Investing for long term is always projected as a complex task, reading about the nature of company business, balance sheets, Profit and loss statements etc. Is there any easy way to find the best stocks to invest for long term? That’s what this article is all about. If you ask suggestion for long term investment, most people would recommend companies like ITC, HDFC, Reliance, Asian Paints etc. And we just blindly go head and purchase these stocks, because even people outside the stock market know that these are market leaders in their respective category.
ITC controls 77% market share of Cigarettes and more than 85% of their revenue comes from Tobacco. Similarly, Asian Paints has more than 50% market share in Paints.
But when we are investing for long term we are looking for time period of 15 to 20 years. Will these stocks continue to be a market leader even after so many years? What if their competitor catch up? In order to find an answer for that, let’s consider the below example.
When it comes to search engine everyone’s 1st preference and only choice is Google. But we also have other search engines like Microsoft Bing. Google was launched in 1998 and Bing was launched in 2009. Even after 13 years, Bing couldn’t capture market share. Its been more than 23 years since Google launched, still they are number 1 with huge market share. Their competitors are way behind and it would decades and decades to catch up for a company to launch a product in this segment and become a market leader.
No wonder why Google is able to continue generating wealth for its investors year after year. Its mainly because they are way ahead. We need to follow the similar approach when it comes to picking up market leader for long term investment.
Is there any quantitative way to pick such market leader stocks which are way ahead than their competitors? Yes, there is a simple way.
I used screener website to download all stocks that are having market cap greater than 100 Crores.
There are 100+ different sectors, each stock is categorised under different industry. Finance sector has the highest number of stocks.
Now we need to sort the stocks based on industry and market capitalization
let us consider Air-Conditioner stocks, Voltas, Blue star and Johnson are there. Market cap of Voltas is 43k crores where as Blue Star market cap is only around 9k, so market leader Voltas is 4.53 times bigger than its nearest competitor. Similarly consider Hindalco with 1.29 lac crores market cap which is 6 times bigger than its nearest Competitor National Aluminium. Likewise we need to do the calculation for all 2000+ stocks listed in NSE.
Based on this approach, listed below are the top market leader stocks which are way ahead than its Competitors, ITC from Cigarettes, Grasim, Sundaram Fastener, Dixon which is 30 times bigger than its nearest Competitor, HDFC is 21 times bigger than its Competitor. No wonder why these stocks enjoy high valuations.
The above approach is useful for picking the market leaders which can survive multiple decades and continue to generate wealth for its investors. But there is one more interesting approach to find multi bagger stocks by following similar method. When the market is leader is way bigger than its nearest competitor, only the market leader continue with top 1 spot, but what about the other companies in the same sector ? They will continue to fight among themselves to grab more market share. But which is the other company which has higher probability of gaining more market share? Answer to that question is based on how well other companies are positioned.
Lets consider the same example. Grindwell Normal might be the market leader in its industry but its just 1.3 times bigger than its Competitor Carborundum. But the same Carborundum is 14 times bigger than its nearest competitor Wendit. Similarly Hindalco might be the market leader which is 6 times bigger than its Competitor National Aluminium but check out what’s next to National Aluminium? MMP Industries which is way below. So National Aluminium is 42 times bigger than its nearest competitor
Consider Bearings stocks Timken is 14 times bigger than NRB Bearings.
Consider paints stocks, Indigo Paints is 8 times bigger than its nearest rivalry Shalimar paints. Indigo might continue to gain more market share
By betting on these other stocks in the same industry, there is an opportunity to gain enormous wealth if any of these stocks continue to move up the ladder and gain more marker share from its competitors. Best way to short list some of the best stocks from the final list is
- Check if you are able to understand its business. The more easier it is, the chance of sticking to the stocks during adverse times will be more.
- There will always be cyclical corrections, just because of one or two quarters poor performance you shouldn’t abandon the stocks.
- Keep track of market leader score, check if it’s increasing or decreasing year on year. If the market leader score kept on decreasing for more than three years, its better to exit that stock and shift to the second best leader.
By following the above simplistic rule based approach, its much easier to pick best stocks for long term investment.