Both bear and bull markets offer tremendous opportunities to make money. The key to success is finding a stock which can generate profits under a variety of conditions. However, identifying such stocks is easier said than done. Limited research coverage and lack of actionable information on companies make it difficult to spot multibagger stocks. At the same time, it also impacts price discovery for majority of stocks.
Analysts do not cover all listed companies in India. They generally focused on large-caps and popular stocks. Their research coverage revolves around top 500 companies as against 2,500 to 3,000 stocks that are traded at exchanges daily. On the other hand, actionable information, derived from analysis of company’s fundamentals, can help in investment decisions. However, going through financials of all companies to derive actionable information is a cumbersome process and requires specialized skills. For individual investors, it would be a daunting task.
To help investors, Heckyl has developed Health Score, which measures financial health of all listed companies. It is a composite financial performance score computed by analyzing financials, key ratios and performance indicators. It is computed on a daily basis so as to capture latest available fundamental information. Moreover, it finds out whether the company is leading or lagging within particular industry sector.
Heckyl’s proprietary Health Score is made up of five main components – value, growth, past performance, quality and dividend. It assigns score on scale of 0 to 100. Companies falling into lowest score range of 0 to 20 are characterized as fair, while score of 21 to 40 is considered as good. Companies with 41 to 60 score are described as very good. On the other hand, companies with score of 61 to 80 are characterized as excellent, while highest score range of 81 to 100 is considered as perfect. This categorization helps investors to quickly judge fundamentals of any company.
To highlight how investors can find out new investment ideas from neglected stocks, we conducted a study on stocks having market capitalization of over Rs 100 crores, but which are not part of top 500 group. We analyzed health score and market capitalization for 825 companies from Dec. 31, 2015 to Dec. 9, 2016. To measure performance, we first shortlisted companies with health score of 60 and above. Then, we excluded companies reporting a drop in health score from December 2015 levels. Finally, we left with 71 companies meeting above criteria. Out of these 71 stocks, 56 companies witnessed an increase in market capitalization following improvement in health score.
[Image 1: Top 10 Health Score gainers’ market cap performance]
Let us understand, how investors can use health score with help of case study on Seshasayee Paper & Boards.
Chennai based paper and paper board manufacturer has delivered excellent financial performance with sequential growth in earnings for the past four quarters. Net profit for the September 2016 quarter jumped 4.27 times to Rs 30.70 crores, when compared with the same period last year.
[Image 2: Seshasayee Paper’s market cap performance vis-à-vis health score movement]
Seshasayee Paper witnessed consistent improvement in health score during this year on the back of robust earnings performance. Health score increased from 40 at the end of December 2015 to 62 on Dec. 9, 2016. During the same period, company’s market cap more than tripled to Rs 927.61 crores.
[Image 3: Composition of health score for Seshasayee Paper]
Seshasayee Paper’s Health Score Performance on Five Components
Value identifies whether the stock is cheap or expensive by analyzing company on five key valuations parameters. Seshasayee Paper scored 12 out of 20 on value.
[Image 4: Value]
Growth measures performance of company’s sales and earnings on five key indicators. Seshasayee Paper scored 20 out of 20 on growth.
[Image 5: Growth]
Past performance identifies whether the company is leading or lagging on five key profitability ratios within particular industry sector. Seshasayee Paper scored 8 out of 20 on past performance.
[Image 6: Past performance]
Quality assesses balance sheet strength on five key indicators. Seshasayee Paper scored 10 out of 20 on quality.
[Image 7: Quality]
Dividend finds whether the company is good at rewarding investors or not by analyzing five key ratios. Seshasayee Paper scored 12 out of 20 on dividend.
[Image 8: Dividend]
By reviewing health score and its five components for companies such as Seshasayee Paper, investors can arrive at appropriate investment decisions.
Health Score is a very useful tool for quick assessment of fundamentals of any company. It not only helps in finding potential multibagger from neglected stocks, but also gives an early warning about deteriorating fundamentals of a company.
From broker’s perspective, presenting flat data is no longer sufficient to help users for exploring the world of investment as we moved into a time of smart analysis and actionable data.
At the same time, the interpretation and presentation of the underlying data is crucial for both brokers and their clients. By educating the end user in how to be a better investor, broker can develop and grow their own business.
This article was first published in January – 2017 edition of BSE Brokers Forum Magazine.
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