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Thursday, May 4, 2017

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?

Label/ Tag showing "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 25th 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:


Table  Showing Stocks Selected under PE Ratio Criterion





























P2BV*PE Combined Criterion:


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.