Steps to choose fundamentally strong stocks

Hitesh Pattanayak
3 min readNov 14, 2023

Disclaimer: This is not a stock recommendation or the process to choose is not full-proof and does not gurantee all-weather stocks. The idea is to understand the underlying concepts. Also this is based on experiences with Indian stock exchanges.

This document focuses on identifying stocks with the potential for long-term returns, making them suitable for long-hold investments.

Given the vast number of stocks in the market, pinpointing lucrative investment opportunities can be challenging.

However, by posing pertinent questions and employing specific filters and statistics, we can pinpoint such stocks.

To facilitate this process, access to data and a mechanism for applying these filters is essential, and Tickertape serves as a reliable platform for this purpose.

At the moment of writing this blog, we have all total of 4723 stocks listed in Indian Exchanges.

So lets start applying our filters:

  1. Benchmark: Nifty 500
  2. Market cap: Greater than 10000 crores
    The rationale for implementing the aforementioned 2 filters is our focus on stocks that promise satisfactory returns with lower to medium risks.
    We now start filtering fundamentally good stocks.
  3. 5 year net revenue: do not fall for this.
  4. 5 year net profit margin: greater than 10 %.
    Opting for net profit margin over revenue stems from the recognition that merely generating revenue without corresponding profits signifies unsustainable growth in the short term. Conversely, if a company demonstrates increased profits despite lower revenue, it reflects effective management and quality products. This is indicative of the company’s ability to sell products successfully even with a higher profit margin.
  5. 5 years historical EPS (earnings per share): greater than 10 %.
  6. 5 years average return on equity: greater than 15 %. Otherwise one should go and invest in passive index funds that require almost no monitroing and relatively safe. Although there is no gurantee on this but we are relying on fundamentally good stocks.
  7. Dividend yield vs sub-sector: lesser than 2 %. We should prefer stocks that have lower dividend yields w.r.t sectoral dividen yield. If a comapany gives out excessive dividends, it means they are choosing to keep their investor happy over re-investing for future growths.
  8. Beta: lesser than 1.5 %. Here we are elliminating riskier stocks. Beta indicates how much sensitive is a stock w.r.t the market conditions, which means if market goes down/up how much is that going to affect the stock. These stocks are less cyclic and more stable.
  9. Pledged promoters holdings: less than 5 %. How much promoters have pledged stocks to get loans. The higher the number the greater the risk. For a reputed company, the money can be arranged without having to pledge stocks.
  10. Long term debt / Total Equity: This is a very sector specific paramenter. Sectors like Financial, Real Estate or Power sectors companies tend to take huge loans considering the nature of business. So we cannot pin point a relative number. So do a comparsion and choose accordingly.
  11. Percentage Buy Reco %: More than 50 %. This checks what analysts are trying to say about the companies. Since common individuals are not necessarily experts, its good to look what experts say.
  12. Difference of P/E and sector P/E ratio: less than 0. This indicates that the stock is undervalued. Undervalued stocks have always opportunity to rise.
  13. Price to intrinsic value: More than 50 %. This indicates that which companies are significantly undervalued to what they deserve.

At the end we will arrive at 10–12 fundamentally strong stocks to invest in to get more than 15% of returns. Which beats the returns of traditional investment asset classes by a good margin. Also these kind of stocks helps us sleep well considering they operate on good factors, have ability to transmit inflatory price hikes, have good management personnel, etc.

As always, the list will keep changing on a quarter-to-quarter and year-to-year basis. So being vigilant and operating once a year/quarter basis will serve us good in a longer run.

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Hitesh Pattanayak

Senior Product Engineer @ Infracloud Technologies | 7 years of experience | Polyglot | Backend Developer | Kubernetes and AWS practitioner | Finance Enthusiast