2019 JANUARY HOW TO APPROACH STOCK MARKET INVESTMENTS IN 2019

2019 JANUARY

HOW TO APPROACH STOCK MARKET INVESTMENTS IN 2019

1. Happy New Year To All Investors, Especially  Long Term Investors

2. January To March – We Are Going To See The Results Of The Third Quarter Of 2018-19

3. Third Quarter Results Are Usually Better Than That Of First And Second Quarters – For Most Of The Companies.

4. Now, we are focusing mostly on mid cap and small cap companies in this channel.

5. These did extremely well in 2017 and not well at all in 2018.

6. Results wise, some have done well even in 2018, but not in respect of price appreciation.

7. Therefore, currently, many promising scrips are available at attractive valuations of less than 10 PE Ratios. It is only a matter of time that these scrips move upto around 20 or more. Not long ago, they had even crossed 30 PE.

8. There are some Mid caps and large caps which have moved thousands of times up from their valuations within 15-20 years time.

9. Only small caps with low valuations but with excellent, consistent results can give such huge price appreciation over a period of time.

10.             They catch the attention of all investors  in due course of time.

11.             Now, what are the factors which make a small cap of present days – a future star which can give a 1000 times price appreciation within a decade or two decades.

12.             First and foremost, there should be enough scope for sales growth in its product line. If growth scope in its product line is limited, then price growth will be limited to the number of times of sales growth. So, Potential for Sales growth is the number one criterion.

13.             Here, we must also consider geographical spread or extensive spread and intensive spread. Spread of sales in the same area and spread of sales in other geographies.

14.             We must also consider backward integration and forward integration possibilities.

15.             Of course, some Managements get over this by diversifying their product lines.

16.             So, Ambitious and imaginative managements is the number two criterion. We can even reverse the first two. Management quality first, product quality second – or vice versa.

17.             The third is – Profitability criterion. How profitable are the sales? Sales to Profits ratio is crucial. If Sales to profits ratio is attractive, as sales grow, profits grow exponentially.

18.             Freedom to increase Prices – is another factor. Some companies cannot pass on raw material price  increases to their customers. So, their profits suffer erosion in course of time.

19.             Availability of Raw Materials – is critical for manufacture and sales. For some companies, this is itself a problem. Such companies have difficulty in growing when raw material availability does not grow from current levels.

20.             CAPITAL INTENSIVE – some companies require huge capital and huge time to grow. Some companies attempt huge expansions at one go. They will take a long time to complete the expansion process. In the mean time, there will be no sales growth and investors can’t see any capital appreciation usually.

21.             No expansion or slow expansion – avoid such companies altogether. Huge expansion – go into them, only if you are willing to forego capital expansion for that much time.

22.             If already PE Ratio is very high – say above 30, usually, it is better to avoid such companies. It is not a hard and fast rule. If their rate of growth is very high and consistent, we can invest in them.

23.             Some people consider Price to Book value. In my view, this is applicable only for certain types of companies whose sales are reasonably proportionate to Book values. When companies are in expansion mode, book values increase fast. PB ratios fall. It indicates potential rise in future sales if the assets acquired are properly used.

24.             Price to Growth Ratio is another ratio. If Sales is growing every quarter, the rate of growth in sales and rate of growth in Price can be compared. But, whether the profits or better still, EPS is growing faster than the price is a better criterion.

25.             PE Ratio is of course the most often used ratio. This can be computed in many ways, depending on the type of company. And, none of them are perfect.

26.             Reason is – we are trying to estimate future, based on past . some methods are (1) today’s price divided by trailing 12 months EPS. This takes case of seasonal business and seasonal variations also. (2) today’s price divided by (4 x latest quarter’s earnings). This takes care of potential growth in earnings in future to some extent. (3) today’s price adjusted for abnormal rises or falls divided by latest quarter earnings adjusted for potential future growth in earnings. This takes care of definite future earnings potential.

27.             Any calculation gives only a trend and not a definite indication. Each company requires a different method but no method is perfect. Future projection is never perfect.

28.             So, watch out – as we go into the results season. Keep your mind free and adhere to Portfolio based approach.

29.             After all, winning is what we all want. I wish you all the best of luck