Lessons On Buying Stocks

How To Select The Right Stocks At The Right Time


The seven lessons in this course explain the characteristics of successful stocks and the forces that push them up. These lessons explain specific traits to look for when buying stocks.

1) Earnings: The Indispensable Element Of Great Stocks

For any businessman, the rate at which he can increase his earnings or profits is a very important indicator of the success of his business. Similarly, in case of a company, the rate at which its earnings can increase over time is a key indicator of the potential of its shares to increase in value.

In this lesson, you'll learn how to find companies with the best earnings growth and avoid some pitfalls that trick many investors.

Earnings, also called net profits or net income, are what a company makes after paying all its expenses, including taxes. Companies usually calculate their earnings every quarter - March, June, September and December – and then publish their annual accounts at the end of the year, which shows the earnings of the entire year.

Earnings per Share (EPS) is calculated by dividing the net profits earned by the company during the year (after paying all expenses and taxes) by the total number of equity shares issued by the company. For example, if a company has earned net profits of Rs. 100 crores during the year and has issued 1 crore equity shares, its EPS for the year will be Rs. 100 (Rs. 100 crores / 1 crore). The EPS is most relevant for equity investors.

Most of us have often regretted missing a great investment opportunity in spite of seeing the company, or its product or service becoming a household name, which, in turn, resulted in its share price zooming up.

A decade of comprehensive research covering fundamental and technical analysis of the greatest stock market winners - stocks that doubled, tripled, and went up even more – showed that there are 7 common characteristics among the big winners with earnings growth being the most important factor. (The other winning factors from the study are discussed in subsequent course lessons.)

In case of 3 out of 4 companies, average earnings increased by 70% or more in the quarter immediately after which their stock prices started spiraling up.

Earnings of 75% of these top-performing companies grew over 5 years before their stock prices started rising.

Acceleration is an increase in the earnings/profits growth rate every quarter. Earnings of top-performing companies accelerate over the previous three or four quarters. When such companies catch the attention of professional/institutional investors, their stock prices spiral upwards.

(For a detailed description of the importance of institutional investors, see "Sponsorship: Catching The Stocks The Pros Are Buying.")

At least 25% growth in quarterly earnings-per-share over same quarter in the previous year; for example, compare profits in quarter ended 31 March 2017 with profits in quarter ended 31 March 2016.

Earnings accelerating/growing in the three most recent quarters; for example, earnings growing in quarters ended 31 March 2017, 30 June 2017 and 30 September 2017.

Earnings per share (EPS) for the year having increased by at least 25% of the past 3 years; for example, EPS for the year ended 31 March 2017 having increase by at least 25% of EPS of years ended 31 March 2016, 2015 and 2015. Remember 25% is the least you should look for; ideally higher the EPS growth, more attractive the stock – 100%, 200% or even more. Strong companies with good management teams, innovative products and leadership in their industries boast the best earnings and reflect the best investing potential.

Now that we have understood the importance of EPS, let’s link this to the market price of the company’s equity share. This will help us judge whether the company’s stock is expensive or available at a reasonable price. P/E stands for Price/Earning. The P/E ratio is the market price of the company’s share divided by its EPS. For example, a stock quoted at Rs. 50 a share with EPS of Rs. 5 has a P/E ratio of 10. In other words, the stock is selling at 10 times its annual earnings. You must compare the P/E ratio of the stock with the average P/E ratio of the industry the company is a part of. For instance, if the company is a pharma stock quoting at a P/E of 25 while the average P/E of the pharma industry is 35, the company’s stock could be available at a reasonable price. However, you must consider the P/E ratio along with other factors before making your investment decision. For instance, if the company does not have good growth prospects, then it may not make sense to invest in the company’s stock even at a low P/E ratio.

Assessing the performance of more than 5,000 companies listed on the stock exchange needs time, research skills and a team of experts to analyse loads of data. Besides, this is an on-going exercise where you need to continuously study the quarterly performance of all these companies in order to locate winning stocks.

StockAxis.com compares the earnings performance of all the traded stocks on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) using its proprietary Rating System. The Fundamental Rating measures each stock on a scale of 1 to 99 (99 being best) for a quick assessment. A Fundamental rating of 80 means that stock is outperforming 80% of all other stocks based on earnings growth. Seen another way, a stock with an Fundamental Rating of 80 is in the top 20% of all stocks in terms of recent quarterly and annual earnings growth.

Our research shows that the stocks that make powerful gains usually have an Fundamental Rating of 85 or higher.

Our proprietary Fundamental Ratings System (FRS) includes not only earnings growth but a number of other important factors such as sales growth, return on equity, profit margins, industry vitality and a stock's price performance. The top 100 stocks that come up in the FRS are then analyzed and the 'top 50 stocks pick ' are presented to you in the market analysis section. Invest in these stocks to grow your wealth.

(Subsequent lessons will go into detail about each of these factors.)

Myth: You should buy stocks with low P/E ratios.

Conventional wisdom says stocks with higher P/E ratios are overpriced and should be avoided. But the truth is that the best stocks (stocks with high growth in earnings) often have high — some would say ridiculous — P/E ratios when they start their big climbs. And they continue having high P/Es throughout their advances. Some of the best performing stocks in history seemed to be 'overpriced' before their biggest price moves.


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27 Comments


Ankitkumar Chheda
Aug 11, 2018 at 05:56 Reply

StockAxis is always helpful and very near & dear to me. If your subscribtion weren;t too costly for small investors like me, I would have definitely taken your services. Anyways I have a question, if you can answer then it will be very helpful to me. 1) (Reference : Lesson 1, article 1.6) Acceleration in EPS quarterly (YoY) with 25% isn’t too harsh. Sometimes due to some or other factor it may fell but get back on its original tracjectory. For example: PVR, recently government allowed outside food into the multiplex will definitely would have affect their margins (though court put stay on these order, take it as a case study). But as great business, they would have found a thing or other to keep their margin intact. In such situation, how will we gauge why EPS is gone down or what factor is pulling it down?


Team StockAxis
Aug 16, 2018 at 11:52

Dear Ankitkumar Chheda,

We agree with you, Sir. Not all the quarter by the company can give growth of up to 25% but if the company is maintaining that QoQ, it represents strong fundamentals. In the scenario mentioned above, such instances are one time and should not and cannot be considered while analyzing a company, though once such news is declared in the market, should be considered while predicting EPS of the company.

Regards,
Team Stockaxis


Yash
Aug 07, 2018 at 10:18 Reply

Hello Team, I am new in this industry & learning fundamental analysis. I do have good theoretical knowledge as I am ca final student but unable to implement my knowledge in practical scenerio. Can you please guide the in the same. Thanks in advance Yash


Team StockAxis
Aug 09, 2018 at 04:22

Dear Yash,

We recommend you to start reading the balance sheet from our website (aka analyzer).

Also, to utilize, the knowledge you have gained from pursuing CA we recommend you to pursue a company through in-depth research by reading there AGM reports, investors reports, trying to analyze the industry and its future growth prospects. You can also learn regarding industry growth through various reports prepared by research companies. By analyzing all of this, you can derive the present valuation of the company and with the help of the future growth prospects, you can derive future valuations of the company.

We also recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

5 Rules to Deal With a Volatile Market

Using the EV/EBITDA multiple smartly!

Use The P/E Ratio Smartly!


Regards,
Team Stockaxis


Atul Gupta
Aug 04, 2018 at 01:23 Reply

Hello Stockaxis, It is always very knowledgeable things I read in lessons. Thanks for spreading the knowledge. Do you have any lesson on "Right time to Sell the Stock" if yes pls share the same. Thanks


Team StockAxis
Aug 06, 2018 at 10:55

Dear Atul Gupta,

Thank you for visiting us and believing in us!

We have forwarded your request to our team and we will try to come up with a lesson on that.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?



Regards,
Team Stockaxis


swati
Jul 21, 2018 at 07:38 Reply

Nice Article on stock market for beginners.


Team StockAxis
Jul 25, 2018 at 11:03

Dear swati,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Maria Alex
Jul 15, 2018 at 01:32 Reply

Sir, nice one. one question on 1.6. Lets say the eps for the years 2014, 2015 and 2016 are 25, 12, 45. Having these figures I would need to assess this in 2017 and I need to consider 25% or more growth from the last three years. here in my example which year eps I need to take for 25%+ calculation? Should I need to avg it?


Team StockAxis
Jul 16, 2018 at 03:53

Dear Maria Alex,

Thank you for your appreciation, Sir. EPS is earnings per share. You do not need past EPS to find present EPS. Earnings per share serve as an indicator of a company's profitability.

EPS is calculated as:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Example: Let Company ABC has Net Income or Profit After Tax be Rs. 1000.
Let Average Outstanding shares of the company ABS be 1000.
Therefore, considering dividend as zero, the EPS will be

EPS = Net Income/Average Outstanding Shares
EPS = 1000/1000
EPS = Rs. 1

Also to your question of 25% growth, you can either choose previous quarter PAT if your finding EPS for a quarter or last financial year PAT if you are finding for the previous year. (Make sure that Average Outstanding shares have not changed).

Regards,
Team Stockaxis


OP SHARMA
Jul 14, 2018 at 12:57 Reply

The information provided is very use for beginner & helpful in the selection of good stocks for investment in stock market. I wish a brighter business prospects for "stockaxis". Please continue helping people. Warm regards, OP SHARMA


Team StockAxis
Jul 16, 2018 at 03:25

Dear OP SHARMA,

Thank you for visiting us and believing in us!

We promise to continue to work for the betterment of the investors.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Y SRINIVAS
Jul 08, 2018 at 12:33 Reply

I am not your member. i am new to the stock market. since 2 months i am following your lessons. It is very useful to new investors just like us. Thanking you sir,


Team StockAxis
Jul 10, 2018 at 11:25

Dear Y SRINIVAS,

Thank you for visiting us and believing in us! You can reach us on 022-66393000

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


hemant sathe
Jul 07, 2018 at 09:53 Reply

very useful info. thanks for sharing


Team StockAxis
Jul 10, 2018 at 11:31

Dear hemant sathe,

Thank you for visiting us and believing in us!

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Munir Mujawar
Jul 07, 2018 at 04:57 Reply

Very good lessons contents for new learners


Team StockAxis
Jul 10, 2018 at 11:32

Dear Munir Mujawar,

Thank you, Sir, for appreciating our efforts to make the article easy to infer.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Hitesh Patel
Jul 07, 2018 at 04:30 Reply

Thank you very much Stockaxis. For giving us basic knowledge. It's very helpful to find better stock.


Team StockAxis
Jul 10, 2018 at 11:35

Dear Hitesh Patel,

Thank you, Sir, for your kind words. We are happy that we were able to help you understand the market better.

We recommend you to also read the following blogs.

Using the EV/EBITDA multiple smartly!

Use The P/E Ratio Smartly!

Regards,
Team Stockaxis


SANKARAN VENKATARAMAN
Jul 07, 2018 at 04:22 Reply

Very nice and useful


Team StockAxis
Jul 10, 2018 at 11:42

Dear SANKARAN VENKATARAMAN,

Thank you, Sir.

We recommend you to also read the following blogs.

StockAxis Market Intelligence

Has the Recent Correction Made Valuations Attractive?

Regards,
Team Stockaxis


Lalitagauri Juvekar
Jul 01, 2018 at 12:07 Reply

Thanks for sharing your valuable piece of advice.


Team StockAxis
Jul 04, 2018 at 04:59

Dear Lalitagauri Juvekar,

Thank you for your appreciation, Sir. We will keep posting such informative articles for our investors to retain the edge. Please visit the following link for more blogs.

https://www.stockaxis.com/Blog/

Regards,
Team Stockaxis


Team StockAxis
Jul 04, 2018 at 04:57

Dear Lalitagauri Juvekar,

Thank you for your appreciation, Sir. We will keep posting such informative articles for our investors to retain the edge. Please visit the following link for more blogs.

https://www.stockaxis.com/Blog/

Regards,
Team Stockaxis


Aswath
Jun 27, 2018 at 06:44 Reply

Though I am not a member, I am following you since two years. Really stockaxis is a very good advisor. Please continue with the lessons which will make investors how to deal. Thank you.


Team StockAxis
Jun 27, 2018 at 11:46

Dear Aswath,

Thank you for your appreciation, Sir. We promise to keep posting such blogs so as to guide and educate investors to make better investment decisions. Please visit performance reports of our recommendations https://stockaxis.com/Performance-Report.aspx, and we look forward to you joining our services.

Regards,
Team Stockaxis


Hitesh Baru
Jun 25, 2018 at 07:30 Reply

Very nice a smart


Team StockAxis
Jun 26, 2018 at 05:56

Dear Hitesh Baru,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis


K venkateswarlu
Jun 23, 2018 at 07:43 Reply

Most useful for the learners in stock market to know about the fundamentals not a stock. Your efforts are appreciable. Please continue your lessons.


Team StockAxis
Jun 26, 2018 at 05:57

Dear K venkateswarlu,

Thank you for visiting us and believing in us! Sure, Sir, we will strive to keep posting such informative lessons

Regards,
Team Stockaxis


sundar jagannathan
Jun 23, 2018 at 01:00 Reply

Sir, I appreciate your presentation of lessons on how to select stocks. Really it is very simple and very good. I request you to continue to provide all the information to all. Thank you for your efforts. I once again thank you


Team StockAxis
Jun 27, 2018 at 11:56

Dear sundar jagannathan,

Thank you, Sir, for believing and appreciating our blog. We promise to keep posting informative blogs to help educate in taking right investment decisions. We advise you to read the following blogs too.

https://stockaxis.com/Lessons-On-Buying-Stocks.aspx

https://stockaxis.com/Rules-For-Stock-Market-Success.aspx

Regards,
Team Stockaxis


Gopal Shrivastava
Jun 22, 2018 at 11:47 Reply

Beautiful


Team StockAxis
Jun 26, 2018 at 05:57

Dear Gopal Shrivastava,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis


D Roy
Jun 22, 2018 at 10:54 Reply

Very nice illustration of the key benchmarks to select the right stock.


Team StockAxis
Jun 26, 2018 at 05:58

Dear D Roy,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis


Dilip Naik
Jun 22, 2018 at 10:19 Reply

Show me 100 companies under Fundamental Rating System.on Nse,Bse.


Team StockAxis
Jun 27, 2018 at 03:19

Dear Dilip Naik,

Please find the link below Sir.

https://stockaxis.com/Top-50-Stocks.aspx

Regards,
Team Stockaxis


Himasis Poddar
Jun 22, 2018 at 10:09 Reply

VERY USEFUL.....++++++++


Team StockAxis
Jun 26, 2018 at 05:58

Dear Himasis Poddar,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis


SOMNATH
Jun 22, 2018 at 09:01 Reply

Excellent.I request some more detail and analysis of balance sheet


Team StockAxis
Jun 27, 2018 at 11:59

Dear SOMNATH ,

Thank you, Sir, for your feedback. We have noted your request and will try to come up with a blog explaining above mentioned details.

Regards,
Team Stockaxis


Pramod Joshi
Jun 22, 2018 at 07:44 Reply

Very good information in a simple language.


Team StockAxis
Jun 26, 2018 at 05:58

Dear Pramod Joshi,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis


Sunil Kumar Singh
Jun 22, 2018 at 06:51 Reply

I am using all these tools.


Team StockAxis
Jun 27, 2018 at 12:00

Dear Sunil Kumar Singh,

Thank you, Sir, for trusting us for your research. Please contact us on 022 - 66393000 for your stocks related queries or write to us at research@stockaxis.com.

Regards,
Team Stockaxis


Ashok Patni
Jun 22, 2018 at 06:08 Reply

Knowledge always pays better in stock market & if analaised report of a company or comparison with peer group companies is available than it is welcomed.


Team StockAxis
Jun 27, 2018 at 01:52

Dear Ashok Patni,

Sir, we recommend you to download our Andriod/IOS application as the features of comparing peers and much more is available. Please contact us on 022 - 66393000 for further queries.

Regards,
Team Stockaxis


Jayanta Chakravorty
Jun 22, 2018 at 05:44 Reply

A very helpful article . Interested to learn more on stock investment...


Team StockAxis
Jun 27, 2018 at 12:01

Dear Jayanta Chakravorty,

Thank you for your feedback Sir. Please contact us on 022 - 66393000 for your stocks related queries or write to us at research@stockaxis.com.

Regards,
Team Stockaxis


k l dhingra
Jun 22, 2018 at 04:19 Reply

Good. But debt and interest factor should be taken into account. Also the share holding pattern and pledged shares.


Team StockAxis
Jun 27, 2018 at 03:21

Dear k l dhingra,

Thank you, Sir, for your appreciation and feedback. We will try to inculcate the above-mentioned factors in our learning section.



Regards,
Team Stockaxis


KALPATARU DAS
Jun 22, 2018 at 02:53 Reply

best advice


Team StockAxis
Jun 26, 2018 at 05:59

Dear KALPATARU DAS,

Thank you for visiting us and believing in us!

Regards,
Team Stockaxis