A winning portfolio is essentially following a defined framework for investing and a proven research methodology. We would like to share the framework for investing and the stock selection process that we rely on here at StockAxis which makes use of 6 different factors to build a winning portfolio.
Each one of these factors individually will help you pick good stocks. But putting all of them together gives you a significant edge over others in stock market investing.
- Identifying quality companies at sensible prices, not overpaying for quality.
- Avoid mediocre companies and poor management even if prices are cheap.
- Growth oriented, more rational than emotional.
- Holding cash when opportunities are scarce.
- Managing risks through adequate diversification and position sizing.
- Adding a layer of fundamental inputs and in- house research.
- Patientdon't track prices every day.
Stock Selection Process
The general idea of 'corporate governance' is processes and practices through which businesses are operated and controlled; in other words, it is, 'the governance of corporations'.
Corporate governance is therefore about rules framed and implemented by the company's board of directors in order to establish the values the company must abide by.
We at StockAxis believe that the most important pillars of corporate governance are: fairness, transparency and accountability. All these factors are critical in successfully running a company.
At StockAxis, one of our top priorities is to look for companies with good governance and ensure that such practices continue.
We check for:
- Change of auditors / very high auditors remuneration.
- Representation of independent directors.
- Directorships in other companies of key managerial persons.
- Remuneration payable to executive / non-executive director.
- Credit rating report.
- Board's approach to corporate social responsibility.
- Promoters control and succession planning.
- True independence of independent directors.
We believe that even the best of companies may be run down if the management quality is below par. Management forms the backbone of any business. Senior managers, starting from the CEO downwards, are instrumental in the success of the business. They provide the vision, direction and strategies to overcome competition while ramping up growth, which reflects in the company's bottom-line. The management is responsible to run the company keeping the interests of the shareholders in perspective with the ultimate aim of creating value for shareholders.
We, at StockAxis, use our market intelligence to look for management with integrity, intelligence and passion to run their businesses efficiently. Some of the factors we consider while evaluating the management include:
- Promoters'/ management's background and competence.
- Salary of KMP (Key managerial persons).
- How efficiently capital has been allocated.
- Insider trading activity, if any.
- Frauds/ scams, if any.
- Related party transactions.
- Past track record of stakeholders' value creation.
At StockAxis, we prefer aligning our clients' investments with proven management which has won the trust and admiration of stakeholders.
The key intent of investing in equity is capital appreciation. This is achieved by investing in 'growth' stocks. We at StockAxis look for growth stocks in trending sectors or rapidly expanding industries, where new technologies and services are evolving. 'Growth' companies usually reinvest their earnings back into the business, rather than pay a minimal dividend to shareholders. We look for stocks with tremendous growth potential which will translate into growth in earnings and revenues, and, in turn, higher stock valuations in future.
Growth stocks usually trade at high prices relative to their fundamentals (e.g., book value, revenue, cash flow and dividends). These stocks quote at high valuations due to high earnings expectations and their growth rates are considerably higher than the market averages. These stocks are popular in the market due to their potential to launch innovative products and capitalize on market opportunities. We expect attractive returns from investing in growth stocks as their market value grows with expansion of their profitability and business.
We look for businesses with strong visibility in earnings. We assess the sector/industry group the business belongs to in terms of its potential to grow and the opportunity size. We generally prefer investing in companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market. Growth investing is profitable because buying stock in emerging companies can provide impressive returns if the companies are successful.
We at StockAxis evaluate stocks in trending sectors. A megatrend is a major development that has huge implications for the majority of the stocks in that particular sector. Thus, we identify a company that's poised to address the opportunities that such trends reveal. A fundamentally strong company in a growing industry is a fitting recipe for success.
We look for companies that have established a strong niche, are consistently profitable and have a strong brand or familiar identity. To evaluate a company's financial condition, we assess the company's balance sheet, income statement, cash flow, and other operational data, along with external factors such as the company's market position, industry and economic prospects. The company should have consistent earnings, low debt and a commanding position in the marketplace.
We look for companies following robust risk management processes, which consist of identifying, assessing and controlling threats to an organization's capital and earnings. These threats, or risks, could stem from a wide variety of sources including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. Risk management helps organizations prepare for the unexpected by minimizing risks and incidental costs before they occur.
By executing a risk management plan and considering the various probable risks or events before they occur, an organization can save substantial amounts. A robust risk management plan will help a company establish procedures to avoid potential threats, minimize their impact should they occur and cope with the results.
The New Year brings a host of challenges and opportunities for the investing in equities. But rest assured that the stocks we pick fully take into account what lies ahead.