10 quality picks in a pricey market

Balancing the imperatives of sound business propsects and reasonable valuations, we offer 10 stocks. Take your pick.

Normally when trying to pick up stocks, we try to balance two imperatives: reasonable valuations and sound business prospects. With the Sensex trading in the 20-21 (12-month trailing) PE zone, fulfilling the first objective has become a challenge.

For this issue, our analysts worked hard to develop a rigorous set of filters that would only allow stocks with robust long-term track records to pass through. Some of the criteria we used are: stocks whose net worth has been growing consistently over the last five years; whose earnings per share (EPS) has grown consistently (and if in any year it has declined, the decline should not have been of more than 10 per cent).

Peter Lynch said that as far as possible one should avoid high-PE stocks. A high PE, he said, is a handicap for earning good returns. We have kept that counsel in mind, limiting our selection to only those stocks that (at the time of choosing) were trading at a PE less than the market level.

The final list represents a range of industries: two-wheelers, cement, pharma, pipes, steel, utilities (gas), high-tech, infrastructure and vehicle finance. They will all participate in - and help you profit from - the consumption story that continues to hold good, and the investment story that will unfold over the next few years. Read on, and if you like the story of any of these players, invest in it. But only, as we constantly admonish, for the long term - at least three to five years.

TEN PICKS Company    Market Cap    5-yr avg RoE (%)    3-yr median PE    PE#    Debt-equity Ratio*    5-yr EPS growth(%)@ ACC   Large   33.53   10.24   10.55   0.10   38.55 Bhushan Steel   Mid   24.99   8.88   10.96   3.31   36.97 Era Infra Engg.   Mid   26.82   10.78   13.00   1.96   68.23 Grasim Industries   Large   23.62   11.35   11.83   0.36   18.42 Hero Honda   Large   45.72   16.64   16.65   0.02   20.09 Indraprastha Gas   Mid   31.40   10.96   15.76   0.00   18.67 Maharashtra Seamless   Mid   28.93   9.13   10.20   0.06   23.39 Rolta India   Mid   18.58   8.56   8.28   0.53   30.44 Shriram Transport Finance   Mid   27.97   12.82   15.97   8.99   33.63 Torrent Pharmaceuticals   Mid   23.84   10.13   16.47   0.66   35.82 *31/03/2009 #27/04/2010 @December 2009