Stock Buying Checklist
The main objective of investing in stocks is to achieve a higher growth rate than other avenues of investing. To achieve this we must be able to identify quality business with the ability to grow faster than their competition. Understanding the business model of the company makes it easier. Investors should know how the company makes money. Understanding the business model helps to estimate the sustainability of fundamental strength and growth in the business.
Never be overconfident about the stock market. To reduce mistakes investors rely on checklists. You should also create your own checklist. Here are a few points you can include in your own checklist.
Quality Checklist
The main objective of investing in stocks is to achieve a higher growth rate than other avenues of investing. To achieve this we must be able to identify quality business with the ability to grow faster than their competition. Understanding the business model of the company makes it easier. Investors should know how the company makes money. Understanding the business model helps to estimate the sustainability of fundamental strength and growth in the business.
Never be overconfident about the stock market. To reduce mistakes investors rely on checklists. You should also create your own checklist. Here are a few points you can include in your own checklist.
Quality Checklist
- Is the company within your circle of competence?
- Does the management of the company have unquestionable integrity?
- Is the earning growth of the company predictable?
- Is the company having above average return on capital?
- Is the earning growing in a stable manner?
- Does the company have a reasonably strong free cash flow?
- Is the company stock available at the right price or is it overbought/oversold?
- Relative Strength Index (RSI)
- Does the management reinvest the surplus capital for growth of the business?
Growth Checklist
- Annual growth rate of sales?
- Annual growth rate of profits?
- Quarterly growth rate of sales and profit in comparison with previous year?
- Growth rate superior to other companies in the sector?
Market rewards these companies with higher PE. Their PE can continue to rise if they continue to outpace their competitors. In this sense, a company with higher growth rate and higher PE is a better investment that a lower growth lower PE company. Lower PE company may appear like a value buy but you will make money only when the company is able to grow.
Growth data can be found in quarterly results, concall transcripts, PPTs etc. Concall may also provide growth guidance for the near future.
Growth focused investing also helps in capital allocation. Market capitalization should not be the primary criteria for capital allocation because a large company can also grow faster than a smaller company. Investors should increase capital in companies that are maintaining their lead in growth or appear to grow faster than the growth leader. Decrease capital from companies which are falling behind in terms of growth. Invest in only the 1st or 2nd fastest growing company in a sector.
Before making a considerable investment in the stock market, always check the market mood. Ideally PE of NSE should be around the average value. (https://nifty-pe-ratio.com/)
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