1) Ensure stocks have strong ROOTS, i.e. robust balance sheets with low debt. Volatile times might cause fragile companies to collapse. Having low debt helps tide over bad times.
2) Ensure promoters are aligned to the company with significant shareholding and low pledging.
3) Ensure companies have consistently high returns on equity, which proves that the company’s cash engine is ploughing money back to grow the company and not into promoters’ pockets.
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4) Ensure adequate ‘margin of safety’ so that they do not end up buying an expensive company in a bull cycle just because the price is seen as going up. Weak ROOTS can cause such stocks to implode.
5) Check if companies are leaders in implementing technology for process automation. In an era where software is seen as eating the world, companies can quickly become irrelevant if they ignore technology.
6) Check for pricing power because companies that are able to hold or increase prices in recessionary periods have been proven to compound well over time.
Describing the investment philosophy of “ROOTS & WINGS” as a handy framework for picking stocks, Medury said “companies with strong ROOTS, i.e. robust balance sheets, aligned promoters, and consistently high return on equity and with growing sales, cashflows, operating income, and profits on the wings side will do well.”
In addition to this, the wealth manager said one should look for companies that
in ABCDE, which is an acronym for Advocacy by customers, Brand power, Cost leadership & Pricing power, Distribution, and Engineering & technology.
“While ROOTS & WINGS is a numbers-driven approach, ABCDE adds a qualitative flavor to the portfolio selection. A combination of quantitative and qualitative approaches can help an investor construct a high-quality portfolio that reduces emotional bias and makes for better decisions,” says the MBA from IIM Bangalore.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)