Strategy- Fundamental flavor

on Sunday, March 13, 2016

Fundamental analysis is Greek to many people but it’s the strong base on which a stock should be Bought. There have been many ways to analyze stocks like discounting cash flow or Dividend growth model or the market multiples model(earnings, sales, book value)
Analyzing stocks requires a lot of digging but I have created a small checklist for beginners which could help them self sufficient and take their own decisions.
So here is how you should go
1) There are two types of analysis- Top down and Bottom up
Top down means that first you shortlist the industry first, then you analyze lots of stocks from that particular industry and then final on a particular stock.

Bottom up is you pick the stock on a standalone basis and don’t do an industry analysis. Even if the industry is not doing well, you don’t care as you have picked the stock standalone on basis of its strong fundamentals.
You can choose whatever you are comfortable with but I will explain these in greater details in my later posts.

2) Stock markets have been built on two types of Investors or rather two thought of schools, one is called as value investors whereas the others are called as Growth investors. Yes Growth and Value , these are the two strong pillars on which everything works. So these are two criteria’s later which we will speak about in the post, and also what all ratios one should analyze in this huge world of ratios. I always prefer growth rather then value, but Growth plus Value together is Soney pe Suhaga.
3)What I have observed is people buy stocks just because they want to buy them or just matching someone or following someone blindly. There has to be certain triggers to buy a stock, this triggers could be:-
a) Reduced raw material prices(in this scenario cos having crude and metals as their raw materials benefitted). Reduced prices of raw materials will reduce the expenses and give a boost to operating profits and margins. Since cost of goods consumed is a major portion of the expenses, one should consider this as a strong reason
b) Expansion in capacities- This is an indication that company is growing and one could get increased sales and profits by some time( The imp point is to check how the expansion was funded, debt or equity or a combination of both).
c) Promoter adding aggressively- Who knows better then the owner of the company that how a company is going to perform. I have generally seen promoters buying in a co before the best is to come and aggressive promoter buying is one thing which makes me deep dig about the co and gives me confidence.
d) Quarterly results- Quarterly results are a great trigger and I have observed it is possible to make decent profits after buying after great results. But there is a catch here as well which is Valuations and prior rally. If the valuations are high and there is a prior rally as well, it means that the good quarterly results are already discounted in price.
e) Change in Govt policies- These could be also a trigger which one could look for. Recent news was Anti-Dumping duty from Bangaldesh jute products which started a new bull run in the Jute sector. So the role of an investor is to anticipate events or understands news and their significance before others do.
f) Exchange rate- This is a very common thing now which is known by most of the people. So whenever Dollar is getting high, its best to keep exporters in your portfolio who would benefit from Dollar rise and plan and construct your portfolio in a way that 70-80% of your portfolio is in exporters so your portfolio gets hedged against rising dollar and falling markets.
g) Macros- Tracking Macros of our country as well Macros of other countries is important. You should be aware of all happenings around you. Like recently China devalued its currency as it was slowing down so one should have avoided sectors/companies which export to China as it would effect them adversely. Also since China devalued its currency, its currency would become cheaper and so would the goods it produced would get more cheaper and attractive in the International markets vis a vis other goods, so in this scenario its best to avoid companies whose goods directly compete with Chinese goods.
Also one could have avoided Banking sector because RBI was issuing new banking licenses and there would be more competition in the banking sector, leading to lesser profitability in future. So one not only has to listen to news but also understand them well and its implications.
h) Fundamental screener- A stock would certainly catch my eye if it has a very good profit and sales growth and is low on valuations. I will give the fundamental screener in second part of my post as the post is getting too long now.
i) Interest rates- The interest rate is the rate at which Banks can lend money. Higher interest rates is used to contract(reduce) money supply in an economy by reducing borrowings. Banks certainly benefit from higher interest rates and industries like auto,housing, consumer durables, high debt industries disadvantage due to the same.
Similarly reduction in interest rates increase money supply in an economy and benefit sectors like auto, housing, consumer durables and high debt industries.

J) Tieups/ mergers- This could be another important trigger. Has the company tied up with some other company which would help the co gain a competitive advantage . Has the company tied up with a gaint of the sector? One should analyse the deal further, understand the beneficiary and then look at the company fundamentals before buying
k) Promoter issuing warrants at higher then cmp- Had recently seen this in kellton when the share was at 75 and promoters had issued warrants to themselves at 90. Promoters issuing warrants at higher price gives shareholders a belief and confidence about the future prospects of the company.
l) Change in management- It’s the management who sails the ships and its upto the management where they want to take the company. I have seen great companies with poor management resulting into lag in price. A change in management could be just the perfect thing to happen and it can be a trigger of change in fortunes of the company. A change in management will prompt me to track the company more closely.
m) New product line - A company releasing a new product line or launching its own brand, who knows it could be start of another mefa FMCG. Track the performance of the product line and the brand
All these factors cant be used on a standalone basis, they could be a potential trigger. You can not buy a share just because promoters have bought or raw material prices have reduced, you need to dig in more about the company and its financials which I will be highlighting in second part of the post.
This triggers could make me track the company but not buy the company, for buying I will have to do a detailed analysis….
But with the above post you yourself can make a watchlist for yourself


Chetan Yadav said...

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