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

Real Returns in Investing

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mai...

Franklin India Smaller Companies Fund - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
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