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How to identify High-Return Good Stocks to invest during market crash:
How Identifying a high-Return good stock for the investment is one of the prime challenges for newbie investors.
Experts say, during times of market crash, an investor has to stay calm and look at a market crash as an opportunity to invest in quality stocks, as we get high-return good stocks at discounted rates. However, during the market is falling, it is difficult for normal investors to identify a high-return good stock from a fundamentally weak stock in the market.
Following two methods will help any newbie investor to easily identify high-return good stocks at the time of the market crash. In addition, we are covering 5 golden rules of investment that need to follow to identify quality stock for investment.
Method 1: High-return good Stock Identification through mutual fund portfolio.
Follow the below simple step, detail explanation with example share below help the newbie investors to Identify a high-return good stock.
STEP 1: Identify the top-rated Mutual funds, who make the higher returns.
STEP 2: Check the portfolio and identify the common companies in top-rated funds.
STEP 3: List the top few identified companies, on the basis of performance.
STEP 4: Check the pattern in 2020 market crash and recovery rates.
STEP 5: Select companies having a higher recovery rate for investment.
STEP 6: Diversify the fund and Invest in the selected companies.
Method 2: Basic fundamental Analysis for Identifying a high-return good stock.
Check the following basic analysis, which helps newbie investors to select high-return good stock for investment.
- Promoter holding in company:
- DEBT of a company:
- Return on Equity:
- Sales and Profit Growth:
5 Golden rules of investments in high-quality stock.
- Invest in businesses domain, which you understand:
- Invest in Companies that dominate in respective Industries
- Don’t Invest all you have in one Sector.
- Buy Stocks with a Solid Track Record.
- Invest in companies with good Dividends payouts.
A smart investor can identify high-return good stocks in the stock market during the market crash simply by following these stock identification mentioned. If investors, identify the quality stock and invest in it, when the market volatility ends, quality stocks will generate higher returns very sooner.
What are the Benefits of a Market crash or Bear Market?
During a market crash, we can get quality stocks at a lower price. If you continuing to purchase quality stocks during the bear market, the higher the probability that you will get a better return over the long run.
During market crash opportunity, most of the investors are tempted to invest in higher fallen stocks, with an expectation that, during the bull market they can make more money. This may work for some stocks and generate returns but these strategies are fully based on the luck of the investor.
High-Return Good Stock Identification through Mutual Fund portfolio explanation with Example for the better understanding:
During the coronavirus (COVID-19) pandemic, some stocks are affected temporarily and rebound in a few months, below financial engineering is done on the basis of performance analysis of the companies during the time period from Feb 2020 to Feb 2021.
Each step is explained with respective plots and charts and the actual data of the 2020 market crash for a better understanding.
Identify the top-rated Mutual funds:
First, we have to identify the top-rated few mutual funds.
The primary criteria in selecting the top-rated mutual funds are shortlisting the mutual funds on the basis of the Financial Ratios, Past Performance, Fund Manager track record, etc. Currently, there are many online platforms like money control are available to identify and select the top-rated mutual funds and high-return good stocks directly.
Below chart showing few selected mutual funds from the online portals and their type and the return rates over the period.
|Scheme Name||Category Name||AuM (Cr)||1W||1M||3M||6M||YTD||1Y||2Y||3Y||5Y|
|SBI Contra Fund - Direct Plan - GrowthContra Fund||Contra Fund||1,855.67||0%||-2%||5%||39%||10%||80%||16%||9%||13%|
|BOI AXA Tax Advantage Fund - Direct Plan - GrowthELSS||ELSS||417.39||1%||0%||5%||26%||8%||62%||26%||12%||18%|
|Canara Robeco Equity Tax Saver - Direct Plan - GrowthELSS||ELSS||1,961.37||1%||-2%||2%||24%||6% ||56%||20%||16%||17%|
|Mirae Asset Tax Saver Fund - Direct Plan - GrowthELSS||ELSS||6,934.49||1%||-2%||3%||27%||8%||66%||20%||17%||22%|
|Quant Tax Plan - Direct Plan - GrowthELSS||ELSS||106.05||1%||4%||11%||44%||18%||109%||33%||23%||22%|
|PGIM India Flexi Cap Fund - Direct Plan - GrowthFlexi Cap Fund||Flexi Cap Fund||774.12||1%||1%||4%||29%||8%||78%||26%||17%||18%|
|UTI Flexi Cap Fund - Direct Plan - GrowthFlexi Cap Fund||Flexi Cap Fund||16,717.24 ||0%||-1%||2%||30%||5%||69%||21%||16%||17%|
|Axis Focused 25 Fund - Direct Plan - GrowthFocused Fund||Focused Fund||15,007.35||0%||-2% ||-2%||23%||-1%||52%||17%||12%||18%|
|IIFL Focused Equity Fund - Direct Plan - GrowthFocused Fund||Focused Fund||1,623.06||0%||-3% ||-1%||23%||3%||55%||22%||18%||19%|
|Canara Robeco Emerging Equities - Direct Plan - GrowthLarge & Mid Cap Fund||Large & Mid Cap Fund||8,179.01||0%||-2% ||2%||25%||5%||57%||17%||11%||18%|
|Mirae Asset Emerging Bluechip Fund - Direct Plan - GrowthLarge & Mid Cap Fund||Large & Mid Cap Fund||16,190.41||1%||-1%||4%||30%||9% ||66%||21%||17%||21%|
|Axis Bluechip Fund - Direct Plan - GrowthLarge Cap Fund||Large Cap Fund||24,598.26||0%||-2%||-2% ||19%||-1%||42%||17%||15%||17%|
|Canara Robeco Bluechip Equity Fund - Direct Plan - GrowthLarge Cap Fund||Large Cap Fund||2,156.28||0%||-2%||0%||22%||3%||50%||19% ||16%||17%|
|Edelweiss Large Cap Fund - Direct Plan - GrowthLarge Cap Fund||Large Cap Fund||231.73||0%||-2% ||-1%||21%||2%||52%||14%||12%||14%|
|Axis Midcap Fund - Direct Plan - GrowthMid Cap Fund||Mid Cap Fund||10,431.65||1%||0% ||6%||28%||8%||56%||23%||17%||19%|
|PGIM India Midcap Opportunities Fund - Direct Plan - GrowthMid Cap Fund||Mid Cap Fund||1,107.77||1%||0%||9%||38%||15%||94%||32%||17% ||18%|
|Quant Active Fund - Direct Plan - GrowthMulti Cap Fund||Multi Cap Fund||259.96||1%||5%||12%||42%||18%||100%||31%||21%||20%|
|BOI AXA Manufacturing & Infrastructure Fund - Direct Plan - GrowthSectoral/ Thematic||Sectoral/Thematic||46.14||1%||-1% ||8%||34%||13%||65%||18%||5%||15%|
|DSP Natural Resources and New Energy Fund - Direct Plan - GrowthSectoral/ Thematic||Sectoral/Thematic||513.81||3%||9%||16%||58%||24% ||93%||18%||10%||20%|
|Invesco India Infrastructure Fund - Direct Plan - GrowthSectoral/ Thematic||Sectoral/Thematic||109.77||-1%||-1%||5%||36%||11%||48%||16%||8% ||14%|
|Sundaram Rural and Consumption Fund - Direct Plan - GrowthSectoral/ Thematic||Sectoral/Thematic||1,336.00||0%||-3%||-2%||18%||0% ||39%||8%||4%||13%|
|Kotak Small Cap Fund - Direct Plan - GrowthSmall Cap Fund||Small Cap Fund||3,423.32||0%||0% ||15%||47%||20%||108%||30%||15%||18%|
Identify common companies in Portfolio:
Once the mutual funds are selected, we need to check the portfolio of each of the mutual funds and identify the common companies that come among the selected mutual funds.
As these mutual funds are managed by well-qualified fund managers, they will select the high-return good stocks for the portfolio on the basis of their experience and analysis skills. Moreover, most of the funds have many fund managers, hence the fund selection will be more effective.
The below chart shows the top 10 high-return goodstocks in the portfolio of each of the selected Growth-ELSS mutual funds. From this chart, we can identify the common companies in these mutual funds.
- BOI AXA Tax Advantage Fund – Direct Plan – GrowthELSS
- Canara Robeco Equity Tax Saver – Direct Plan – GrowthELSS
- Mirae Asset Tax Saver Fund – Direct Plan – GrowthELSS
- Quant Tax Plan – Direct Plan – GrowthELSS
|BOI AXA Tax Advantage Fund - Direct Plan - GrowthELSS||Canara Robeco Equity Tax Saver - Direct Plan - GrowthELSS||Mirae Asset Tax Saver Fund - Direct Plan - GrowthELSS||Quant Tax Plan - Direct Plan - GrowthELSS|
|HDFC Bank Ltd.||Infosys Ltd. ||HDFC Bank Ltd.||Stylam Industries Ltd.|
|Infosys Ltd. ||ICICI Bank Ltd.||Infosys Ltd.||Fortis Healthcare Ltd.|
|ICICI Bank Ltd.||HDFC Bank Ltd.||ICICI Bank Ltd. ||Thyrocare Technologies Ltd.|
|Pi Industries Ltd.||State Bank Of India ||Axis Bank Ltd.||Infosys Ltd.|
|Divis Laboratories Ltd.||Larsen & Toubro Ltd.||Tata Consultancy Services Ltd.||Tata Consultancy Services Ltd.|
|Cholamandalam Investment & Finance Co. Ltd.||Bajaj Finance Ltd.||Bharti Airtel Ltd.||Sun Pharmaceutical Industries Ltd.|
|Reliance Industries Ltd.||Axis Bank Ltd.||State Bank Of India||J.b. Chemicals & Pharmaceuticals Ltd.|
|Housing Development Finance Corporation Ltd.||Tata Consultancy Services Ltd.||Maruti Suzuki India Ltd.||Tech Mahindra Ltd.|
|Kotak Mahindra Bank Ltd.||Divis Laboratories Ltd.||Reliance Industries Ltd.||Bharti Airtel Ltd.|
|Navin Flourine International Ltd.||Voltas Limited||J.K. Cement Ltd.||Aurobindo Pharma Ltd.|
Common company in all 4 Mutual funds:
The following company is identified in all the 4 mutual funds selected.
- Infosys Ltd.
Common company in 3 funds out of total 4 funds:
Below 3 companies are identified in all the 3 mutual funds selected.
- HDFC Bank Ltd.
- ICICI Bank Ltd.
- Tata Consultancy Services Ltd.
Common company in 2 funds out of total 4 funds:
Following 5 companies are identified in 2 mutual funds selected.
- Reliance Industries Ltd.
- Divis Laboratories Ltd.
- State Bank Of India.
- Axis Bank Ltd.
- Bharti Airtel Ltd.
Now we get 10 stocks which we can invest in, from this list we can choose the stocks on the basis of their individual performance.
Performance Pattern from April 2020( market crash) to Feb 2021 (Market recovery):
The below technical charts show the performance of each selected high-return good stock over the time of last five years. A line chart will help the investors to easily understand the performance of the companies over the period of time.
HDFC Bank Ltd.
ICICI Bank Ltd.
Tata Consultancy Services Ltd.
Reliance Industries Ltd.
Divis Laboratories Ltd.
State Bank Of India.
Axis Bank Ltd.
Bharti Airtel Ltd.
Evaluation of top-performing companies:
Once we identify the top-performing high-return good stocks, we can invest as per our investment plan.
The below table shows the performance of the companies from Feb 2020 to Feb 2021 and their recovery rate.
|COMPANIES||BEFORE CRASH (Feb 2020)||Crash (March 2020 )||After Crash (Feb 2021)||Recovery Rate (Crash to recover)|
|Infosys Ltd.||790 ||580||1300||124%|
| HDFC Bank Ltd. ||1230||813||1590||96%|
| ICICI Bank Ltd. ||545||287||643||124%|
|Tata Consultancy Services Ltd.||2183 ||1656||3188||93%|
|Reliance Industries Ltd.||1467 ||1010||2170||115%|
|Divis Laboratories Ltd.||2217 ||1859||3703||99%|
|State Bank Of India||326||177||397 ||124%|
|Axis Bank Ltd.||744 ||325||749||130%|
|Bharti Airtel Ltd. ||562||428||585||37%|
It is ideal to diversify the investment and Invest in the top selected 5 high-return good stocks from the different domains. In the selected 5 companies, 50% of total investment can invest in top 2 companies and 35% we can invest in next 2 companies and 15% in last company.
If you are planning for a large amount, you can plan for 7 to 8 companies and follow a diversification ratio of 50-35-15 percentage. Even it is better to invest in the SIP model investment to get the advantage of money cost averaging.
Basic fundamental Analysis for Identifying high-return good stocks:
Basic fundamental analysis is an easy way to identify high-return good stocks. While choosing the company for investment, an investor can consider all the below fundamental analysis factors or a mix of some factors or a single factor. These factors should not be the sole criteria for selection to invest, an investor can look for all the fundamental analysis factors to confirm the investment decisions.
Below are the few factors every investor needs to look at in selecting the stock before investing.
Promoter holding in company:
Promoter holding is the percentage of holding of the promoters in the business. High the promoter holding, better is the confidence of the promoters in the business. If promoters are confident, the chance of higher growth of the companies and higher return, hence it will be high-return good stocks.
- Investors should look for companies with a high level of promoter holding lower pledging or dept.
DEBT of a company:
Sometimes companies take debt for the expansion of the companies business, if the company is meeting the obligations and repaying the Debt on time, it can be considered as a healthy dept. As Debt is a fixed obligation to the company and they need to pay irrespective of the market situation, hence it affects the performance of the company directly.
- An investor should choose the companies for investment with zero or lower Dept or companies paying out the Dept regularly.
Return on Equity:
Return on equity (ROE) is calculated by dividing the net income of the company by shareholders’ equity holding, this shows the measure of financial performance of a company. A high percentage indicates the company is generating more amounts of profit from its equity capital, hence it will be a high-return good stock.
- Investors can invest in a company that has a higher Return on equity (ROE)or higher Return on equity compared to the industry average.
Sales and Profit Growth:
Sales and profit growth indicates how much is the company’s business and how much profit companies are generating in a year. Higher or growing sales and profits percentage indicate that the company is growing in the market. A company with higher profit can consider as high-return good stocks.
- An investor should consider investing in a company that has higher or growing Sales and profit or more than the industrial average.
In addition, to the above basic analysis, to make a perfect investment decision, investors can check for positive corporate actions for respective companies.
5 GOLDEN RULES FOR HIGH RETURN GOOD STOCK SELECTION IN PORTFOLIO.
Below are the 5 golden rules, which every investor can follow to create a high-return good stock portfolio in your Demat account. These rules are very generic and easy to follow.
Rule 1: Invest in a businesses domain that you understand:
We can see thousands of different companies that have a very high rate of growth and many people buy stock of it. But if you don’t know the business of these companies, it is ideal to stay away from it. Follow are the things that you can consider during identifying high-return good stocks.
- Some are well-known companies, whose products, and services, which we are regularly consuming. In these companies, we can invest as we are also a customer for them and we know, how valuable their products are.
- There are some companies engaged in a business where we have average understanding through our domain of expertise, personal interest, etc. In these companies, we can invest, as we have knowledge on, how these industries are performing and future scope, even if we are not using any products or services of these companies.
Always try to select a stock in either one of the above categories.
Rule 2: Invest in Companies that dominate in respective Industries
If you check the portfolios of most performing mutual funds, some companies we can see in common, which are from different domains, this is because these companies are dominating in their respective industries and these companies will be high-return good stocks.
- These high-performing companies have a track record of doing business in their respective domain consistently in the past and because of it, these companies will continue their excellent success.
- Products of these companies are well known to the customers, hence the chance of getting repeat business for these companies is much more than the other companies in the respective domain.
Even though there is no guarantee that going forward these companies will continue to dominate. But the chance is more due to their current capital and know-how to develop more winning products and services and moreover their current customer base.
Rule 3. Diversification:-Don’t Invest all you have in one or Two Sectors.
Even though the rule of diversification is against the previous recommendation to invest in industries that you understand, it must follow.
- Diversification in your portfolio is important, because, if we invest all we have in a very small number of industries, there will be a chance, everything we may lose over the night, even if we are very strong in that industry.
- Diversification helps us to invest in different high-return good stocks.
If you plan to hold about 8 different stocks, it is ideal to diversify your investment among 4 or 5 different industries. 2 to 3 stocks you can buy from the industry in which you are most aware and the remaining stocks of the market leaders of the remaining industries. Even if how confident you are in a particular industry, it is ideal to invest only less than 40% in a single industry.
As we cannot predict, the performance of any specific stock or industry, even while the market is flourishing, it is ideal to diversify your funds among different industries and stocks in an industry.
Rule 4. Buy Stocks with a Solid Track Record
It will be ideal if we can buy penny stocks which can become multi-bagger stocks in few months, but it will remain a very ideal condition to workout, the chance of penny stock to grow faster than a proven track record stock is lesser.
- The “Thumb rule in the stock market” of making money is not to lose any. The chance of negative outcomes for any unproven company that’s relatively new is more than a well-established proven stock.
If a company has a steady track record of increasing both profit and revenues on a consistent basis, it will have more chances to continue it. Hence these are high-return good stocks and it is ideal to invest in these proven companies than in a new company, to get a higher guarantee of return over a long time.
Rule 5. Invest in companies with good Dividends payouts.
A company that pays dividends regularly to the investors is consistent as a healthy company and its stock as high-return good stocks. Dividends are a form of regular income for the investors, in addition to the capital gain which they can get during the selling of the stocks.
- Dividend payout represents the return of a portion of a profit of a company to investors.
In general, the companies, who can provide the dividend regularly to the investors, able to continue the operations, and expand the business, even after returning some portion of the profits. Hence these companies will have a higher chance of growth and stock value appreciation.
It is ideal to invest our major portion in “dividend growth stocks,” to make an optimal combination in our portfolio.
If you find it difficult to follow the mutual fund method of identifying the high-return good stock from the mutual funds, you can easily identify the suitable companies by following the second method “Easy ways to identify quality stocks” in this blog.
Identifying quality stock is one of the qualities of the stock investors and it is the pillar stone creating a perfect investment portfolio.
If you would like to understand more about the stock market and investments, we recommend reading investment learning books that we recommend for the readers.
For more specif to the Indian market, we recommend reading, share market and investment books by the Indian Authors.