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Consider this real-life example: Sejal Glass, a company listed on the BSE in 2008. Its stock price remained firmly in the single-digit range for a solid decade, making it a classic penny stock and the highest Return Stocks.
[Updated: 13-Oct-2023]
Just twelve months ago, you could snag a share for a mere Rs. 3.64. Fast forward to today, and that stock is soaring at Rs. 425 per share. That's a staggering Compound Annual Growth Rate (CAGR) of 11,597%. In simpler terms, if you'd invested a humble one lakh rupees in this stock a year ago, your investment would now be worth over a crore. That's an incredible turnaround in just a year!
It's quite intriguing. Sejal Glass, despite its remarkable price surge, receives a rather humble score of zero from my algorithm. To truly grasp why, one needs to delve into the financial report of this company. As they say, the devil is often in the details, and the financial report might hold the key to understanding the underlying factors that don't align with the stock's meteoric rise.
Success in the stock market often comes to those who embrace the role of investors, not speculators. But what does it mean to be an investor? It means selecting stocks of companies with a solid foundation and holding onto them for an extended period.
This extended holding period allows investors to harness the incredible power of compounding. So, the first piece of the puzzle is acquiring stocks and keeping them in your portfolio for a significant stretch, typically 10-15 years.
The second key is investing exclusively in companies that exhibit fundamental strength. But how do you determine if a stock belongs to a fundamentally strong company? This is where fundamental analysis comes into play. If you're interested in the intricacies of this analysis, please explore my articles on fundamental analysis. Let's stay focused on our quest for the highest return stocks.
As we witnessed in the case of Sejal Glass, the company's fundamentals might not have been robust, yet its share price skyrocketed. How did that happen? The promoter's ownership in Sejal Glass surged from 50% to 99% between December 2021 and February 2022.
This influx of demand artificially inflated the stock's price, demonstrating how external factors can sometimes influence stock performance.
If you're eager to delve deeper into the intricate mechanisms of how stock prices are determined, I recommend reading the article mentioned. It will supply valuable insights into the factors influencing the upward and downward movements of share prices.
In the specific instance of Sejal Glass, the remarkable price surge can be attributed to the heightened demand for its shares stemming from the promoter's increased ownership.
Nevertheless, it's worth noting that the company's fundamentals didn't exhibit strength, as I verified by examining their financial performance over the last few quarters, up until December 2021. The financial numbers during that period did not paint an encouraging picture.
In my stock screener, you'll discover a curated list of stocks that have delivered remarkable returns over the past decade. But what truly sets this list apart is the remarkable consistency in the returns generated by these stocks. How can we measure this consistency? That's precisely what we'll be exploring in this article.
To illustrate the practicality and effectiveness of my stock screener and its scoring methodology, let's consider an example. Suppose you're researching a stock, let's call it XYZ, to evaluate its historical returns. You've gathered the following performance data:
On the surface, when you examine XYZ's performance, it certainly seems impressive. It has shown remarkable price growth over the last 1, 5, and 10 years, demonstrating strength in its historical returns. Additionally, a recent % price correction of 26% in the last three months is a potential buying opportunity. Not to mention, the low P/E (Price-to-Earnings) ratio at 1.54 levels makes it appear quite attractive.
However, the story takes an interesting turn when considering the "GMR score" from our stock screener, which rates XYZ at just 15 out of 100. This low score strongly indicates underlying weaknesses in the company's business.
It's a stark reminder that while historical performance and ratios like P/E can be enticing, they may not provide the complete picture when evaluating a stock's overall health and prospects. This highlights the importance of considering various factors and not relying solely on past performance when making investment decisions.
In stock screeners, the GMR score is a specialized algorithm designed to evaluate stocks based on the returns they've historically provided investors. The higher the historical returns, the better the score. But what sets the GMR score apart is its emphasis on more than just absolute return numbers; it considers the trend in returns over time.
This means that not only are high returns valued, but the consistency and direction of those returns play a significant role in determining a stock's score.
In addition to historical returns, our stock screener considers various other critical stock data points. Some of the prominent ones include:
It's worth noting that XYZ has recorded negative ROCE (Return on Capital Employed) figures over the last 3, 5, and 10 years. ROCE is a critical metric included in the GMR score calculation. A positive and consistently growing ROCE is a robust indicator of solid underlying fundamentals within a company. This further emphasizes the significance of not only historical returns but also the financial health and performance of the company when evaluating its investment potential.
Over the last 3, 5, and 10 years, it's evident that XYZ's EPS (Earnings Per Share) growth has been consistently negative. Our algorithm considers these historical EPS growth figures when determining the stock's score. But why is EPS growth such a crucial factor?
The rationale behind using EPS growth as a key metric is to filter out companies that may experience stock price growth despite declining profits (EPS). By considering EPS trends, we can effectively screen out such companies.
This is vital because it helps ensure that we're not solely relying on share price performance, which can sometimes be influenced by factors other than a company's core financial health. Examining EPS growth provides a more comprehensive perspective on a stock's financial stability and potential for sustainable growth.
No matter how impressive a stock's historical returns may be, it might not be a wise investment if it's currently overvalued. Discovering if a stock is overvalued or undervalued is crucial. One of the simplest ways to assess this is by looking at the Price-to-Earnings (PE) ratio. Our algorithm considers this and assigns low scores to stocks trading at high PE multiples.
To delve even deeper into the valuation of stocks, it's beneficial to explore the PEG ratio, which combines two key factors: EPSG (Earnings Per Share Growth) and PE. This ratio provides a more comprehensive view of a stock's valuation, considering its current price about earnings and factoring in its earnings growth potential.
By incorporating the PEG ratio, we can make more informed judgments about whether a stock is overvalued or undervalued, leading to smarter investment decisions.
Investing in companies with low debt is generally considered a safer approach. But how do we quantify a company's debt level? This is where the Debt-to-Equity (D/E) ratio comes into play. Our algorithm employs this ratio to assess the debt situation of a company.
It assigns low scores to companies with a D/E ratio exceeding two. Companies excessively burdened with debt receive no score regardless of their past returns.
Why this cautious approach? It's primarily because highly indebted companies can swiftly become risky, especially when their business performance falters. Excessive debt can limit their ability to weather economic downturns and meet financial obligations.
As a result, such companies are often perceived as riskier investments. For a safer investment, consider exploring debt-free companies that offer more financial stability and security.
Indeed, even the most exceptional companies can falter without sufficient cash. Companies generate cash primarily through their current assets, which serve a dual purpose: repaying current liabilities and creating a surplus to control future expenses, a concept known as working capital. Companies adept at maintaining this balance are often called reasonably liquid companies.
To assess a company's liquidity, the simplest approach is to use the current ratio, which measures its ability to meet its short-term responsibilities with its current assets. Our algorithm considers this and assigns low scores to companies with a low current ratio.
The GMR Score presented in our stock screener for high-return stocks is a composite evaluation incorporating the following virtual parameters: past returns, current ratio, RoCE, D/E ratio, P/E ratio, and EPS growth.
This comprehensive approach allows investors to make more informed decisions by considering a range of key financial metrics that reflect a company's historical performance, growth potential, financial health, and risk factors. For further understanding of the concepts of solvency and liquidity in a company, I recommend delving into the articles given in the link: "Financial Ratio Analysis," "Working Capital Use," and "Working Capital Management." These resources offer valuable insights into the dynamics of financial stability and efficiency in companies.
As investors, it's essential to grasp the most fundamental factors that underpin a profitable business. A profitable business will likely grow rapidly and yield higher stakeholder returns. At the core of any successful enterprise lie three foundational elements: the business model, the quality of its management team, and its capital structure.
These three components, when combined, shape the quality of a business. They act as the building blocks that underpin a company's success. To gauge the quality of a company, it's crucial to assess two fundamental indicators: profitability and growth numbers.
These factors encompass the business model, the caliber of the management team, the company's capital structure, the ability to generate profits, and growth potential. Together, they are the driving forces behind a stock's future price appreciation.
In our pursuit of high-return stocks, it's evident that solely looking at the stock's current price is insufficient. Why is that? Because the stock's price is ultimately influenced by the underlying business fundamentals, which either drive it higher or lower. Therefore, thoroughly analyzing these core business elements is essential to making informed investment decisions.
Investing in sectors and industries on an upward trajectory is crucial when achieving high returns in the stock market. In today's landscape, sectors like Fintech, Data Analytics, Artificial Intelligence, Green Energy, Renewable Energy, Real Estate, and Healthcare are prime examples of industries with the potential for rapid growth. Stocks within these flourishing sectors often offer the best opportunities for high returns.
So, what's the strategy here? It involves selecting fundamentally strong stocks within these growth-oriented industries, ideally at a price that aligns with your financial goals and risk tolerance. The key to success is to keep investing for the long term, as this approach allows you to reap the benefits of sustained growth and maximize your potential for high returns over time.
Investing in profitable businesses at a reasonable price is a tried-and-true approach that tends to yield the highest returns over the long term. From an investor's standpoint, the most profitable stock can rapidly accelerate its revenue, profits, cash flow, and asset growth. Rather than solely fixating on immediate returns, the focus should be identifying high-growth stocks.
By targeting stocks with strong growth potential, high returns will naturally follow as a by-product of the company's sustained success and expansion. This approach reflects a more strategic and sustainable way to achieve long-term financial goals in the stock market.
As of December 2022, Jyoti Resin's stock price experienced a remarkable ascent, surging from Rs.2 in December 2012 to Rs.1250 by December 2022. This impressive growth equates to an astounding annual growth rate of 80%.
Similarly, another company, GRM Overseas, witnessed substantial growth, with its share price climbing from Rs.2 to Rs.370 over the same ten-year period, resulting in an annual growth rate of 60%. These examples underscore the substantial potential for high returns in the stock market ahead of the long term.
Two distinct approaches emerge when considering stocks for a holding period of at least five years or longer. First, blue-chip stocks are the go-to for assured returns and a more conservative strategy. These stocks belong to well-established companies and should be acquired fairly, offering stability and the potential for steady long-term returns.
Second, investors with an appetite for higher returns can delve into low-cap penny stocks boasting strong business fundamentals. These stocks often hail from smaller firms with substantial growth potential, but they also come with increased volatility and risk. The choice hinges on aligning one's strategy with specific financial goals and risk tolerance.
