Stock Selection

Cheap Stocks: companies with PE multiple of less than 20. Try to restrict list to only those stocks whose earnings (as measured by earnings per share) has grown by at least 20 per cent in both of the last two financial years

Example:

Low Beta Stocks Beta is a statistical measure that shows how sensitive a stock is to market moves. For example,if Sensex moves by 25 per cent, a stock's beta number suggests whether the stock's returns are expected to be more than this or less. The beta value for an index itself is taken as one. Stocks can have beta values, which can be above one, less than one or equal to one. A stock with a beta of more than one is expected to rise more than the market and also fall more than market. Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. This means that high beta stocks are meant for aggressive investors who want to beat the market on the upside, but do not mind taking the risk of higher losses if the markets fall. On the other hand, for conservative investors who want higher insulation from losses, a stock with a beta of less than one is a better option.

Contrarian Bets? The idea behind the contrarian strategy is to buy into the out-of favour stocks, i.e., the stocks which have few takers at the moment, and hold them till the time they catch the fancy of the markets again and bring in handsome gains. Aim to search for such out-of favor stocks which are available quite cheap, but seem to have a reasonably strong financial position. Therefore, as and when the markets rediscover their potential, they might be in for a significant capital appreciation. The first filter is that they should have a price-earning multiple of not more than 12, which suggests that the markets does not seem to be very optimistic about them at the moment. But a high current ratio (of 2 times or higher), coupled with negligible debt on the balance sheet points towards a potentially strong financial condition. We can add another criterion that the stock should have a decent dividend yield (of at least 2.5 per cent) to ensure that at least it yields some dividend income till the time it brings in the capital appreciation.