Last Updated on 26/02/2022 by Deepak Singla
Everybody wants to invest in good stocks and receive guaranteed wealth growth. You’ll often find people advising you to invest in long-term stocks to avail of the benefits of compound growth. But, not everyone can find a handful of the right stocks to invest in. And with the current status of the Indian stock market, it becomes all the more difficult.
The present Indian share market has witnessed some dramatic movements in 2020 induced due to the COVID-19 panic sell-off. And it also broke the records be reaching new highs in December 2020.
There is a procedure that you must follow to find the best stocks to buy in the Indian stock market 2021. This blog will shed light on the same along with providing you with some of the top stocks to buy in 2021.
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To be able to screen the right stocks, the first you need to know is what is meant by a potential stock. It is nothing but the stock that can yield your desired return. Such stocks are known as undervalued stocks
But, the question is how will you know which stock will give you the expected returns. Let’s try to understand it via an example:
Let’s say there is a stock with an intrinsic value of INR 100 and the current market price at INR 85.
Discount to Intrinsic Value: First, you have to calculate the discount at which it is trading to the fair price. In this case, it is 15% and so, this means that in the upcoming months, this stock can be estimated to grow by 15% at the very least.
Future Earnings Growth: Moreover, if this company can also increase their EPS (earnings) at 12% / share over the next 5 years. Then, there will be an extra price growth of 12% at least for the person who purchased the stock at INR 85 per share. This growth will be added every year for the next 5 years.
Hence, the stock taken in our example has the potential to bring in a revenue of at least 12% to 15% per annum over the next five years.
Parameters To Consider While Finding the Best Stocks for Long Term Investment
While looking for the best stocks to invest in, you must consider the strong businesses first. The reason being that the best stocks will obviously represent strong and stable businesses. But, the definition of a strong company might vary from one person to another. However, here are some general parameters that you would want to look at:
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1. Size of the Business
Keep in mind that large organizations reflect large shares in the market. Let’s say that a given market has around 100 customers and 4 companies operating in it. If one of these companies starts serving around 40% of the consumers, then this company is stronger when it comes to market share or size. Such strong businesses are known as Blue Chip companies.
This is the amount of profit a company generates for every rupee it spends. Let’s understand this via an example. If there are 2 companies X and Y who have INR 100 each to run. Now, if X generates a profit of INR 5 and B generates a profit of INR 7, then B is the stronger company in terms of profitability.
3. Company Growth Rate
Every investor loves investing in a growing company. If a company is growing visibly, then it is bound to attract investors regardless of how small or big it is. This is the reason why the highly profitable businesses, at times, under perform in the stock market. So, a fast-growing company is good for stock investment.
4. Assessing the Business Sector
The investor needs to analyze the sector in which the company conducts business. This is important to be able to understand which sector has the potential to grow. Also, you need to know how many participants the sector has and the competition to be faced for growth.
You should look for businesses and companies that can build sustainable models, strong enough to compete against other big players in the industry. There should be a balance between industry potential and the competition a business faces to analyze growth potential.
5. Potential of the industry
As an investor, you also have the responsibility to assess whether the company can generate enough growth or not. Also, you have to analyze if the sector that the industry is based on is likely to experience growth in the future or not. For instance, the oil marketing companies do not have much hold over the prices of oil because those depend on global prices and government decisions.
6. Regulation And Dependency
Regulation is important to protect customer and government interests in a company. But, too much regulation will leave hardly anything for the company’s shareholders. For example, the coal industry in India is heavily regulated which gives mining and pricing rights to Coal India only. So, such companies do not earn returns more than the predefined limits. Higher the regulation, the higher the risk that the government’s control over revenues and income will affect the company’s growth drastically.
7. Management Quality
One of the most important aspects to consider while analyzing a business is its management style and quality. Efficiently managed teams tend to triumph over several challenges and push their business towards higher growth. So, you need to assess if the management staff and the board of directors are well enough or not. The better standards the corporate has, the more protected the shareholders of the business are. You can analyze this via the annual report.
8. Price Evaluation
After you have considered all the above factors, you need to look into the price of the shares. Make it a rule to never buy overvalued stocks. Because overvalued stocks can never yield good returns. They tend to shed their prices soon enough. This, in turn, will give you negative returns, resulting in a loss.
At the end of the day, all of the above aspects should be justifying the share price of the company. And to know that, you have to evaluate the financial ratios of the company.
Also, keep in mind that strong businesses don’t always indicate good stocks. This is because in some cases, the strong companies might have overvalued stocks. Why? Because, as mentioned earlier, the stocks of super-strong companies are mostly in high demand. Hence, the overvaluation!
So, it is always recommended that you prefer strong businesses with undervalued stocks if you want to grow wealth in the long run.
List of 10 Best Stocks for Long-Term Investment in 2021
|Sl. No.||Stock Name||Industry||CMP (INR)||M. Cap (INR)||Income (INR)|
|1.||Infosys||IT consulting||1,311.90||559,432 cr.||93,594 cr.|
|2.||Bharti Airtel||Telecommunications||539.90||294,736 cr.||89,473 cr.|
|3.||HDFC Life Insurance Company||Life Insurance Company||716.55||144,614 cr.||1,687.8 cr.|
|4.||Bandhan Bank||Financial Services||421.50||67,805 cr.||7,873 cr.|
|5.||Sun Pharmaceuticals||Pharmaceuticals||617.10||148,758 cr.||33,473.4 cr.|
|6.||ICICI Securities||Capital market||451.05||14,555 cr.||2,129.40 cr.|
|7.||IOL Chemicals & Pharm||Pharmaceuticals||736.90||4,326 cr.||1,946.30 cr.|
|8.||Muthoot Finance||Foreign Exchange||1,284||51,550 cr.||10,633.86 cr.|
|9.||Indian Energy Exchange||Power Trading Exchange||223||6,687 cr.||267.93 cr.|
|10.||Gujarat State Petronet Ltd.||Natural Gas Transmission||209.80||11,848 cr.||10,850.61 cr.|
Top 5 Best Stocks to Buy in 2021
The financial profile of this IT giant is great with a balance sheet devoid of any debts. Moreover, they have consistently depicted a healthy pattern of cash-generating capability in the past. Their liquidity and flexibility in terms of finances.
Their financial strength has been estimated at INR 26,011 crores as of 30th September 2020. Besides, they have also announced big deals summing at approx. 3.15 billion dollars.
2. Bharti Airtel
Bharti Airtel has kept their price at INR 521.6 per share. The volatility has decreased considerably that hints towards an upside. The company has witnessed a sharp growth in the last year. The liquidity flow will probably stay high, so the stocks will stay positive until it is held more than its long term mean levels in the next months. Also, the uplift in the delivery volumes says that they are undergoing some healthy gains.
The largest telecom business in India, Bharti Airtel has a dominating presence in India and also in Africa. It also has a great command over DTH, broadband, and other services. The valuations of Airtel seem profitable at the moment. Religare Broking also suggests that Airtel has a high chance of outperforming itself in 2021.
3. HDFC Life Insurance Company
HDFC Life Insurance Company Ltd. is estimated to witness an even more positive momentum in FY 2021. ICICI Securities suggest that you should buy it with an expected target of INR 738. Moreover, HDFC Life Insurance is trading way more than their short-term and long-term averages. So, we can expect good momentum with HDFC Life Insurance Company
4. Bandhan Bank
Bandhan Bank has been delivering a robust and consistent balance sheet for a decent amount of time now. They hold over 20% market share in the country along with a 50% share in the Eastern and North-Eastern area.
Moreover, their fund costs are low and their deposit base is pretty sturdy. Over the next 5 years, it would widen its range of services and open doors for both low and mid-income groups of people. For further proof, its AUM has risen by 44% CAGR in the span of the last 10 years.
5. Sun Pharmaceuticals
Sun Pharma is currently one of the biggest pharmaceutical companies in India. They have around 8.2% market share in our country. Moreover, 31 of their brands rank in the top 300 brands list in the IPM.
For the record, they have made $410 million via the global specialty business in the fiscal year 2020. They are also ranked number 1 in CNS, Orthopaedic, Urology, and several other fields. This company is very promising and you won’t be at a loss if you invest here.
We hope that this detailed article on long term stock investment ideas has been useful to you. One last thing we would like to add here is that there is no fool-proof way to find the best stocks to buy for long-term investments. However, we have listed down the most accurate ways to find stocks that promise growth in the coming years.
Moreover, long-term investments in stocks have been proven to be highly profitable, time, and again. So, you can count on this blog and go on to invest in a long-term stock after reading this.