   2015   2016   2017   Expected EPS   Std Dev   Actual EPS  SUE 
DLF Ltd 3.63 3.03 1.72 4.01 3.10 1.0030 25.02 21.8560
Titan Company Ltd 8.28 9.19 7.60 8.01 8.27 0.6740 12.73 6.6168
HDFC Ltd 50.93 55.65 64.50 69.56 60.16 8.4208 96.77 4.3476
Hindustan Unilever Ltd 18.24 20.17 19.22 20.79 19.61 1.1158 24.09 4.0196
Chambal Fertilisers and Chemicals Ltd 5.73 5.90 7.12 5.31 6.02 0.7773 8.70 3.4543
ITC Ltd 7.45 8.04 7.74 8.47 7.93 0.4359 9.24 3.0166
JSW Steel Ltd 1.75 7.32 (1.40) 14.66 5.58 7.0442 25.71 2.8573
Kotak Mahindra Bank Ltd 16.00 19.72 18.86 26.84 20.36 4.6065 32.54 2.6452
Bharat Electronics Ltd 3.45 3.60 4.53 5.07 4.16 0.7709 6.20 2.6432
Infosys Ltd 46.57 54.07 58.96 62.73 55.58 6.9763 73.66 2.5913
Tats Elxsi Ltd 12.06 16.52 24.86 27.83 20.32 7.2956 38.54 2.4977
HDFC Bank Ltd 36.45 42.64 50.63 59.63 47.34 10.0424 71.28 2.3841
Capital First Ltd 7.19 12.56 18.21 24.52 15.62 7.4464 33.09 2.3461
Yes Bank Ltd 6.94 9.56 12.03 14.63 10.79 3.2974 18.38 2.3018
Reliance Industries Ltd 38.25 40.04 50.45 50.53 44.82 6.5908 56.94 1.8393
Jain Irrigation Systems Ltd (0.86) 1.20 1.02 3.53 1.22 1.7984 4.42 1.7780
Minda Corporation Ltd 3.92 4.32 5.16 4.62 4.51 0.5224 5.37 1.6558
LIC Housing Finance Ltd 26.12 27.65 33.05 38.49 31.33 5.6247 39.91 1.5259
Just Dial Ltd 17.19 19.70 20.55 17.45 18.72 1.6596 21.25 1.5229
HCL Technologies Ltd 46.50 52.04 39.72 60.32 49.65 8.7195 62.63 1.4892
Maruti Suzuki India Ltd 94.47 126.07 181.99 248.67 162.80 67.7249 260.86 1.4479
MindTree Ltd 27.03 32.04 32.93 24.92 29.23 3.8731 34.78 1.4330
Dabur India Ltd 5.24 6.07 7.11 7.25 6.42 0.9451 7.69 1.3464
Tata Consultancy Services Ltd 97.69 101.35 123.20 133.45 113.92 17.2139 135.21 1.2366
Vedanta Ltd 21.24 (52.77) (41.38) 14.83 (14.52) 37.9681 27.82 1.1151
Hindustan Petroleum Corp Ltd 7.09 9.83 30.68 54.05 25.41 21.8051 47.37 1.0070
Castrol India Ltd 4.80 6.22 6.78 6.99 6.20 0.9867 7.02 0.8336
Suzlon Energy Ltd (14.16) (24.70) 1.16 1.71 (9.00) 12.7938 1.26 0.8018
Kiri Industries Ltd 5.22 79.88 73.71 95.66 63.62 40.0138 93.46 0.7458
Bharat Forge Ltd 6.54 11.28 16.38 14.57 12.19 4.3194 15.13 0.6801
ACC Ltd 61.88 31.30 35.05 49.23 44.37 13.9989 51.32 0.4968
India Cements Ltd (7.92) 0.00 3.80 4.92 0.20 5.8084 2.15 0.3357
Cummins India Ltd 16.70 27.85 26.02 26.56 24.28 5.1130 25.68 0.2733
Jet Airways Ltd (363.54) (184.63) 106.66 38.60 (100.73) 214.8889 (56.03) 0.2080
Federal Bank Ltd 4.97 6.17 2.83 5.03 4.75 1.3940 4.74 (0.0072)
Granules India Ltd 3.71 4.45 5.68 7.19 5.26 1.5231 5.22 (0.0246)
Bank of Baroda Ltd 22.81 23.29 17.69 (21.99) 10.45 21.7747 7.88 (0.1180)
Canara Bank Ltd 65.20 55.46 58.64 (46.70) 33.15 53.3876 22.74 (0.1950)
Siemens Ltd 16.94 32.99 81.85 31.93 40.93 28.2490 33.61 (0.2590)
Tata Motors Ltd 43.01 42.99 34.10 21.95 35.51 9.9676 31.13 (0.4397)
REC Ltd 24.01 27.06 28.82 31.97 27.97 3.3283 25.98 (0.5964)
Oil india Ltd 24.87 21.70 17.30 13.28 19.29 5.0670 16.04 (0.6409)
Sintex Induatries Ltd 11.52 12.24 13.83 2.46 10.01 5.1267 2.39 (1.4868)
Biocon Ltd 6.90 8.29 9.17 10.20 8.64 1.3982 6.21 (1.7380)
Coal India Ltd 23.92 21.73 22.59 14.93 20.79 4.0108 13.60 (1.7933)
State Bank of India Ltd 18.99 22.76 15.75 0.30 14.45 9.8587 (5.11) (1.9840)
Karnataka Bank Ltd 13.45 19.51 17.95 16.00 16.73 2.6146 11.52 (1.9917)
Dr. Reddy Laboratories Ltd 115.35 137.11 124.89 77.93 113.82 25.5304 57.06 (2.2232)
Bharti Airtel Ltd 7.55 11.56 15.20 9.51 10.96 3.2695 2.75 (2.5096)
Axis Bank Ltd 26.86 31.42 35.04 16.51 27.46 8.0291 1.78 (3.1980)
Apollo Tyres Ltd 19.94 19.21 22.06 21.59 20.70 1.3465 12.65 (5.9783)
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