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.
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|
|Titan Company Ltd||8.28||9.19||7.60||8.01||8.27||0.6740||12.73||6.6168|
|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|
|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|
|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|
|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|
|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|
|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)|
|Tata Motors Ltd||43.01||42.99||34.10||21.95||35.51||9.9676||31.13||(0.4397)|
|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)|
|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)|