How to Allocate Funds Among Pre-Selected Stocks?

Actual Question:

I like your model of picking the shares. Can you also suggest how to rank among those eight you have shortlisted? If some one has to invest say Rs.5,00,000 - how do they distribute? Thanks in advance.

Answer:

Dear Friend!

The selected eight stocks are as follows:

Answer:

This answer is sort of a sequel to the previous question “What Stocks to Buy when the Market is at its Peak?”. Therefore, those who have have not happened to read the previous article may kindly read the previous post first and then read this present article.

1. The eight stocks had been shortlisted based on following four criteria:
2. Price to Book Value (P2BV) Ratio - must be less than or equal to 1.5
3. Price to Earnings (PE) Ratio - should be less than or equal to 15
4. The Combination/ Product of the first two - shall be less than or equal to 22.5 (1.5*15)
5. Dividend Yield - More than or equal to 4%

Let us apportion the Investible sum of Rs.5,00,000 equally for the four criteria. This translates into Rs.1,25,000 each.

We will allocate the sum of Rs.1,25,000 to all the candidates based on the weights of available market discount (how much less than maximum permitted 1.5).

For example for the first criterion, the stock having the lowest price to book value will attract the maximum allocation. Following table make the process clear:

Price to Book Value (P2BV) Ratio Criterion: 

The same process is repeated for the the ‘PE’ and ‘P2BV*PE’ criteria also and the results are as follows:

Price to Earnings (PE) Ratio Criterion:

P2BV * PE Ratio Criterion:

Dividend Yield Criterion:

Please note that while shortlisting the eight stocks, we had already eliminated non-conforming stock under the first three criteria. Under the fourth and dividend yield criterion it is not fair to eliminate a stocks which otherwise shines on the other three prior criteria. The best you can do is do not allocate any funds to those stocks that whose dividend yield is below 4 or allocate only based on the weight.

Total Allocation:

To conclude, the investible funds are allocated amongst the pre-selected candidates based on the relative merits under the criteria of P2BV Ratio, PE Ratio, P2BV*PE Ratio and Dividend Yield.

Thank you,

With Best Regards

Anand