When the index is doing well….we all buy into the optimism. It may actually be a great time to review your portfolio and SELL the duds and perhaps be in an index ETF. This is a tactical strategy of getting away from the high Beta stocks to safer territory – if the market goes up, the Sensex will. If the mid and small cap fall hard , you are still protected. If the large cap also falls you will still fall less compared to your mid cap and small cap. Also be aware of your ill-informed shifting you from large cap funds to mid and small caps…or enjoy the roller coaster ride!
It sound so easy to say ‘sell poor stocks’ . Here is a small note on what is a poor stock – and what are the characteristics:
1. Has a negative cash flow – and not because of growth investing. If the company is still ‘buying’ markets, establishing itself etc. in a difficult market conditions, the capital market will punish such companies real hard during hard times, so be careful.
2. Too much of debt: In an easy debt market in the world many companies take on too much debt to grow. When interest rates go up such companies will be hurt real bad. So high debt equity ratio, and low interest coverage ratio, expensive roll overs and inability to convert debt into equity will all bring the earnings and the price expectations to new lows. Infrastructure companies with many SPVs fall in this category, be selective avoid over-leveraged companies.
3. If the price has gone up more on p/e increase rather than earnings increase: a sure-fire sign of a share being over-priced. In real estate terms if the rents are stagnating and the ‘price’ of the house is going up, it is time to think of it as a bubble. May burst later, or much later but be prepared for the burst that is all.
4. Warnings before quarterly results: When a company revises its quarterly, and half yearly EARNINGS, the capital market ALSO reduces the expectation (price-earning ratio) thus dramatically hurting the price. See the high standard deviation in the price of Icici Bank.
5. After issuing the warning if the company actually follows it up with poor results and does not know how to cope with it, the market will kill it further. Of course the market may do it on the sell side too (Bharti fell to 245, remember?).
6. Company talking big – expansion, merger, foreign acquisition, etc. but has accumulated losses! If you had bought this share at Rs. 30 and is now quoting at Rs. 150, RUN with your clothes intact. If the share price falls, there will be NOBODY to buy it! So I am repeating point no. 1 – see whether the CASH is coming in or going OUT.
7. See the origins of bulk sales of the companies shares. This is a little tricky, but not impossible. Keep your eyes and ears open.
8. Keep reading message boards – Moneycontrol.com, Myiris.com, etc. they all have shareholders, employers, suppliers, etc. willing to tell you things which the media does not know. Keep track.
9. See whether there is a spate of resignations, large scale flight from one company or from the industry? Look at the mutual fund and life insurance industries! There is a massive reduction of people – and it is not the low end employee’s fault. It also reveals the culture of the company – and that is useful.
10. See the SEBI website / IRDA website to see whether the company has been warned, punished or warned your mutual fund, life insurance company or your broker – tell tale signs to change your broker.
these steps will keep your life, wealth and happiness – ALL intact immaterial of whether the market is at 18700, 13800, or 9800…or 76,000!
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