Top 5 Stocks to buy in 2017 – Based on Benjamin Graham principles (Warren Buffet Guru)

Top 5 Stocks to buy in 2017 – Based on Benjamin Graham principles (Warren Buffet Guru)Top 5 Stocks to buy in 2017 – Based on Benjamin Graham principles (Warren Buffet Guru)


Benjamin Graham who is considered as guru by Warren Buffet was focussing on filtering stocks based on earnings yield and avoiding high Price / Earning (P/E) Ratio Stocks. His focus was to invest in value stocks which are currently trading below their assets so that these are purchased at attractive valuations. How Benjamin Graham used to filter stocks for value investing? How do these principles apply in Indian Stock Markets. Which are the top 5 Stocks to buy in 2017 that can be pickedup by Benjamin Graham Principles in India? In this article, let me do some analysis in picking up value stocks based on his principles?

Also Read: Upcoming IPO’s in Aug and Sep 2017 that can create good wealth to investors

About Benjamin Graham, father and Guru of Warren Buffet


If you are already aware of Benjamin Graham, you can skip this section.

Benjamin Graham is considered as father of value investing and guru of Warren Buffet. As per Benjamin one should not just filter on P/E Ratio, but focus more on earnings yield and ratios of equity and total assets. Companies filtered on these criteria has high potential where their share prices can go up and investors are rewarded.

I still remember one of the nice quote from him that “an individual investor should act consistently like an investor and not as a speculator”.

How Benjamin Graham used to filter stocks for value investing?


He used to pick-up value stocks based on certain key filters indicated below.

1) Benjamin Graham’s main focus was on Earnings Yield. As per him, a company can do well if earnings yield is twice that of AAA rated corporate bonds yield. Means if a company earns above this level, it has good potential that its stock price would go up. E.g. if corporate bonds yield is 7%, then 14% minimum yield can be way to filter a good stock.

2) His second focus was on ratio of shareholders equity to total assets. How much company owes / what are its debt? As per him, if company owns twice of what it owes, it can have good future. E.g. if company debt ratio is 0.5 (twice it owns), it can be considered as good company.

How Benjamin Graham Principles can be applied in Indian Stock Markets?


Now let us see how these principles can be applied in Indian Stock Markets to filter the stocks in India.

1) Currently we have Corporate Bond Yield of 6% to 7% for AAA rated bonds. Hence as per Benjamin Graham, earnings yield should be twice of corporate bond yield i.e. 14%. Means, company should have minimum of 10% to 14% earnings yield to pass this test.

2) Earnings Per Share (EPS) of over 10% CAGR in last 5 years.

3) Return of Equity (RoE) for the last 5 years should be over 14%.

4) Total debt of the company should be half of the book value (Debt to equity ratio should be less than 0.5)

5) Current Ratio (Assets over liabilities) should be higher than 2

6) Total debt should be less than 2 times of current asset value (CAV).

Top 5 Stocks to buy in 2017 – Based on Benjamin Graham principles (Warren Buffet Guru)


Now let us pickup stocks in India that matches these filters of Benjamin Graham. Let us see how such stocks pass these tests.

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Top # 1 – R Systems International – CMP Rs 43


R Systems Intl is in the Computers – Software Medium & Small sector. The current market capitalisation stands at Rs 556 crore.

1) Earnings Yield is 21%. As per Benjamin Graham filter it should be minimum of 10% to 14% (twice corporate bond yield). This stock has passed the test.

2) Earnings Per Share (EPS) growth is 20% CAGR in last 5 years. As per Benjamin Graham filter, 5 Years EPS should be minimum of 10%. This stock has passed the test.

3) Average Return of Equity (RoE) is 26%. As per Benjamin Graham filter, it should be over 14%. This stock has passed the test.

4) Its Current Ratio is 2.3 (Debt to Equity Ratio).  As per Benjamin Graham filter it should be over 2. This stock has passed the test.

5) Its total debt is Rs 2 Crores and current asset value Rs 118 Crores. As per Benjamin Graham filter, debt should be less than twice the current asset value. This stock has passed the test.

6) Below is the share price movement in the last 1 year (Source Moneycontrol.com)

R Systems Intl Ltd - Top 5 Stocks to buy in 2017 based on Benjamin Graham principles

Top # 2 – Chaman Lal Setia Exports – CMP Rs 94


Chaman Lal Seti is in the Food Processing sector. The current market capitalisation stands at Rs 488 crore.

1) Earnings Yield is 13%. As per Benjamin Graham filter it should be minimum of 10% to 14% (twice corporate bond yield). This stock has passed the test.

2) Earnings Per Share (EPS) growth is 38% CAGR in last 5 years. As per Benjamin Graham filter, 5 Years EPS should be minimum of 10%. This stock has passed the test.

3) Average Return of Equity (RoE) is 29%. As per Benjamin Graham filter, it should be over 14%. This stock has passed the test.

4) Its Current Ratio is 2.9 (Debt to Equity Ratio).  As per Benjamin Graham filter it should be over 2. This stock has passed the test.

5) Its total debt is Rs 24 Crores and current asset value Rs 87 Crores. As per Benjamin Graham filter, debt should be less than twice the current asset value. This stock has passed the test.

6) Below is the share price movement in the last 1 year (Source Moneycontrol.com)

chaman Lal Setia Exports Ltd - Top 5 Stocks to buy in 2017 based on Benjamin Graham principles

Also Read: 10 Good Midcap Stocks that posted amazing Q4 Results in 2017

Top # 3 – Good Year India – CMP Rs 891


This stock is part of Automobiles and Ancillaries Industry.

1) Earnings Yield is 13%. As per Benjamin Graham filter it should be minimum of 10% to 14% (twice corporate bond yield). This stock has passed the test.

2) Earnings Per Share (EPS) growth is 16% CAGR in last 5 years. As per Benjamin Graham filter, 5 Years EPS should be minimum of 10%. This stock has passed the test.

3) Average Return of Equity (RoE) is 22%. As per Benjamin Graham filter, it should be over 14%. This stock has passed the test.

4) Its Current Ratio is 2.1 (Debt to Equity Ratio).  As per Benjamin Graham filter it should be over 2. This stock has passed the test.

5) Its total debt is nil and current asset value Rs 16 Crores. As per Benjamin Graham filter, debt should be less than twice the current asset value. This stock has passed the test.

6) Below is the share price movement in the last 1 year (Source Moneycontrol.com).

good year india - Top 5 Stocks to buy in 2017 based on Benjamin Graham principles

Top # 4 – Sasken Technologies – CMP Rs 492


Sasken Tech is in the Computers – Software sector. The current market capitalisation stands at Rs 841.90 crore.

1) Earnings Yield is 13%. As per Benjamin Graham filter it should be minimum of 10% to 14% (twice corporate bond yield). This stock has passed the test.

2) Earnings Per Share (EPS) growth is 12% CAGR in last 5 years. As per Benjamin Graham filter, 5 Years EPS should be minimum of 10%. This stock has passed the test.

3) Average Return of Equity (RoE) is 21%. As per Benjamin Graham filter, it should be over 14%. This stock has passed the test.

4) Its Current Ratio is 2.9 (Debt to Equity Ratio).  As per Benjamin Graham filter it should be over 2. This stock has passed the test.

5) Its total debt is nil and current asset value Rs 177 Crores. As per Benjamin Graham filter, debt should be less than twice the current asset value. This stock has passed the test.

6) Below is the share price movement in the last 1 year (Source Moneycontrol.com).

Sasken Technologies Ltd - Top 5 Stocks to buy in 2017 based on Benjamin Graham principles

Top # 5 – KPIT Technologies – CMP Rs 128


KPIT Tech is in the Computers – Software Medium & Small sector. The current market capitalisation stands at Rs 2,528 crore.

1) Earnings Yield is 14%. As per Benjamin Graham filter it should be minimum of 10% to 14% (twice corporate bond yield). This stock has passed the test.

2) Earnings Per Share (EPS) growth is 10% CAGR in last 5 years. As per Benjamin Graham filter, 5 Years EPS should be minimum of 10%. This stock has passed the test.

3) Average Return of Equity (RoE) is 21%. As per Benjamin Graham filter, it should be over 14%. This stock has passed the test.

4) Its Current Ratio is 2.2 (Debt to Equity Ratio).  As per Benjamin Graham filter it should be over 2. This stock has passed the test.

5) Its total debt is Rs 252 Crores and current asset value Rs 525 Crores. As per Benjamin Graham filter, debt should be less than twice the current asset value. This stock has passed the test.

6) Below is the share price movement in the last 1 year (Source Moneycontrol.com).

KPIT Technologies Ltd - Top 5 Stocks to buy in 2017 based on Benjamin Graham principles

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Should you invest in these Top 5 Stocks in 2017?


Since markets is at peak, I would not advice investors to invest them right away. However, you can keep investing in such stocks as and when there is market correction happening. These are good stocks to start with. However, one can go little deep dive and check any risks involved in investing in these stocks. This would help you to filter and make them as multibagger stocks.

Disclaimer: I don’t own any of these stocks as of now. However, I keep recommending stocks to my friends /collegues and on the blog comments or through email to the readers who would have posted a query. However, I have an intention to buy these stocks during market corrections.

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Suresh

Top 5 Stocks to buy in 2017 – Based on Benjamin Graham principles (Warren Buffet Guru)

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