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

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
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