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You can generate handsome returns by picking potential turnaround candidates early or by investing in companies that are already in the green and have strong fundamentals.
The results season is coming to an end and investors are scurrying through the quarterly reports to spot companies that made a turn around in their fortunes.
The easy way to spot a turnaround stock is to pick a company which has reported a profit in the last quarter and compare it with the numbers reported in the corresponding quarter of the previous year to see whether it had reported a loss.
This method, however, is more about a superficial study of the numbers and may throw up a large number of stocks that fall in this category. Sample this: out of the 1,182 companies that have declared results in the January-March quarter, over 100 companies would qualify as a turnaround stock. Second, the profit figures could be the result of a one-off incident and may not be sustainable in the future. In other words, they may fall back to the red.
Therefore, experts advise you to go about it in a more informed manner. And, the first step, they say, is to spot companies that have reported profits after several quarters of continuous losses. But, having done so, you may ask, whether there are any possibilities for such funds to slide back to the red again? Not much, especially so, as the economy is bottoming out now. The way the investment climate is improving and as the economy is expected to pick up, most turnaround companies may not fall back to the red this time. In fact we may see more and more companies turning around. Though there was no major improvement in the fourth quarter numbers, green shoots are visible now. Management commentary was also distinctly positive. There is a possibility that there will be more upgrades than downgrades in the coming quarters.
Second, you must take a closer look at the fundamentals and understand the reasons behind this turnaround in the company's performance. This will help you sieve through companies that have performed well because of a one-of incident and consolidate a list of sustainable candidates. For example, most turnaround stocks in the last quarter were from the export-oriented sectors and this can be attributed directly to the sudden depreciation in the Indian ru pee. Now, with the US dollar below the `60 mark and threatening to go down further, it may not be easy for these companies, going ahead.
Third, the most important step in stock investing is to track its valuation. For example, power generation is a segment that has shown some improvement in the last quarter and, that is so, due to the fundamental changes the companies have gone through.
Therefore, it is sustainable in the long term.
Despite this, analysts are of the opinion that investors should stay away from Adani Power, which has already made a significant turnaround in the last quarter. The company's stock price has shot up and the valuation is in a much range than expected. The change in price, analysts say, has more to do with the promoter's alleged proximity to the central government headed by the BJP and not just because of the improvements in its fundamentals. That explains why the analysts' recommendations are heavily loaded in favour of "sell". Out of the 32 analysts tracking the stock, only two have "buy" recommendations. Since all the positive news are already discounted, the future stock performance of Adani Power will be based only on its fundamental performance. One must also remember that buying stocks based on positive or negative political sentiments is not a good long-term strategy.
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