One needs to track sectors to identify emerging trends and companies within the sector that can leverage from the emerging trend.
I’m certain if you are somehow related to stock markets, you would have heard of successful investors and stories about their stock-picking skills. For example, Rakesh Jhunjhunwala spotting an opportunity in Titan, late Chandrakant Sampat’s portfolio stocks such as HUL and Nestle, portfolios of Chetan Parikh, Ramesh Damani etc.
The obvious question is, how do they pick stocks? Well, here are few things that I’ve learned by observing and learning from some of these highly seasoned investors.
General Observation
This may sound rudimentary, but believe me, this is one of the best ways to develop a stock idea. All you need to do is keep your eyes and ears open and observe the economic activity around you.
Observe what people are buying and selling, see what products are being consumed, keep an eye on the neighbourhood to see what people are talking about.
In fact, Peter Lynch, one of the most illustrious Wall Street investor advocates this method in his book “One up on Wall Street”. Personally I have used this method to pick some of my investments – PVR Cinemas Ltd (because I noticed PVR multiplexes mushrooming in the City), Cummins India Limited (because I noticed most of the buildings had a Cummins diesel generator on their premises), and Info Edge Limited (Info Edge owns naukri.com, which is probably the most preferred job portal).
Of course once you identify stocks based on “general observation” you will have to investigate further to ensure it qualifies key investment criteria such as balance sheet strength, growth rates, margins, and management quality etc.
Stock screener:
A stock screener helps to screen for stocks based on the parameters you define and therefore helps investors perform quality stock. For example, you can use a stock screener to identify stocks that have a ROE of 25% along with PAT margins of 20%. A stock screener is a very helpful tool when you want to shortlist a handful of investment ideas from a big basket of stocks.
There are many stock screeners available; I personally like the stock screener from Smallcase and screener.in.
Macro Trends:
Keeping a general tab on the macroeconomic trend is a great way of identifying good stocks. For example - As of today there is a great push for infrastructure projects in India.
An obvious beneficiary of this push would be the cement companies operating in India. Hence, I would look through all the cement companies and apply the checklist to identify which amongst all the cement companies are well positioned to leverage this macro trend.
Sectoral Trends:
This is sector specific. One needs to track sectors to identify emerging trends and companies within the sector that can leverage from the emerging trend.
For example, the non-alcoholic beverages market is a very traditional sector. Mainly, three kinds of products are sold - coffee, tea, and packaged water. Hence, most of the companies manufacture and sell just these three products.
However, there is a slight shift in the consumer taste these days - the market for the energy drink is opening up and it seems to be promising. Hence the investor may want to check for companies within the sector that are best positioned to leverage this change and benefit from it.
Special Situation:
This is a slightly complicated way of generating a stock idea. One has to follow companies, company-related news, company events etc. to generate an idea based on a special situation.
One example that I distinctly remember was that of Cox & Kings. You may know that Cox & Kings is one of the largest and the oldest tour operator in India. In late 2013, the company announced the inclusion of Mr. Keki Mistry (from HDFC Bank) to its advisory board.
Corporate India has an immense respect for him as he is known to be a very transparent and efficient business professional. A colleague of mine was convinced that Cox & Kings would benefit significantly with Mr. Keki Mistry on its board.
This alone acted as a primary trigger for my colleague to investigate the stock further. Upon further research he figured out that the company also has good fundamentals, hence he happily invested in Cox & Kings Limited. Good for him, as I write this today I know he is sitting on a 200% gain.
Circle of Competence:
This is where you leverage your professional skills to identify stock ideas. This is a highly recommended technique for a newbie investor. This method requires you to identify stocks within your professional domain.
For example, if you are a professional from the pharmaceutical industry your circle of competence would be the healthcare industry. You will probably be a better person to understand the industry than a stockbroker or an equity research analyst.
All you need to do is identify which are the listed companies in this space and pick the best based on your assessment. Likewise, if you are a banker, you will probably know more about banks than the others do.
So, leverage your circle of competence to pick your investments.
The point is that the trigger for investigating stocks may come from any source. In fact, as and when you feel a particular stock looks interesting, just add it to your watchlist and keep evaluating the same for investment opportunities.
Source - Moneycontrol.com
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