I present here the ‘Value for Money Stocks September 2018′ I invested in this month.
I have maintained the logic I followed in August 2018 for selection of stocks intact. However, I felt that the allocation of the investible sum of over 70% to Grade A deprived allocation to other equally good stocks languishing in other grades. Therefore this month I re-balanced the allocation a bit. Now let us get down to detailed business.
The 20 Shortlisted Stocks
I have shortlisted 20 stocks based on the ‘Return on Equity’ criterion. The list includes 14 of my existing ‘Portfolio 2K15‘ and six new finds. I rejected Mangalore Refineries and Petrochemicals (MRPL) as not meeting my minimum investment criteria. Muthoot Finance I have not fully analysed yet. Shipping Corporation of India too I have rejected. That leaves us with 17 stocks. I have greaded them into grades A to D based on the ‘Return on Equity’ criterion as follows:
The Rules of Grading I have Used
Value for Money Stocks September 2018: How I selected Grade A
- Average ROE for the last 14 years is greater than or equal to 20% and
- The ROE for the year 2017 is greater than or equal to 5% but lesser than 8%
I applied the Following Rules for Grade B
- Average ROE for the last 14 years is greater than or equal to 15% and
- The ROE for the year 2017 is greater than or equal to 5%
- Average ROE for the last 14 years is greater than or equal to 10% but less than 15% and
- The ROE for the year 2017 is greater than or equal to 10%
- Average ROE for the last 14 years is over 0%
Distribution of Investible Sum
I distributed the investible sum of Rs,10,000/- to the four groups as follows:
- Grade A: Rs.4,444 or 44.44%, last month Rs.7,015
- The Grade B: Rs.2,500 or 25%, last month Rs.1.343
- Grade C: Rs.2,222 or 22.22%, last month Rs.1,194
- Grade D: Rs.833 or 8.33%, last month Rs.448
Please note that total weight is obtained by multiplying grade weight with the number of scrips weight. For example, the total weight of Grade A of 941.18 is obtained by multiplying grade weight 40 and number scrips weight 23.53.
As I had mentioned in the beginning I balanced the allocation so that the grades other than A got an equitable share.
Value for Money Stocks September 2018: Criteria for Allocation of the Investible Sum to Individual Stocks under each Grage
Since the money available for investment has been distributed to various grades, the next task is to allocate the available to stocks figuring under each grade. I have adopted five considerations for allocating the available cash to individual stocks. Out of these five, two are purely based on the company’s performance. The other three simultaneously depend on the company’s performance as well as the prevailing market conditions.
Factors Based Purely on Company’s Performance
- 14-year Average Return on Equity (ROE) – 20% of available cash
- ROE for the financial year ending on 31st March 2017 – 20%
Consideration Based on Company’s Performance and Market Conditions
|Company Performance||Market Condition||Allocation|
|Price to Earnings (PE) Ratio||Earnings Per Share (EPS)||Current Market Price (CMP)||20%|
|Price to Book Value (P2BV) Ratio||Book Value||Current Market Price (CMP)||20%|
|Dividend Yield||Dividend Per Share||Current Market Price (CMP)||20%|
The combined ‘Price to Earnings and Price to Book Value’ ratio is only used to determine whether a stock is expensive. I have not made any allocation of money under this norm. If a stock fails this test (PE*P2BV Ratio shall be less than 22.50), then the stock is expensive and is eliminated. No allocation of investment is made to the stock.
For example, even though Hindustan Zinc and LIC Housing Finance had made it to Grade A, I have eliminated them. Their combined ratios is 45.41 and 27.67 respectively.
On the other hand, if a stock fails under any other criterion it simply will not get any allocation under that criterion. It will not be totally eliminated. Please see the example of BPCL. Its P2BV is more than 1.5. However, its combined PE*P2BV is 17.73 and less than the maximum of 22.50. Therefore it is selected. However, BPCL will not get any allocation under the P2BV consideration.
Please note that the Great Eastern Shipping Company Ltd. stock. Its’s PE ration on 31st August 2018 was negative. It was (-) 31.68. This means in the latest quarter it has suffered a loss. The combined PE*P2BV ratio is a negative number (-) 20.91. It is selected. Why? Because a negative number indicates that the company incurred a loss in the preceding quarter. However, it does not mean that the stock is expensive. Therefore I selected the stock but did not make any allocation under the PE consideration.
How I allocated Cash based on 14-year Average ROE
I present here the distribution of Rs.2,000 (20% allocated for this parameter) among various stocks based on the ‘14 Year Average ROE Criterion’:
How I distributed Money as per FY 2016-17 ROE
Value for Money Stocks September 2018: How Distributed as per Price to Book Value Ratio
Please see the following table to understand how I distributed the next Rs.2000 based on price to book value ratio consideration:
This is How I Allocated the Next Rs.2000 as per Price to Earnings (PE) Ratio
I present below how I allocated the investible sum of Rs.2000 based on the price to earnings ratio:
Value for Money Stocks September 2018: I show How I Apportioned Capital as per the Dividend Yield Consideration
Please see the table which shows the way I distributed the next Rs.2000 based on the ‘Dividend Yield‘ Criterion.
I have explained in this post how I picked the ‘Value for Money Stocks September 2018‘. I hope I made myself clear to you. If you have any questions please do not hesitate to contact me.