Some people automatically sell the winners and keep on adding the losers in their portfolio. This is because when market goes up, the winning companies tend to move up but the bad quality companies are never able to match the returns of a superior company and poor investors keep on adding the stock to reduce their average purchase price. This results in portfolio consisting of low quality companies which always produces lousy results and their share price goes down and so is the overall portfolio value. One should do the opposite by selling the bad quality companies and adding sound companies in the portfolios.

Peter Lynch has divided companies in to five categories:

1. Slow growers – Growing at 7-8% at GDP growth rate.
2. Stalwarts – strong companies with EPS growth at 12%
3. Fast growers – small, aggressive new companies growing 20-25% or more.
4. Cyclicals – whose earnings rise and fall as the economy booms and busts
5. Turnarounds – companies with temporarily issues, but good contender for recovery.
6. Asset plays – companies which are mispriced but there assets worth more than its market capitalisation.

A sound portfolio consists of 10-12 great ideas. These ideas should have economic moats which keep on expanding. Always stick to the fundamental side of the company. We get lot of mails saying stock price is huge, this is an index stock, sector specific issues etc. We tell you what matters the most is not the price or company name but its fundamental valuations, products and its economic moats.

“The investor of today does not profit from yesterday’s growth.”         Warren Buffett

Dr Equity’s Filters to find a Multibagger Stock:

• Great Business Model like – Nestle, Cera Sanitaryware, Titan Industries, Symphony.
• Robust Balance Sheet with highest ROE, ROCE.
• Negative working capital cycle due to economic moats.
• Able management with long term vision.
• Highest Corporate Governance
• Dominating market share, expanding markets.
• Share holder friendly management
• Huge opportunity to tap like in case of symphony, Cera sanitaryware, CARE Ratings etc
• Reasonable Valuations with sufficient margin of safety.
• Efficient allocation of capital

These are the main ingredients to find a multibagger stock. We at Dr Equity deal with many such opportunities every day but due to any of the above missing factors, our analyst rejects many opportunities. At the core we deal & practice the Buffett principles to find Quality Company with strong moats at reasonable valuation.

To know more about Dr Equity visit www.drequity.in

Team – Dr Equity