Introduction to the Stocks Series on r/IndiaInvestments Wiki

Can You Beat the Market?

Mon, 01 Jan 0001 00:00:00 +0000

Can You Beat the Market?

Here you’ll find,

What does beating the market mean? Is it possible?
Whether one can consistently beat the market - and what it takes

Beating the market — what it means

The phrase beating the market can mean different things for different people. The intuitive definition is to earn returns on a portfolio level that consistently beats the market index. However, more people allocate their equity investments in funds managed actively than passively - so it makes sense to see how your returns stack up against that of professional investors (simply put, those who invest money on behalf of others), or at-least try to understand how an individual investor has a fighting chance against institutions in the chase for every possible rupee gain.

Reading an Annual Report

Mon, 01 Jan 0001 00:00:00 +0000

Reading an Annual Report

Disclaimer & Disclosures

The author of this section DOES NOT have any long or short position for companies used in this section for illustration purposes as of the date of being published. This may or may not change in the future.
The companies used as examples are mentioned solely for educational purposes, mention of any company is random and is certainly NOT an investment recommendation.
Readers are advised to read the complete fine-print of an annual report while conducting due-diligence and avoid skipping contents that went unmentioned in this section.

Introduction

There are various filings & documents an investor should read before making an investment decision, such as the company’s annual reports, quarterly reports, transcripts of conference calls held by the company, credit rating reports, brokerage reports, and so on. Of these, annual reports are unquestionably the most critical to study.

Researching a Sector

Mon, 01 Jan 0001 00:00:00 +0000

Researching a Sector

Disclaimer & Disclosures

The author of this section DOES NOT have any long or short position for companies used in this section for illustration purposes as of the date of being published. This may or may not change in the future.
The companies used as examples are mentioned solely for educational purposes, mention of any company is random and is certainly NOT an investment recommendation.

Introduction

As individual investors, our primary focus is to,

Using Screeners

Mon, 01 Jan 0001 00:00:00 +0000

Using Screeners

Disclaimer & Disclosures

The author(s) of this section does not hold any position (long or short) in any of the companies used in this section at the time of writing this. The purpose of using these companies is purely illustrative and educational in nature. Mention of any company in this section is NOT financial advice.
The screens run in this section are purely for educational and illustrative purposes. The results of queries run in this section are NOT stock recommendations. The screens themselves are NOT financial advice.
The watchlists in the screenshot of this section are NOT the author(s) actual watchlist. They are just resultants of arbitrary screens run for illustration and educational purposes. Stocks under these screenshots are NOT stock recommendations.
The author(s) of this section did not get incentivised for recommending or not recommending any websites/tools/products mentioned in this section.

Note

Due-Diligence Checklist

Mon, 01 Jan 0001 00:00:00 +0000

Due-Diligence Checklist

Sector/Industry

The Product
- What is the sector primarily selling?
- How is the sector sub-classified based on product segments? (for example, FMCG can be categorized into home care, personal care, food products, etc)
- What is the market size for the product?
- Is the product prone to disruption from an alternate solution?
Brief History / Key Events
- What are some key events that have had material impact on the industry?
- What are the domestic policies that affect the sector; what forthcoming policies are expected; how will they affect the sector?
Value Chain
- What are the key raw materials & machinery/equipment required to build the product?
- Where does the sector largely source these raw materials & machinery/equipment from?
- What are some geographical advantages that preferred production destinations enjoy?
- What kind of labour force/workers are required for conducting the production process?
- What are steps involved in the core production process?
- What is the preferred strategies for marketing, distribution, delivery & installation of the product?
- How capital intensive is the production, marketing, distribution, delivery & installation of the product?
Market Overview
- How mature is the sector domestically? Is the sector expecting a turnaround from the current trend?
- How is the product’s market share split between organized & unorganized players? Which way is the market leaning now?
- How is the product’s market share split between domestic & international players? Which way is the market leaning now?
- Who are the key players that set the trend for the sector? (in terms of pricing power, product innovation, market practices)
- Who are the emerging players that could have material impact on the trend for the sector?
- What barrier to entry does the sector enjoy?
Industry Benchmarks / Key metrics
- Industry’s preferred benchmark for capacity
- Industry’s preferred benchmark for utilization
- Industry’s preferred benchmark for consumption

Business

Brief History/Key Events
- When was the company founded?
- What are some key events that have had an impact on the core operations of the company?
- What are some key events that have had material impact on the stock price?
Value Proposition
- What is the company primarily selling?
- What product segment is the company catering to?
- Where does the product fit in the market? Is there something that differentiates the product against competitors?
- What is the addressable market size for the product?
- What is the product’s market share, mind share, or position in the market?
Business Model
- A brief overview of the business model of the company.
- What are the growth avenues for the company?
- How does the company market its product?
- What is the capital allocation policy of the company?
- What is the earnings retention policy of the company?
- What is the dividend distribution & buyback policy of the company for earnings not retained?

Financials & Ratios

Profit & Loss Statement
- What does the revenue & profit breakup look like between different businesses of the company?
- What does the revenue & profit breakup look like in terms of the geographies the company sells to?
- What has been the revenue growth for the past 3, 5 & 10 years?
- What has been the EBIT (earnings before financial costs & taxes) growth for the past 3, 5 & 10 years?
- What has been the net earnings **growth for the past 3, 5 & 10 years?
- Is the revenue of the company overly concentrated within a few clients?
Balanced Sheet Statement
- Is the balance sheet clean/strong?
- How does equity dilution look like in the past few years for the company?
- How much cash, or equivalents does the company hold currently?
- What’s been the major capital expenditures that the company has done in the past few years?
- How does regular capital expenditure look like for the company?
- What is the quantum of debt obligations for the company?
- Is there inventory building up for the company?
- Does the company face issues with collecting cash — Is there receivables building up for the company?
Cash Flow Statement
- Are cash flows from operations comparable to net earnings?
  - If CFO > Earnings, cash is not translating to earnings in the P&L statement
  - If CFO < Earnings, there may be early revenue recognition without realizing/collecting it
- How much cash is being left after tending to operational expenses and capex (free cash flows)
- Are there any anomalies/red flags in the cash flows of the company?
Profitability Ratios
- What has been the trend for operating margins for the past few years?
- What has been the trend for net profit margins for the past few years?
- What has been the trend for return on capital (roic/roce) for the past few years?
Capital Ratios
- Is the company over-leveraged? (in terms of debt to equity etc)
- What is the latest cost of equity, cost of debt, & thus weighted average cost of capital for the company?
- Is the company able to service its debt obligations? (in terms of interest coverage ratio, quick ratio etc)
Efficiency/Operational Ratios
- How much time does it take for the company to convert its investments into cash? (in terms of cash conversion cycle)
- How much time does it take for the company to convert its inventory into sales? (in terms of inventory days/inventory turnover)
Industry Benchmarks
- How does the company stack up against peers in terms of industry benchmarks (like capacity utilization, average revenue per user, revenue per room, gross merchandise value etc)

Management

Overview of promoters & management
- Are the managers of the company competent enough to run it?
- Is the management style overly conservative or aggressive?
- Have the actions of the promoters or managers been in the interest of minority/retail shareholders?
- Have the promoters or managers been transparent & integrous in actions that impact the operations or valuations of the company?
- Is there a proper succession plan in place for key positions of the company?
- Is the management of the company being remunerated more than they should be?
- Do the promoters or managers of the company communicate well with the shareholders (hold conference calls, conduct interviews, answer to investor relation emails, etc)?
Shareholding Pattern
- What has been the trend for promoter shareholding in the recent past?
- How does the distribution look between retail and institutional shareholding?
- Is there enough free float? Are the shares of the company liquid?
- Is the quantum of shares pledged a concern?
Red Flags
- Is there any pending litigation against the promoters or managers that can materially impact the stock?
- Is there any pending litigation against the company that can materially impact the stock?
- Are there too many/suspicious related party transactions taking place?
- Is the structure of the company too complex (in terms of subsidiaries, holding companies etc)?
- Are there any red flags in the auditor notes?

Valuation

Multiples
- What multiples have been used to evaluate the valuation of the company, if any?
- How do the multiples compare versus peers in the same sector?
- Is there a significant discount for risks that the multiples of the company suffer from? Why?
- Is there a significant premium for moats that the multiples of the company enjoy? Why? Does the moat show up in financial statements?
- Has there been a significant rerating of multiples for the company? Why?
Valuation Models
- Have you used any valuation models (such as Discounted Cash Flow or Discounted Dividend or Sum of parts) to evaluate the company?
- If a valuation model has been used, what is the approximate intrinsic value of the stock as per the model? What discount does the stock price enjoy with intrinsic value in context?
Valuation Philosophy
- Would you characterize buying of the stock as value investing, or growth investing?
- Is there adequate margin of safety in an investment in the stock? What constitutes it?

Investment Thesis

Consideration of investment
- What is your primary thesis for investing in the business?
- What is the expected duration for which the company is being bought?
- What are the quantitative factors that could invalidate this investment thesis?
- What are the risks or threats that could cause invalidations to this investment thesis?
- What would conclude your investment in the company if everything goes according to the thesis? What is the exit plan?
- Is your investment thesis in consensus with other participants of investing forums such as r/IndiaInvestments Subreddit/discord or ValuePickr? Does this classify as a contrarian bet?
- Is your investment thesis based on a corporate action or a key event that would have material impact on the stock price? Does it therefore qualify as a workout investment?
Should this transaction be avoided?
- Where does the primary thesis for this investment come from? Was it peddled on a news channel/social media post or did it come into your radar as a consequence of independent research?
- Is the investment being done due to Fear of missing out on positive price action momentum?
- Can the investment qualify as a case of Catching a falling knife?
- If you’re exiting an investment because it has fallen significantly/sharply, is it because something has changed fundamentally about the business or its future earning potential?
- How does the stock fit into the overall portfolio? How much do you own of that sector/country already?
Staying on track
- Does the latest Quarterly earnings report validate or invalidate your investment thesis?
- Does the latest Annual report provide you any material information that could validate or invalidate your investment thesis?
- Does the latest Investors call or management interview provide you any material information that could validate or invalidate your investment thesis?