Invest in Business Not Gold or Farmlands

"Owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices."

Warren Buffett

What Stocks to Buy in May 2017?

This month we have liberalised the rules for buying stocks a bit. Besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the three criteria prescribed below:

1. The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalisation from a stringent 1.00 earlier.
2. The Price to Earnings (PE) Ratio shall be below 15. This is again a liberalisation from the tough hurdle of 10 earlier.
3. The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
4. The Dividend Yield shall be more than 0%. However, a mere good dividend yield is not sufficient. In addition, the scrip must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BV criteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investible sum is taken as multiples of 20,000, that is Rs.20,000, 40000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 20,000 is equally distributed among the four criteria at Rs.5,000 each or multiples thereof.

Another significant adverse development in April is the demise of a great, cash rich company, CAIRN India, which is merged with its debt-laden parent, Vedanta Ltd. Trading in Cairn has been suspended from 25^th April 2017. With a heavy heart we remove Cairn from our list.

Finally you will observe that a few companies like NMDC, MOIL and Hindustan Zinc are dropped. Kindly note that these companies are dropped not because of the quality of stocks – these are wonderful companies – the only reason for rejecting them is that they are presently expensive; once their prices fall and the valuations become reasonable, we will start buying them.

The stocks that made the cut are:

Price to Book Value (P2BV) Ratio Criterion:

Serial Number	Stock	Total Allocation	CMP 3rd May 2017	Total Shares to Buy
1	NHPC	1660	31.7	52
2	PFC	3805	160.9	24
3	REC	3494	210.8	17
4	NMDC	0	--	0
5	SJVN	1569	35.4	44
6	Neyveli Lignite	1468	103.5	14
7	ONGC	1712	191.1	9
8	NALCO	396	68.55	6
9	MOIL	0	--	0
10	HZL	1247	264.8	5
11	OIL	1802	330.05	5
12	GE SHIP	1986	436.5	5
13	VEDANTA	0	--	0
14	SCI	861	78.35	11
	Total	20000

Price to Earnings (PE) Ratio Criterion:

P2BV*PE Combined Criterion:

Serial Number	Stock	P2BV*PE	Discount (22.5 – PE*P2BV)	Weightage	Allocation of Investible Amount Rs.5000
1	NHPC	13.4696	9.0304	9.25%	463
2	PFC	3.6875	18.8125	19.27%	964
3	REC	4.9248	17.5752	18.00%	900
4	NMDC	26.1274	-3.6274	FALSE	0
5	CAIRN	67.936	-45.436	FALSE	0
6	SJVN	13.5978	8.9022	9.12%	456
7	Neyveli Lignite	13.6165	8.8835	9.10%	455
8	ONGC	11.8888	10.6112	10.87%	544
9	NALCO	29.5936	-7.0936	FALSE	0
10	MOIL	33.152	-10.652	FALSE	0
11	HZL	40.38	-17.88	FALSE	0
12	OIL	11.6424	10.8576	11.12%	556
13	GE SHIP	9.559	12.941	13.26%	663
14	SCI	52.234	-29.734	FALSE	0
	Total (Positive Values)		97.61	100%	5000

Dividend Yield Criterion:

Serial Number	Stock	Dividend Yield	Weightage	Remarks on Dividend Yield	Allocation of Investible Amount
1	NHPC	4.69%	8.54%		801
2	PFC	8.63%	15.71%		751
3	REC	8.10%	14.74%		0
4	NMDC	0.00%	FALSE	8.59%	291
5	SJVN	3.14%	5.71%		270
6	Neyveli Lignite	2.91%	5.30%		413
7	ONGC	4.45%	8.10%		273
8	NALCO	2.94%	5.35%		0
9	MOIL	0.00%	FALSE	1.52%	1029
10	HZL	11.09%	20.18%		450
11	OIL	4.85%	8.83%		288
12	GE SHIP	3.10%	5.64%		0
13	VEDANTA	0.00%	FALSE	1.46%	0
14	SCI	0.00%	FALSE	0.00%	0
	Total (Positive Values)	53.90%	100%		5000

In the case of MOIL, even though the actual dividend yield is 1.52%, since the stock has failed in all the three previous tests, no allocation is made under the dividend yield criterion. In order to make it ineligible for allocation, the dividend yield is forcefully shown as 0% and under the ‘Remarks on Dividend Yield’ column the actual dividend yield is shown. Same is the case with NMDC, Vedanta and Shipping Corporation (SCI).

To conclude, we have identified 11 good companies' stocks that are fit for investing in the month May 2017.