The definition of a good company is a company which has given consistent growth in revenues consistently for the last 10 years with a return of capital employed of 15 percent.
Making money in equity markets is not easy and investors are always in search of stocks which can give multibagger returns in near future. Finding such stocks is tough, and requires a lot of study, but there is a simple formula to spot such stocks with high return potential.
Saurabh Mukherjea of Ambit Capital in his latest book titled 'Coffee Can Investing' is all about buying quality companies and holding them for long-term. “It highlights the strategy of buying companies which are growing at a decent rate with sensible ROCs and sit tight. If investors typically do this, we get 10 times return in 10 years.
Markets are fully valued right now and our fair value of the S&P BSE Sensex is around 30,000, said Mukherjea. The economy is recovering and the stock market is overvalued and by year-end, this overvaluation will get cleansed out.
The global economy is steaming along, and it looks like across the world including India we have pre-empted the recovery by buying ahead of it, and now a correction of 15 percent could bring things to a stable footing.
In India, the cause for a fall could be LTCG while for US markets it could be a rise in bond yields.
If the index corrects further investors should not rush into buying stocks which have fallen the most. Instead, look for good companies which have given consistent growth rate in the past, quality management and good balance sheet.
The definition of a good company is one which has given consistent revenue growth for the last 10 years with a return of capital employed of 15 percent.
Unfortunately, only 17-18 companies qualify with this criteria. But, if investors systematically buy those companies they will get 10 times return in the next 10 years.
Investors can use the same mantra to select companies in the smallcap space which have given sensible growth in the past 5-6 years, clean accounting and one important thing to see if these stocks have not run-up nearly as much compared to stocks with weak accounting and shady fundamentals.
The identity of the winning stocks will change depending on the economy. In the last couple of years, the Coffee Can portfolio has companies from the building material sector. This year, 2018, we have added midcap pharma company.
The matrix we are using to select companies is 10 percent revenue growth and ROC itself are doing the job for you. It will help in filtering companies which are likely to benefit the most based on economic development.
Commenting on the Budget, Mukherjea said barring LTCG Tax, rest of the Budget 2018 was broadly in-line with expectations.
MORE WILL UPDATE SOON!!
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