I’m back after a long vacation and sorry for no updates last month. My mind is fresh and hence thought I can write on my favorite subject- stocks. After long requests from readers I decided to ponder on the top best stocks to buy for long term in India.
India is the flavor of market among emerging markets and the markets have run up quite sharply. One should tread with caution and have a wait list of stocks to buy during correction.
Or simply you can buy the top 10 best performing funds and expect they return good in long term. This would be the best approach for investors with other full time jobs. You should not invest in direct equity if you can’t spare time for own research.
Now let me put the disclaimer :There is no guarantee that these stocks will perform well in future. I’m not a SEBI registered analyst and this is not a buy/sell recommendation. Fair to assume that I may have interest in some stocks discussed. I may buy/sell these stocks anytime without intimation. Please consult your financial advisor before making decision. Discussion to be used only for educational and knowledge sharing purpose.
The degree of conviction and opportunity size is huge for these stocks based on my analysis and this post is merely for sharing educative/research purpose. You must only use this post to further your own analysis and not blindly follow them.
Top 10 best bluechip stocks to buy for long term and why
Now you must be very eager to know the list of 10 stocks to buy. Let me tell you – if you wait for tips you’ll never graduate to next level of investing or hold best stocks for long term.
Following tips will be throwing money in air on somebody’s advice – includes me. So invest in your own knowledge and read good books to understand the concept of investing.
To be successful in stock markets you need high degree of conviction and understanding of businesses you invest in. Remember crux of Warren Buffett’s advice – ” When you invest in stocks treat them as owning part of business. You do not sell out a business if it has few bad quarters. Sametime you do not want to own a business which will earn lower returns even over long term.”
Consider this that Buffett became the world’s second wealthiest man (not anymore) by compounding at 20.3% for little above 50 years. That is the power of compounding.
Why should you invest in bluechip largecap stocks?
Beginner investors must first avoid losses. And hence are advised to start with large cap stocks when investing direct in stocks . As knowledge and experience grows you can consider mid-small caps. Here are few reasons why we advocate that.
1) GOOD TRACK RECORD: I advice people new to direct equities to stick to large caps of Nifty 100 stocks. The simple reason being these are businesses which have been around for quite long time.
They are not fly by night companies. So atleast there is some degree of protection. These are also usually owned by large institutional investors and governance is fairly decent.
You have 5-10 years of annual reports, balance sheets to analyze if interested.
2) DECENT CORPORATE GOVERNANCE – These companies are widely tracked and have decent corporate governance. You must not mistake that for minority shareholder friendly nature.
Here we mean accounting standards. Also, remember that in extreme bull markets even dummy low-quality companies might make it to Nifty. So while it is good place to start, you must not trust them blindly.
3) LESS VOLATILITY – Large cap stocks have comparatively less volatility to mid-small cap stocks . They may not go go up or down 10-20% everyday for prolonged periods. The upside and downside are less volatile or calibrated.
4) MARKET LEADERS – Usually large cap are market leaders in their own niche. Their brands is entrenched in consumer minds and difficult to dislodge. Any business which has great brand recall will have pricing power and turn out as best stock for long term if prudently managed/followed. Think of Asian Paints, Brittania etc., which have great brand recall.
List of 10 best stocks to buy in India in 2017-2018
Now without further delay here are list of top 10 large cap stocks that can give decent returns in future. More importantly read and try to understand if you agree with the logic. if not skip them. Use this as a list to select 2-3 good stocks after doing due diligence.
I have used some basic filters to arrive at above list. First let us see details briefly on these stocks. All data/analysis/logic is based on data available at moment in Oct 2016. If any new adverse data present itself investment thesis must be reconsidered.
Many good quality top stocks like Eicher Motors, Page Industries, IndusInd Bank, MAauti, Amara Raja Batteries, ITC, TCS, Lupin, Sun Pharma etc., made it to best stocks list but were left out due to short term concerns or high valuations. They are equally good stories but compounding them may take bit longer time period from current point.
- Infosys – Probably the biggest wealth creating stocks in last two and half decades. It has returned little above 5000 times in last 25 years. Even Rs 10000 investment in early 1990 would have made you crorepati. It is part of IT outsourcing saga with cost advantage compared to western countries. Still exists but not a big growth engine as it used to be. The growth is still expected at 12-15% and hence had little hesitation adding to ‘best stocks to buy now‘ list. Because had doubt about ‘now’ given uncertainty in IT. Has huge cash of Rs. 30000+ crores in balance sheet protecting huge downside. The company is trying to re-invent itself under new leadership of Vishal Sikka and hence made it here.
- HCL Tech – Another great IT company stalwart going through troubled times now. Great infrastructure and government contracts. Among the top 4 IT firms in India. Good return ratios, decent balance sheet. Looking for triggers for future revenue growth avenues.
- Cummins India – One of the very few companies with clean balance sheets in Capital Goods sector. Nil debt and one of leading engine manufacturers in India. Good growth opportunity as India is on path into a developed nation. Technology strength is difficult to duplicate, good tie-ups with parent company and hence has good moat.
- UPL – UPL is one of leading chemical/agro-chemical manufacturers with presence in 124 countries. The pace of branded portfolio addition has been very good in last 2 years. Decent growth in revenue and profits of above 12% even during downturn in agricultural/agrochemical industry. But needs to be watched closely for governmental intervention though less likely. As specialty chemicals is migrating from China to India due to pollution issues we believe UPL has good long term prospects as it is among leader in this space.
- Pidilite Inds – Pidilite is the manufacturer of Fevicol, FeviKwik, M-Seal and many more household brands/products. They have great focus in portfolio. they work on sealants, water-proofing solutions. The company is a huge wealth creator in last decade. Has good potential as more infrastructure, houses are expected to be built. It is a nice proxy play on infrastructure revival. though over-priced at moment there is good chance of earnings growth as economy revives. Added with bit of hesitation due to slightly premium valuations at current moment. This is among best stocks with 25% CAGR in last 10+ years has good potential to maintain fair compounding in next decade.
- Axis Bank – A bank which shows how a public enterprise can be turned around with entrepreneurship and private management. Axis Bank is a story of value migration from public sector banks to private banks. Do you like to bank with government banks nowadays. They are behind the curve on technology and sometimes the customer treatment is pathetic. They just don’t care much. Of course there will be few exceptions branchwise. So private banks are set to benefit with good access to capital and cleaner balance sheet.
- HDFC Bank – Probably another better story like Infosys only that it still has long growth ahead of it. It is a case of text book execution and still has growth in it. They have been growing at 24% like clockwork and if all goes well they may grow their profit CAGR at similar or slightly lower rate. They are aggressive in marketing and leading in terms of technology. I personally have a HDFC Bank account and in last 3 years never needed a chance to visit them. Everything is online, digitized and customer friendly. But true that they charge high fees and modern generation is willing to pay for it. But though I may crib about high fee as customer I’m OK with that as shareholder. One of quality best stocks where I have high long term conviction.
- MRF – Leading tyre manufacturer is India. The number of vehicles is expected to grow in India and tyres will be beneficiary as they need to changed every 3 years. Of course MRF must stay ahead with technology adaptation and conservative management like it has done in past. Don’t fret about high share price of Rs 50000+ . You should concentrate on valuation, growth and return ratios rather than absolute stock price.
- Aurobindo Pharma – Another case of value migration with decent execution. Remember that labour/manufacturing cost is high in US, Europe. Making of generics in these countries is not viable due to competitive low manufacturing cost in Asian countries. India is gaining larger pie in generics and this is expected to continue as US people want lesser medicine cost. Aurobindo pharma has been a 50 bagger in past but prospects still look good. With large ANDA filings, product portfolio and high profitability it is a good large cap pharma stock. One must follow closely the future ANDA filings, FDA inspections and growth in future when buying long term.
How to select best stocks for long term
Now that we’ve given the possible best stocks listed on NSE and BSE market in our opinion, you must also learn the parameters which we used.
This will help to identify good stocks yourself ans is the main motto behind this article. To educate you and help you make informed decisions for long term financial independence.
- Market Capitalization above Rs 10000 crore – Now because we decided to focus on large cap stocks, the companies chosen must be big in size. So market cap was chosen above Rs 10000 crores. So lot of mid cap companies with high potential got left out. Market Capitalization = Outstanding shares X Current share price. You can check on market capitalization from Wikipedia here. Companies with high market cap are usually that have been around long time. However, also be cautioned that during extreme bull market even low quality companies may have very high market cap due to bubble. This will weed out penny stocks or fly-by-night operators.
- Average 5 year ROE above 15% – Now many beginner investors will not use this. But this is one of very important parameters to track. It tell you how the business or stock has generated profits using shareholders money. If a stock generates profit with high borrowing someday it has to pay with interest. But high ROE without debt is an indication of efficient use of capital in a business. If it is above 12% the business is decent. But I always have high cut-off off of 15%. During cyclical recoveries or growth investing some stocks with low ROE may return high multibagger returns as they grow in profits and their ROE may improve. But since we were interested not in future bluechips stock but already big companies ROE> 15% is a good place to start.Importance of ROE in stock selection.
- Debt to Equity ration <1 – Any companies with large amounts of debt will get consumed by the debt. Remember shareholder return from stocks is what is left behind after paying debtors. IF company has huge debt, the debtors will only get the benefit. Servicing debt is an overhang and unless it is a growing new company debt does not make much sense if you cant earn above cost of debt. Large cap stocks have high cash flow and hence seldom require debt. So companies with Debt/Equity ratio less than 1 will allow shareholders to enjoy the fruits of cash. Many ex-largecaps like Suzlon Energy, Unitech have lost huge value due to high debts.
- Average 3 year ROCE > 15% – Return on Capital Employed helps you determine how the company is using its cash flow. Very important for assessing non-financial companies in my opinion. It would be good practice to look for companies with high ROCE in manufacturing, services business. ROCE = Earning before Interest & Tax/Capital Employed. So companies which pay high dividends and have good cash flow have good ROCE as they employ less capital every year.
- Last 3 year Sales growth > 10% – A company which cannot grow its sales from servies/products over 3 years is unlikely to generate returns. Some companies may improve efficiency and generate higher profits. But if sales does not grow even after few quarters then it is a sign of worry. Meaning the stock has matured or does not have pricing power or demand. So top quality stocks portfolio consists of stocks with sales growth. Good if it has both volume growth as well with it and not just sales growth. As example, Maruti has grown its profits and volume over the last 10 years. The number of vehicles sold every year as well cost of each vehicles have increased driving sales in absolute Rs. terms.
- Last 3 year Profit Growth > 15% – Over short term a company may drive profits by improving efficiency. This happens during periods of downturn or sluggish growth. For example companies like Bata, Brittania hade improved grown profits though their sales did not increase much in 5 years. They have done this by reducing operating cost, improving technology. This can be seen by their increase in operating margins. A great company will have both increasing operating margin and sales growth.
These are basic parameters one can use while investing. I personally prefer 15% cut-off in 5 year ROCE, ROE, profit growth, sales growth.
In addition, advanced investors will consider Fixed Asset Turnover, Inventory days, Interest Cover ratio, Tax ratio (how much tax it pays), dividend record etc., while evaluating investments.
Remember these are the quantitative parameters. These are other qualitative parameters to consider as well when buying top high quality stocks.
We have already discussed the quality parameters in our post on how to select good stocks.
5 best stocks investing tips
In addition to above and matters discussed in links provided, here are few other checks to do when buying top stocks for yourself.
- Number of stocks in portfolio is adjustable – There are 500 listed companies in NSE and BSE. You do need to own all of them. Id you use above criteria you’ll end up having less than 200 companies. In that buy good companies which you can track. If you can buy and track 50 companies your choice. But tracking 50 companies is usually diffcult unless you have great interest in stocks. If not choose few companies and use mutual funds. Matured investors usually advise lesser stocks in portfolio with concentrated approach. But remember there is no one size fits all. Buffet quote “Concentrated portfolio is when you know what you’re buying. If not, extremely diversify”
- Buy business which you understand – There may be 100 top quality stocks but invest in only stocks which you understand. if you don not understand the competitive advantage of pharma stocks or technology then exclude them. Only invest in business you understand. A Doctor may understand hospital or good medicines. He may buy pharma companies. An IT Engineer may understand what is advantage of particular software company. So he may buy a software business. Only buy business which you understand.
- Check for honest management – Google and check if company you want to invest has been unfriendly to minority shareholders. Check for any investigations or SEBI cases ongoing on the promoters.
- Don’t invest all in one stock, have portfolio strategy – I have seen my friends and clients investing everything in one stock saying it is the best stock to invest for long term. This is very high risk approach. Try to follow a portfolio approach even if you’re not a beginner in stock market. There may be a bad news which will wipe of investment. A stock portfolio must consist of bare minimum of 5-6 stocks in my opinion.
- Never leverage – Probably the best advice I can give especially for beginners. Don’t borrow and invest in stocks. The market can remain irrational for longer term. Leverage is a double edged sword and Very few people can make that work and it will work only in few specific occasions. Unless you have great experience in stocks, don’t leverage. Don’t trade in derivatives if you’re beginner. often the greed for quick money wipes out your capital.
How to avoid bad stocks and select top quality stocks
- Avoid stocks with high Related Party Transactions – One of the steps to select good stocks is to avoid the bad stocks. Any stock which has high related Party Transaction is a red flag especially in same line of business. Good companies try to consolidate similar business under one roof. If same promoter has similar business unlisted, then good chance money is routed for predatory promoter benefits. Good businesses or promoters do not do this.
- Avoid stocks with high debt – Well this is a no brainer. Debt can be beneficial but too much is disastrous. High debt is one of the main reasons for businesses to go under and stocks to make loss. Equity investors get money after debtors are paid. So avoid stocks with huge debt ie., Debt/Equity > 2.0
- Avoid commodity stocks – This is slightly controversial. Commodity stocks go in cycles. One must know how to predict cycles, to benefit form commodity stocks. So better to leave them be. There are lot of top quality best stocks to choose from 6000+ stocks.
- Stocks with negative cash flow – You should choose stocks with positive cash flow. Simply put companies where operating profits flows to the bottom line and realized as cash. There are numerous companies paying high interest, very high inventories and negative free cash flow. Avoid them.
- Don’t invest in IPOs – This is not a blanket statement. Huge investors make a killing by investing in IPOs. I don’t mean IPOs are bad stocks. Most of time, they don’t have margin of safety in them. They may turn out to be bad investments. Investors must be careful when investing in them. Promoters only come with IPO when bull sentiments prevail so they can price at or above fair value. Good stocks may not be best investments at high price.
With that I think we’ve covered our intention of learning to find the top best stocks to buy for long term . By following all the above rules a beginner or experienced investor can definitely avoid big losses. We remember Warren Buffet’s evergreen quote on investing “Rule No.1 – Don’t lose money; Rule No 2 – Don’t forget Rule No.1 “.
Hope you liked the post on Top 10 best bluechip large cap stocks to buy now for long term in 2017-2018. Share it with friends and ask any doubts (barring stock tips request) below and we’ll be happy to help.