How to screen stocks

Niteen S Dharmawat - http://dharmawat.blogspot.com/

June 2017

1

How to screen stocks(Basic work to avoid TIPs -> PITs)

A presentation by: Niteen S Dharmawat

Be a wise

investor and

not a day

trader…

http://dharmawat.blogspot.com/

Niteen S Dharmawat - http://dharmawat.blogspot.com/ 2

IMPORTANT DISCLAIMER: This presentation is prepared solely to provide information about this company and take feedback from the readers. This presentation is NOT meant for equity investment. It should NOT be construed as an investment advice for buy/sell/hold or anyother form of recommendation. This presentation does not recommend any price or price target for the company discussed. Investment in equity shares has its own risks. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the companies/stocks discussed/presented here. Please do your due diligence and take the help of a qualified advisor before you take any financial decision.



Agenda

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We get tips (or interested to get tips)

Quick screening to avoid major mistakes

What are the parameters that you must see

How to generate your owns stock list



The Wealth Creation Formula

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Right Focus – Right results



Tips: after reading Google news/Forums

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TIPs take you to PITs

Someone I know bought few lac shares, despite my warning,

believing Google news with a target price of 100 in next few years.



Tips: after analyst reco/FII holding

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TIPs take you to PITs

• Strong FII holding• Increased holding

by 12% in 5 years (equity dilution)

Rs 244 on Jan 4 2008*

As on Dec 2007 • FII holding 25.49%• MFs holding 4.3%

Rs 221 on Feb 17 2012*

As on Dec 2012 • FII holding 37.34%• MFs holding 0.07%



Before you put in money…

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Make an Excel sheet (Detailed PPT even better)

Write the name of the script, buy price

Write very briefly the reasons for investment: it could be your research finding or someone recommended you to buy

Also, your expectations from the investment



Classify your portfolio… My way… You may evolve yours

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Portfolio A: 70-90% funds

High conviction

Long term: 3-5 Years

Not more than 5-10 stocks

Portfolio B: 10-20% funds

Still unsure about Long term

Want few more quarters, ratify investment thesis

Medium term: 1-3 years, move to A else drop

Portfolio C: 5-10%

Tips /Respect quota

Time duration: 1min-1year

If develops conviction based on research move to B



What are the free resources for quick screening

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bseindia.com / nseindia.com

Screener.in, Moneyworks4me.com, stockflare.com, capitalcube.com… and many more… including Apps

Brokers websites for financial data

Annual reports (most important)



Annual Report

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Key sections

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Annual Reports

1. Chairman / CEO’s statement & Management

Discussion and Analysis

2. Financial statements

• Cash flow statement (most important, least understood)

• P&L

• Balance-sheet

3. Others



Annual Report

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Chairman / CEO’s statement and Management Discussion and Analysis

Must read the first two and last two paragraphs in detail.

Find the answer for:

Is management staying focused?

What are the management’s stated plans to take the

business forward: Expanding capacity, Rationalizing

underperforming areas, Introducing new products

/services to existing customers, Investing to raise

margins (e.g. new product features, service add-ons)

via R&D, marketing, etc



Annual Report

13

Chairman / CEO’s statement and Management Discussion and Analysis

Negative list: flowery language, away from the

reality like throwing big industry numbers/future

growth

Positive list: clearly elaborating risks while

talking about opportunities, conservative in

approach,

Look for: The results of operations, Changes in

financial condition and Risk management

strategies



Annual Report

14

Financial statements

Always look for consolidated numbers and not

standalone

Go through notes to the financial statements for

details

(P&L): net profits and sales are positive, rising or

falling;

(CF, P&L): operating cash flow after working capital

adjustments is positive or negative and compare with

NP

(B/S and P&L): net debt is rising or falling and interest

amount;

B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss



Annual Report

15

Financial statements

(CF, P&L): Is company paying Taxes while showing profits?

(P&L) Component of other income? If high then see

previous years/quarters’ numbers also. If one off then

remove from net profit, if consistent then dig more to find

sustainability

(P&L) What are the main expenditure heads: employee

costs, raw material dependencies (e.g. crude prices)

(P&L, CF): Interest paid v/s net profit v/s OCF

(P&L, B/S notes) Inventory trends: Finished good, WIP v/s

sales numbers

B/S: Balance Sheet CF: Cash Flow P&L: Profit and Loss



Annual Report

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Others…

• Salary of the directors, revision in the salary,

in line with the growth/profit numbers?

• Members of audit and salary committees

• Composition of board of directors, how many

of them are independent?

• Directors attendance in board meetings

• Independent auditors report



Shareholding Pattern

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Governance

Skin in the game

- Unpledged Holding

- Promoters’ Holding – Buying or Selling

- BSE Website SHP:

- Quarterly Trend

- Going in strong hand

- Corporate Announcements



Shareholding Pattern

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Governance

XYZ Industries

Who Month # of Shares % holding

Promoters Mar-07 48,94,544 35.28%

Promoters Dec-06 47,78,994

Total Change 4 months 1,15,550

Date Acquired Who

15-Mar-07 10,000 Managing Director

06-Mar-07 20,050 Managing Director

28-Feb-07 8,000 Managing Director

28-Feb-07 17,500 Managing Director

14-Dec-06 60,000 Director

Total Buy 1,15,550

100 Crs market cap in 2008 800 Crs market cap in 2017



Trader v/s investor

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Time V/S Return

KNR Industries in 2011

Fundamental Analyst 100 Day Trader 100

5 years target 200 5 hours target 105

You bought They sold

Today = Rs 1025 + Dividend =>

Total valuation including dividends =

Rs 205*5 KNR + Rs 14 Dividends => 1029

10 times return that of original investment

KNR Case study from 2008-2017: https://goo.gl/PR3gCe

A case study of how slow and steady wins the race

10 bagger in 6 years…v/s

5% (?) of a trader


https://goo.gl/PR3gCe


Year 2000: A repetitive grim reality

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Time V/S Return V/S Valuations

Date Price Shares

2-Feb-00 1,549 119,642

3-Feb-00 1,673 68,309

4-Feb-00 1,807 82,375

7-Feb-00 1,855 3,126,844

8-Feb-00 1,877 2,358,212

9-Feb-00 1,817 2,394,038

10-Feb-00 1,848 1,788,398

11-Feb-00 1,842 1,570,270

14-Feb-00 1,875 1,336,249

15-Feb-00 1,823 975,591

16-Feb-00 1,791 808,272

17-Feb-00 1,841 843,279

18-Feb-00 1,948 2,350,699

21-Feb-00 2,104 528,893

22-Feb-00 2,272 1,301,678

23-Feb-00 2,090 1,424,987

24-Feb-00 1,952 1,454,274

25-Feb-00 1,810 1,469,617

28-Feb-00 1,770 879,915

29-Feb-00 1,628 2,157,518

1-Mar-00 1,759 1,030,278

In year 2000

Low of 200 Rs

High of 2000+




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bseindia.com / nseindia.com

Screener.in, Moneyworks4me.com, stockflare.com, capitalcube.com… and many more… including Apps

Brokers websites for financial data

Annual reports (most important)

Free Resources



Availability of data on internet/Annual Reports

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Free Resources

Parameter Section

P/E ratio/Earning Yield Key Financial Ratios

Book Value Key Financial Ratios

Return On Invested Capital (ROIC) Key Financial Ratios

Dividend & dividend history Summary

Revenue & profits of last 5 years P&L

Inventories trend of last 5 years Balance sheet

Current Assets & Current Liabilities Balance sheet

Statements of the company

executives Company websites/read newspapers

Promoters’ Holding (Buying or

selling)

Corporate announcements in NSE/BSE

websites




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Screener.in

Standard summary

Customized summary



Quarterly results

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Screener.in

Draw top 5 conclusions in 90 seconds and move on

1) Sales trend2) Operating performance3) Interest component4) Depreciation5) Tax paid



Annual results

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Screener.in


1) Sales trend2) Operating performance3) Interest component4) Depreciation5) Tax paid6) Dividend payout ratio



Balance Sheet

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Screener.in


1) Equity Dilution2) Share capital (equity / preferential)3) Borrowings (ST/LT) v/s interest component from last quarter



Cashflow

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Screener.in


1) CFO v/s NI2) WC changes 3) Taxes Paid4) CFI trend5) CFF trend



Reports and announcements

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Screener.in



Query Builder

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Screener.in



Quiz…

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Two questions

1. Identify this legend?

2. Where is this portrait kept?

If you know answer to 2nd question, you would also know who presented this portrait?



About the presenter:

Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. A firm believer in long-term financial planning, and a 20 years veteran of the stock market. He also conducts free investor awareness sessions.

He likes reading books/magazines/news papers on the topics as diverse as general management, technology, investment, fiction, marketing and the Gita.

He is a person who believes in "Everything else can stop but learning".



Thank you

Twitter: @niteen_india

Blog: http://dharmawat.blogspot.com/

Mobile: 9850571857

Also on: Slideshare, Facebook


33Niteen S Dharmawat - http://dharmawat.blogspot.com/

Cash flow concept



A Scooter Manufacturer… A quick example

Cash

Credit

Cash recorded in OCF

P&LSales, Profits recognized

Cash Received

Yes Bad debts

No

Warning sign: Check Receivables…



Exceptions

- Companies that sells more and more cash through lending

- e.g.: Banks and Financial Institutions

Other helpful parameters along with OCF

- Interest paid v/s net profit

(a ratio of more than 0.4/0.5 is risk)

- Equity dilution?

- Promoters unpledged holding in the company

- Trend in receivables

- Investing and financial cash flows

Exceptions



Case Studies



Case 1: A vertically integrated multinational medical

technology Group

From Rs140 to now Rs25



Case 2: Education and training company based in Chennai

‘Darling’ of punters Several stories around the business model FII holding close to 28% (now less than 1.4%) Some prominent names on the board could also

not save it CBI caught one of the directors of the company

in a bribery case

Parameter Mar-11 Mar-10 Mar-09 Mar-08

Net Profit 67.64 45.45 22.08 13.8

CFO 16.01 25.13 -8.98 13.31

Signal

In INR Crs

Poor shareholding

pattern




Case 3: a leader in the Security Surveillance domain, the first

company of its kind to be

“Big names” leaving dangerously Promoters holding 21% (unpledged 8.4%) Big stories =>

poor cash flow & receivables numbers

In INR Crs

Parameter March-08 March-09 March-10 March-11 March-12 March-13 March-14 March-15

Net Profit 1.45 19.36 15.03 44.46 16.84 30.32 41.94 50.59

CFO -9.02 -40.41 0.46 -114.28 -15.53 -42.34 2.87 -51.66

Signal

Parameter March-12 March-13 March-14 March-15

Share Capital 12.7 17 17.6 20.2

Borrowings 160.37 318.3 436.82 555.7

Equity dilution +

Borrowings

From 185 to 45 in no time



Case 4: A ‘fast growing’ Indian Pharmaceutical company

A recent casualty Analysts/research house giving aggressive

targets Several stories around the company Promoters pledged the shares

In INR Crs

Parameter Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08

Net profit 53.71 42.77 33.18 22.33 18.63 27.19

CFO -70.44 -53.43 -35.84 -28.11 -50.78 -40.46

Signal

Poor shareholding

pattern

From 75 to 11 in no time



Case 5: Unified Supply Chain & Infrastructure Group


Poor shareholding

pattern



Case 6: the largest commercial real estate developers in India

Parameter Mar-08 Mar-07 Mar-06 Mar-05

Net Profit 7812.03 1933.65 411.03 86.5

CFO -1780.9 -6563.5 -873 575.4

Signal

A high profile developer with expansion in multi-sectors Brought India’s largest IPO (June 2007) At IPO price Rs525 (market cap 96K Crore) Touched Rs1200 (market cap 2Lac Crore) Jan 2008 Today Rs157 (market cap 28K Crore) Some “smart investors” searching value again

From peak price Rs1200 to below Rs160



Case 7: India's second largest real estate investment company

Parameter Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05

Net Profit 675.05 1196.43 1661.34 1306.14 84.07 33.36

CFO -1339.5 -5.39 -975.03 -2074.5 -224.67 96.89

Signal

Another high profile developer Touched Rs500 (market cap 1Lac Crore) Jan 2008 Today Rs8 (market cap 4K Crore) 98% loss of wealth from peak




'Piotroski Score'

44

Interpretation: In the range of 0-9• 8-9: considered to be strong • 0-2: considered to be weak

Calculation: 9 specific criteria from financial statements each with 1 point else 0• Profitability

1. Positive ROA in the current year2. Positive operating cash flow in the current year3. Higher ROA in the current period compared to the previous year4. Cash flow from operations are greater than ROA

• Leverage, Liquidity and Source of Funds5. Lower ratio of long term debt to in the current period v/s previous year6. Higher current ratio this year compared to the previous year7. No new shares were issued in the last year

• Operating Efficiency8. A higher gross margin compared to the previous year9. A higher asset turnover ratio compared to the previous year

Strength of a firm's financial position

Should not be applied to Financial Services/Banks



'Altman Z-Score'

45

Interpretation• Below 1.8 means the company is probably headed

for bankruptcy, • Above 3 are not likely to go bankrupt

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where:

• A = working capital / total assets• B = retained earnings / total assets• C = earnings before interest and tax / total assets• D = market value of equity / total liabilities• E = sales / total assets

Score for bankruptcy

Should not be applied to Financial Services/Banks


How to screen stocks

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