"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
A Place for Learning and Practicing "Value Investing" Taught by Benjamin Graham and Successfully Executed by Warren Buffett.
Thursday, May 4, 2017
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:
- 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.
- The Price to Earnings (PE) Ratio shall be below 15. This is again a liberalisation from the tough hurdle of 10 earlier.
- The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
- 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:
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.