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
