82018 ‘Stocks that investment gurus would buy for Diwali 2018 -The Economie Times Tue Ecoyomic Times srmnser cou | et etn Acca wsy | neutne.. gemma 9! IMONEY R52 MARKET STATS * | a5207 A24677 10800 aan Mat400y 7800 7200 voce Heme mr Stocks that investment gurus would buy for Diwali 2018 BY SAMEER BHAROWAL, ET BUREAU [NOV 06,208,060 AM ST itis that time ofthe year when stock analysts, brokerage houses and research fms come ‘ut with their Diwali picks. Some base their selection on technical chars, which examine the trading activity in the past few weeks and identify stacks that are likely to move up. Big Change: Others look a the basic fundamentals ofthe stocks to name their picks. However, if you are looking for stocks that can create wealth in the long term, a deeper fundamental analysis ofa stock is necessary. Its considered imperative for stock selection and offers a number of financial tools and ratios to judge the quality ofa stock. However, there is no single parameter that works inal situations. The best way to conduct fundamental analysis ofa stook isto run a permutation and combination of different ratios and select those that work well in most situations. But there are numerous ratios, and there could be countless combinations, making the exercise practically impossible. At the same time, volality leads to fear and anxiety among investors. ‘Apart from company specific or intemal factors, the swings in stock prices are mostly due to external factors such as developments in the domestic and global economy, changes in inflation and interest rates, government finances, currency movements and global oil prices. These extemal factors can drag down even fundamentally sound stocks and contribute to the poor performance of retail investments in direct equities. The anxiety forces investors to exit good stocks that are meant for long-term capital appreciation ‘The behaviour of investors vindleates the theory of random walk which states that the markets move in an unsystematic manner and its ‘almost impossible to predict or beat the market. Even professional fund managers and seasoned investors have at times failed to beat the market, How to beat the market With so many factors influencing the stock markets, how can one identify stocks that will ensure success? One way is t follow the stratagies of famous investors. These people believe that no matter how volatile the market isin the short term, inthe long run the market moves around its intrinsic or fair value. They strongly believe that there are inherent inefficiencies in the market and one can beat the market by recognising and buying stocks that are trading below their intrinsic values. The inrinsic value is defined as the price derived from the firm's fundamentals such as sales, earnings, dividends and its assets. The investment strategies devised by these guru investors are based on years of research and analysis and thelr investment track record is. outstanding. All of them have successfully demolished the random walk theory by generating market beating returns from their strategies. ET Wealth has used the strategies of four top guru investors to identiy the Diwal stock picks for you. These stocks have passed the stringent quantitative fiters that are based on the series of profit and lass and balance sheet variables. Historical returns of stocks picked by gurus The stocks have outperformed the BSE 500 by a wide margin hitps/leconomictimes indiatimes. comvealininveststocks-thatinvestment-gurus-nould-buy-or-dval-201prntartila6486063.ems wrri8r2018 ‘Stocks that investment gurus would buy for Diwali 2018 ~The Economic Times Re not) wumpen avenace EXCESS. average EXCESS ru Camm ct a a ar ov z poe Jameson S368 shavgnnessy — ae Warren Buttet 219 Joe! Greenblatt 1814 Joseph Piotroski 2284 “Covered by Bloomberg analysts out of the shortlisted universe. BSE 500 index grow 22.74% in toe years and 78.6% in ive yoars. Returns are absolute returns. Data as on 26 Oct 2018, Source: ACE Equity & Bloomberg ‘Athough these strategies are devised for developed markets lke the US and UK, we have replicated itn Indian markets. The financial data used forthe study is the consolidated data for 2017-18, We also back-tested and found that these stocks have delivered supernormal retums in the past three and five years. The Growth Strategy of James O'Shaughnessy has given average returns of 1,018% inthe past five years, beating the BSE 600 by 936 percentage points. But our study does not take the names thrown up by the firs as the last word, The shortisted stocks ware then assessed on the basis ofthe recommendations by analysts on Bloomberg. Stocks not covered by Bloomberg analysts were ignored. Before we proceed, a small caveat for investors. These strategies only work in the long run and are ‘meant for longterm investors, Short-term investors or day traders may not derive satisfactory benefits from these strategies. |. JAMES 0° SHAUGHNESSY (FOUNDER & CIO OF O'SHAUGHNESSY ASSET MANAGEMENT) "Go for large-cap stocks with high cash flow, sales, dividend yiold” James O'Shaughnessy is famous for his United Cornerstone strategy which is a purely quantitative technique. O'Shaughnessy studied international economics and ausiness diplomacy at the School of Foreign Service of Georgetown University and has a degree in economics from the University of Minnesota. His investment strategy stresses that if you want fo beat the market, you need to pick a strategy and stick with it, no matter what. Emotions are perhaps the greatast enemy of the investor because feelings lke fear, anxiety and excitement can cause an investor to shun his long-term plans. He is a firm believer of the buy and hold approach but unlike Warren Bulfett, he doesn't hold stocks for years. Instead, he holds stocks for a year and then rebalances his portfolio. By doing so, O'Shaughnessy makes sure that he is not holding stocks that no longer meet his citria, This guru investor's stock picking ‘approach, the United Comerstone is a combination of two quantitative models: the Cornerstone Value and the Cornerstone Growth. The first madel focuses on large-cap stocks whereas the second model looks at mid-sized stocks. The second model is more volatile as ‘compared tothe frst model (0’'Shaughnessy’s filters for United Comerstone (Value) * Look for large-cap stocks. Only stocks with a market capitalisation of more than Rs 10,000 crore are included. * Cash flow per share in the current year should be greater than the markel average. For determining the market average, we have used the average cash fl ow of BSE 500 companies. * The number of shares outstanding (or shares issued) inthe current year should be greater than the market average. For determining the market average, we have used the average shares outstanding of BSE 500 companies. *Tralling 12-month (TTM) sales should be greater than 1.5 times the market average. For determining the market average, we used the htps:leconomictimes indiatimes. comvealininvest/stocks that investment-gurus-ould-buy or-dval-2018prntartile/66486063.cms an82018 ‘Stocks that investment gurus would buy for Diwali 2018 -The Economie Times average TTM sales of BSE 500 companies. * Alter applying the above fiers, the stocks need to be ranked on the dividend yield in the descending order. Higher the dividend yield, better the stock To identify stocks using the Cornerstone Value model, 0” Shaughnessy looks at large, wellknown market leaders with above average sales. He uses not only market cap as the fier for identifying large stocks but also includes the number of outstanding shares and sales revenue. Both these variables should be above the market average ‘Another predictor is the cash low of the company. The higher the cash flow, the beter itis. Finally, he ranks stocks that pass all the previous erteria on the dividend yield. Ths is because 0’ Shaughnessy found that dividend yields were excellent predictors for large, ‘wellknown stocks. His study showed that market leaders with high dividend yields tend to outperform during bull markets but do not fall ‘as much as other stocks during bear phases, Stocks picked by 0” Shaughnessy's Value Strategy “Also in Joe! Greenblatt’ ist | Dats source: ACE Equity & Bloomberg. PE estimates are for 2018-19. ROE estimates are based on 12- ry] ‘month forward projections. Estimates, recommendations and target prices are from Bloomberg. Current price as on 26 Oct 2018, BSE {500 estimates are for the year ending December 2019 The second model, the Cornerstone Growth looks at stocks with low price to sales (PS) ratios, which is a ratio developed by Kenneth L. Fisher. He looks for stocks that have a PS ratio of less than 15, However, to keep weak stocks out, he also applies the eamings criteria. According to him, the earnings or EPS ofa stock inthe past five years should be consistently rising. Finally, he ranks the stocks that pass all other criteria on the relative strength that measures how a stock has performed, pricewise, compared to all other slocks over the past 12 months. Shaughnessy asserts that the more one trades, the higher are the chances of loss. Therefore, have a strategy and let it work. Disciplined implementation of active strategies isthe key to performance, (©'Shaughnessy's filters for United Cornerstone (Growth) * Look for mid-sized companies. We have included companies with market capitalisation between Rs 1,000 crore and Rs 5,000 crore. * The earning per share (EPS) should be consistently rising for the past five years. EPS measures the earings of a company on a per share basis. * Price to sales ratio should be less than 1.5. The ratio measures the amount of money that one is willing to pay on every rupee of sales generated. * From the stocks that passed the above filters, choose them in the descending order oftheir 12-month relative strength. Relative strength isa technical indicator that measures the speed and change of price movements. ‘Stocks picked by 0” Shaughnessy's Growth Strategy hitps/leconomictimes indiatimes, comvealivinveststocks-thatinvestment-gurus-nould-buy-or-dval-201prntartil6486063.ems a7