If Warren Buffet were to Pick Stocks in India Now …

19 10 2008

 

Just when the stock markets were tanking all over the world, the Oracle of Omaha, Warren Buffett wrote a article published in the New York Times last Friday, urging people to invest in the equity market. He writes:

 

“I’ve been buying American stocks. Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

 

Chandrakant Sampat, who is often referred to as the Warren Buffett of India, goes by the following cardinal rules for picking stocks of the companies which 

 

  • Are in a business that even fools can understand
  • Have very little debt
  • Have free cash flows
  • Don’t have much capital expenditure, which is nothing but deferred cost
  • Has a P/E ratio of 13 to 14 based on current year’s earnings
  • Has a Dividend yield between 3.5 and 4.0 % 

These are classic rules of value investing for identifying companies which will give returns in times, good and bad. The high dividend yield criterion ensures that the companies give returns even in bear markets.  

Using Chandrakant Sampat’s stock-picking rules, barring the first one, I have created a shortlist of stocks which meet the following criteria: 

 

 

·        P/E ratio less than 13 times based on last year’s earnings (current year’s earnings data are not available easily)

·        Dividend Yield of around 3 %

·        Return on Capital Employed of atleast 25 %

·        Debt/ Equity ratio less than 0.25

·        Companies with market-capitalization higher than Rs. 1000 crore

 

 

Here are the eight stocks which clear all the above filters

 

·        Pfizer

·        Tata Consultancy Services

·        Monsanto India

·        Ambuja Cements

·        ACC

·        Indraprastha Gas

·        Biocon

·        Bharat Electronics Ltd

 

Here are the seven stocks which missed the filters narrowly.

 

·        Praj Industries

·        Voltas

·        Infosys

·        Alfa Laval

·        Opto Circuits

·        Gujarat Gas

·        Jindal Saw

 

 

Disclaimer: Readers are advised to look at company specific news and future earnings outlook before investing, as the above selection has been made on historical data only.

 

 

– G. Mohan

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One response

25 10 2008
gina

Is Biocon a business that even fools can understand? I know you didnot include the first rule….but perhaps that is the best rule and one which cannot be left out.

Here is what WB meant by it: look at his stock picks : Washington post, Coca cola, Gillette, Wal Mart, McDonalds…..look how simple the profit rationale these businesses have.
For that matter you cant even include TCS in the list…you dont know what they do….yeah they provide professional IT service….but what?

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