BAD NEWS – A GOOD OPPORTUNITY TO BUY AN UNDERVALUED STOCK
As the economy teeters between bad and worse, the stock Market has always been question on every one face, how to invest and earn from it. Investing in the stock market is similar to investing in any other business. A good value investing is based upon the basis that it is possible to always find stocks that can be bought at a discount to their true worth. Judicious selection of stocks is very crucial. Now the question is that how will you select stocks? One should consider factors like consistent track record say financial performances and dividend paying, company’s strengths in its business and its market position, positive cash flows, management quality, sound business model and ability to sustain growth rates. Sometimes even the best of stocks suffers the worst on the bourses not for the inherent reasons but due to other factors which over weigh on the capital markets. In such circumstances people who have a lot of money and deep understanding of the market, can make most of the profit by buying up shares of heavy weights much below than their intrinsic value. But to know which companies are best suited for your hard earned money, which companies are permanent losers and which are undervalued gems, here are some of the important points that can be used for decision taking.
Does management have a tremendous track record?
The most important thing for an investor is to find out the management track record of a company or not. It is upon the value, skill and visualization of the management that the future of company rests. A good and competent management can make a company grow. There are numerous success stories, of prosperity that resulted due to the foresight and vision of management. Chairman YC Deveshwar diversified ITC into hotels (the WelcomGroup chain); his successor diversified into agro based industries.
Investor needs to make opinion about a company by analyzing its past record and performance. So it is always a good habit to know about the past performance of a company.
Is the business a superb business?
It is not just about investing in the company, the nature of business is again an important factor; one can avoid high tech companies, which bring new technology rapidly, as they are comparatively unpredictable in long run. Such businesses bring the fab but suddenly fade after sometime. It would be reasonably safer to invest in the “Low-Tech” business that has absence of change like Paints, shaving blades, rugs etc.
If you are good at calculations, search the difference between the value of a business and the price of that business in the market. This is the key to value investing.
And sometimes when market is fearful for a business, become greedy to get that stock and vice versa. Buy when people are selling and sell when people are buying…it works.
As investor should always look at large company rather than in a small cap company of the same sector because theoretically and practically it is observed that the stock of large companies recovers earlier. Market capitalization is also a good indicator to know which one is big and which one is small company. On the contrary small cap companies stock takes time to realize their full value in the market. Moreover, investor must look for under valued stock rather than a overvalued stock, and should be interested in non-asset intensive businesses with high returns on equity, little or no debt, operating in non-commodity type industries without fixed cost structures.
The success of a company is of major significance for an investor. Profitability ratios support an investor in shaping how well a particular company is doing in relation to other companies within the similar industry, and with reference to its own performance in earlier years. With the help of profitability ratio, an investor can calculate the company’s efficiency on the basis of the returns generated on sales and investments.
Is the problem temporary or long-term?
The focus here is to enquire that weather the companies stock is trading lower on factors other then related to company’s financial or strength like because of some panic in stock market or else weather the stock is beaten down due to some of the bad development in the company which has short term impact & which is going to change as far fundamentals are concerned in the long term of the company.
Before Investing in any stock, an investor must have to know the overall performance of the company. The choice to make the stock market endeavor succeed lies upon the investor. A wise investor would only investigate into stock market investment upon being apprised with the necessary and crucial information.
Sometime problems come from the result of one-time mistakes on the part of management. If there is long-term problem in the stocks then investor must have to change the direction of his/ her investment as investment is made to earn profit. Build stock market research and decide which stock is profitable one, which company can grow in future and which one is likely to get trap. Accordingly plan your stock investment. The market is always random in the short-run, but in long-term markets do better than those who inclined to buy stock in rising markets. It is a basic mathematics. Those with the lowest average cost will always win the wealth accumulation game.
Is investor financial capable to wait out the problem?
It purely means being patience and disciplined; investor should able to attach the emotions and think for himself. He must know when to sell or to buy. The big question is that is investor financially able to wait out the company’s difficulty? If you have the patience then you must invest the money in good companies because the market will definitely recognize them. In short term the undervalued stocks may fall for below than buying price. But in the long run patience will definitely bring fruit full return and a smile on face.
To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.. Whether it is a bull run or a bear hug, the market throws up opportunities for those who look out for them, and for those who invest wisely. Not only a single system has consistently outperformed the market. All systems require thought and some assumptions. However, of all the systems that I have experimented with and tried, the one I am most comfortable with is fundamental analysis as it is the most logical and the most meaningful. There is much feeling attach to money and there is no avoidance of any fact. You can minimize the pressure by using this investment decision strategy. In single sentence it is advised do your homework well. While choosing a stock, discipline is the key. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy.
