How to pick long term stocks? This question puzzles every investor during their initial days in the stock market. No set of filters can work always in the stock market. The market is very dynamic but following few basics goes a long way. Let us look at some of them.
- The bussiness should be profitable, quarter after quarter, year after year. Positive EPS is desirable.
Beginners should stick to businesses that are profitable. To check if a business is profitable, we can quickly check a ratio EPS which stands for Earnings per Share. you can read more about EPS here in this blog. A positive EPS number is advised. Positive EPS shows that the company is making profits. We can check EPS of any stock by looking at google or visiting websites like Moneycontrol etc.
- PE ratio
PE ratio helps us to filter a stock out of its peers for investment. The IT sector has multiple companies listed on the stock exchange, which one is relatively underpriced? We can answer this question by looking at the PE ratio of every stock listed in the IT sector. As a rule of thumb, the lesser the PE ratio, the more it can grow to reach the P/E of its peers. P/E is nothing but the current price of stock/EPS.
- PEG
PEG stands for PE / Earnings Growth. This ratio goes a long way to indicate how the business might perform in future. The lower the PEG ratio, the better the stock is. Negative PEG is a warning that the business is either making losses or expected to make losses in future. A very insightful explanation of the PEG ratio can be read here.
- Debt to equity ratio
Suppose you have to start a business and you need some working capital. You can use some of your own savings but if you run short of capital, you ask your friends/banks to fund your business and promise to pay back. The amount that you have to pay back, is a liability. Debt to equity is a simple measure of the amount you have to pay back/Your own capital infused in business. Even if your business doesn’t perform well, you will be under pressure to return money to friends/banks. But if you did not ask for any help from friends and banks, you have one less issue.
Ideally, debt to equity of 0 is desirable. This simply means that you do not have to pay back anyone.
- Mutual fund holdings
Mutual funds have very qualified fund managers at the helm of affairs. They are vastly experienced and usually are early and fast movers. They know when to enter a stock; if they should keep buying it, if they should book partial profits and if it is the right time to exit the stock. We can take a clue from the activity of mutual fund managers in a particular stock. We can check mutual fund activity by clicking this link here and inputting the scrip name. Suppose we entered CDSL, we can see how the holdings of funds houses change over time.
- Dividend yield
The dividend yield is a ratio in percentage, which conveys how much dividend is paid that year/Current market price of the scrip. Higher the dividend yield, the better it is. Zero or low dividend yield should not stop us from buying a stock though. Dividend yield should act as one of the last filters when one is confused between two businesses with very similar potential.