In a recent research report, the research arm of Morgan Stanley Asia Pacific has come up with a list of ‘buy’ stocks as well as stocks that need to be avoided

Morgan Stanley Asia Pacific, in a recent research report titled “The Quintessential Quest for Quantamental Alpha”, has come up with a list of stocks to buy based on three different filters, namely fundamentals, market dynamics and value screen. Some of the stocks that found their way into their short-list were Ambuja Cements, Biocon, Cairn India, Coal India, Godrej Consumer Products, Hindustan Unilever, Idea Cellular, Infotech Enterprises, ITC, MCX, Oberoi Realty, Oil India, Oriental Bank of Commerce, Ranbaxy, Tata Motors DVR, TCS, UltraTech Cement and Wipro. We also found companies like Reliance Infrastructure, OnMobile Global, Sesa Goa, Sterlite Industries, United Phosphorus, Cairn India in the list.

Apart from the list it came up to buy, Morgan Stanley also included a list of stocks to avoid. In other words, the stocks which were ‘underweight’ by Morgan Stanley Asia Pacific were included in this list. They are Kotak Mahindra, Essar Oil, Adani Power, Axis Bank, GAIL, Hindalco Industries, Indiabulls Power, Reliance Communication, State Bank of India, Titan Industries, JSW Energy and Educomp Solutions.

The first filter—market dynamics—used various price and market inputs to filter out stocks. Some of these filters were strong one month and 12 month performance, deviation from 200 day moving average (the further away from the moving average, the better), beta (lower beta over higher beta), sell-side ratings (the stocks which were unpopular or scored worse, were better) and institutional ownership (the ones over looked by institutions). Some stocks which were filtered through this method were UltraTech Cement, Colgate-Palmolive, Biocon, Idea Cellular, ACC, Godrej Properties and Oberoi Realty.

The second filter—fundamentals—uses fundamental metrics to assess each company’s performance and ranks stocks accordingly. In other words, it uses conventional methods of fundamental analysis using ratios like expected return on equity, two year forward earnings growth. (The higher the earnings growth, the better for the stock) A combination of high ROE and low gearing gets more points, expected sales growth to name a few criteria. For instance, it found out that MCX is expected to grow its earnings at 52% over the next five years, while Hindustan Unilever has a 2012 ROE consensus of 73% (an astoundingly high figure). Some of the companies that were shortlisted using this filter were Lupin, ITC, Infotech Enterprises, TCS, Exide Industries to name a few.

The last filter—value screen—was used to judge valuation and its relative cheapness/dearness relative to the market and cost of capital. Parameters such as price to book ratio, dividend yield, price-earnings ratio, implied EPS growth, Relative P/B as Standard Deviation from Average were used to shortlist candidates. Companies which found its way through this filter were OnMobile Global, Jain Irrigation, Tata Motors DVR, Sterlite Industries, Reliance Infrastructure, to name a few.