The markets are crashing – both for equity and commodities. Gold, which remains the only investment which appears to make sense (not that it is always a sensible purchase) has been pushed underground by the latest dictats of the finance ministry. Property prices are in a slump. So where do you put your money?
We decided that this could be the best time to pick up stocks which could be going at their lowest prices. And while we have identified some companies, a few caveats need to be made:
1. These are companies that have been selected on the basis of some very transparent ratio analysis.
2. Nobody can predict the way markets go. But it is possible to identify ways in which risk could be reduced.
3. You can rarely time the market – you will seldom be able to purchase at the lowest prices, or sell at the highest prices. The trick is to set your own benchmarks and not get too ambitious or too greedy. It is also sensible not to become very sentimental about any company's shares. If your benchmarks have been met, you should re-assess the share, and then become ready to sell it. Invest the sale proceeds in another share which makes immense sense on the basis of fundamentals. Remember, technical analysis is for traders and market savvy people. For most common people, fundamental analysis is safer. So here is the first of a series of lists:
These companies were selected on the basis basis of some very sound principles.
We only looked at companies that had an asset base of over Rs.100 crore. This way we eliminated companies that could be listed today, and could disappear tomorrow.
We selected companies that had an inbuilt respect for money. It does not matter whether the money comes from shareholders, from banks, or is with the company either by way of accumulated reserves or accumulated depreciation. Money is money. And if it cannot earn at least a 12% rate of return, you should not be looking at that company.
We were aware that some companies have money invested in assets which could become productive a couple of years later. Hence we have deducted capital work in progress (CWIP) from total money with the company (equity + reserves + total borrowings + accumulated depreciation less CWIP). This way we get total money that could be put to productive use. We have selected only those companies which have been able to meet this benchmark of a 12% return on adjusted capital employed for three years continually.
We then took companies that had the highest rates of return on adjusted capital employed. The top 25 companies that earned the most on the money that they had at their disposal are featured below.
Look at the price ratios next. Ideally, you should be looking at companies which are available at the biggest discounts to the current market price, or are the lower (or closest) to the 52-week lows or the 52 week average prices.
If you like the company and the current market price (as a ratio of the 52 week highs, lows and averages), they could be the shares you should be purchasing right away.
Remember, the best time to purchase shares is when the ratios appear right, the company is good, and others are too scared to enter the market. Enter a market when others are also rushing in, you could end up purchasing shares at unreasonably high prices.