‘Well, tell me, which is the best stock to buy?’
Now this question is not uncommon for me, considering the fact that all my friends and family know that I am associated with an organization that helps investors build wealth by scouting the best investment opportunities that meet their profile.
So wherever I go, any parties or social gathering, I am bombarded with this question. With this I realize, that there would be many investors who would have the same question in mind.
However, the answer to this question even more complicated with many macro & micro variables at play.
But before we delve into the qualities of the best stocks to buy, let’s take a quick look at two stocks that have consistently outperformed the benchmark Sensex in the last 5 years. Yes, I am talking about Bajaj Finance and HDFC Bank.
Bajaj Finance is a non-banking financial company (NBFC) and specializes in consumer finance, commercial lending, and wealth management while HDFC Bank is a banking and financial services company and India’s largest private sector lender by assets.
As you can see in the above table, Bajaj Finance and HDFC Bank have consistently beaten the returns generated by Sensex by a huge margin, thus making them ideal for investments. But that is not our intention behind showcasing these examples. What we are trying to say is, rather than looking at the names, let’s understand the rationale which defines the best stock to buy in India.
Let’s understand this in detail.
Some common factors that helped these stocks outperform the Sensex over the past 5 years include:
- Excellent fundamentals
- Strong financials
- High growth in sales and profit y-o-y
- Consistent high ROE
- Good corporate governance
- Low NPA’s
- Helmed by a visionary leadership of excellent pedigree
- Sound business model
- Better performance than its competitors
As you can see above, these are the qualities that make stocks the right fit for stock market investments. Hence, these are the factors that you need to look for in business while selecting the best stock to buy in India.
Having talked about the qualities of the best stocks to buy, it is equally pivotal to understand the methodology behind selecting such businesses rather than names of specific stocks.
Here are some factors that can help you in choosing the best stock to buy today:
- Financial ratios
Scrutinize the balance sheet of the company to check the financial ratios of the company such as Earnings Per Share, Price to Book ratio, Debt to Equity Ratio and Return on Equity.
- Debt of the company
Look for companies with zero or low debt as high debt means that significant proportion of the earnings will go towards paying off the interest.
- Future prospects of the company
Always evaluate the scope, future growth, scalability and sustainability of the business in the long run while looking for the best stocks to buy in India.
- Shareholding Pattern
A high shareholding pattern reveals how much interest the promoters have in the company. This also means how serious they are about taking the business to its next level.
- Management pedigree
It is very important to check the pedigree of the management for its past history and how well the company is managed.
If you consider the above factors, it will not only help you invest in such stocks, but also identify them by using the right approach.