Skip to main content

Select A Stock Based On Its Fundamental Strength Rather Than Technical Indicators

 

OFTEN people misunderstand smallcap stocks for penny stocks, which is not true. It is actually derived from a company's market capitalisation, which is arrived at by multiplying current market price with the number of shares outstanding. So, what is the meaning of "small" for terming a stock as small-cap? The categorisation actually varies with the market condition and in the current scenario it could be anything less than Rs 1,000 crore.


   There is nothing more rewarding than to buy a small-cap stock just before its take-off. Usually, small-caps grow at a breakneck speed, which may not be possible for large-caps. For example, take Infosys. It clocked three-digit growth in revenue and profits for several years, starting at base revenues of less than Rs 9.5 crore in 1992-93. In 2000-01, its topline was Rs 1,950 crore. Ask someone who had invested in Infosys in 1992 and is holding the stock still and the answer would be "wow".


   But then is it that easy to make money by investing in small-caps. Well, certainly no. Investing in small-caps is not without risk and it requires a lot of analysis and patience. Let us discuss how to choose the correct one.

HOW TO SCREEN SMALL-CAP

The big question is how to find the hidden gems in small-cap stocks. There is a saying, "A fool and his money are soon parted." Do not go by market rumors. Before you invest read about the company, know who are at the helm of affairs, their credentials and previous entrepreneurial achievements. It is better to select a stock based on its fundamental strength rather than technical indicators. Investment should be done keeping in mind long-term prospects. To quote another phrase, "Don't invest for 10 minutes if not prepared to invest for 10 years". Put money in the stock of an industry that you understand, where you see growth potential. Best example being the "dot com" boom during the beginning of millennium. Investors then had blindly parked their money without doing any due-diligence.


   The biggest concern with investing in small cap stocks is liquidity. Many a times, investors end up overweighing their portfolios with illiquid stocks. Here, it's advisable to stay away from glitter stocks. These are stocks that have some attention grabbing activity like huge volumes, extreme movements in the price—up or down.

GET THE FUNDAMENTALS RIGHT

If you are looking for the hidden gems, you need to know the things "beyond the obvious". Companies that have superior investment return and are trading at a discount to their long term valuations are considered as good stocks. Stocks of those companies must be preferred which have a sound business record both in adverse and favorable market conditions. Decent performance over a full business cycle must be the benchmark while screening.


   While reading the financial statements, look thoroughly into the hidden assets in the balance sheet, besides the debt profile and the payment schedule. Typically, small-cap stocks with no debt should be fancied. May be a small debt can be helpful sometime, but then, it's better to avoid stocks with a debt-to-equity ratio over 25% to 30%. It's also important to identify near-term catalysts that can unlock value by driving higher earning growth. As part of core screening process, companies with low valuation should be measured on ratios of price-to-book, price to earnings, price-to-cash flow and enterprise value to EBITDA.


   You can also rely on companies that pay dividends regularly. The payment of dividends is considered a tangible proof of a company generating excess cash flow. In fact, pay out of excess cash to shareholders also optimizes return on capital.

WHEN TO EXIT

Your philosophy of investment in small-cap stocks should ideally be to own future multi-baggers. At the same time, it's always a good practice to outline your exit strategy. Your first signal to exit should be usually when the stock hits your target price. Second, if the financial performance does not match with the projected revenue growth, earnings growth margin etc. When there is a big difference in estimated and actual figure, there is also every reason to exit. Thirdly, you can opt out if there is a better opportunity with excellent risk to reward ratio. You must always remember—happy is the man who knows what to remember of past, what to enjoy in the present and what to plan for the future.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now