Chekpoints to Stock Analysis

There is no thumb rule or perfect way to analyse a stock but there are a few basic rules that one can try and follow to minimise unwanted deviations. This post will try and discuss a few basic criteria and also a few common mistakes done while picking and analysing stocks.

Common Mistakes

• Running the criteria selected for only one year (usually the current year)
• Applying/ following the same framework for stocks pertaining to different industries
• Picking stocks purely based on low P/E and high EPS
• Not taking market news and Mass Psychology into account
• Blue Chip companies with the highest Market Cap are the safest

Checkpoints

• First pick an industry which is growing and relatively shielded from economic tremors. Usually this would filter down to Power and Core Infrastructure
• Do not analyze stocks purely based on Ratio Analysis. Take Technical Analysis into account as well. Look at factors such as Volume of trade, Price Volatility of the stock, adverse or positive news impacting the stock
• Analyse stocks from capital intensive sectors on the basis on ROCE (Return on Capital Employed) and others on the basis of EVA (Economic Value Added)
• Always analyse every parameter for at least past 3 years or more to try and figure out a trend. (Never take an average. It is never a true measure)
• Look for P/E between 10 and 15 if you have a slight appetite for risk vs returns. Historically if a stock has had high P/E but is currently trading at a P/E of 5 or less due to adverse market conditions, then make it your first choice
• Analyze company earnings and check the Profit Margin vs the industry average. At least 80% of the earnings should come from Core Operations of the business
• Make sure that your investment horizon is at least 1 year
• Invest money that you would not need in the near future assuming 100% capital erosion

Posted by Rahul Gosain

Pump and Dump

The year 2008 was definitely not the best for most stocks and Penny Stocks are one of the worst hit. This post is to specifically warn our readers about a certain threat in 2009. Several large brokerages in India have lost millions in Penny stock holdings and I have come to know from my friends in the market that the year 2009 will witness widespread use of the Pump and Dump strategy to trap investors.

"Pump and Dump is a form of microcap fraud that involves artificially inflating the price of a stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price". (Source: Wikipedia)

So don't fall for a call or an e-mail by your broker this year if he claims to have some inside information on a stock or assures you very high short term returns. You just might fall victim to an oversold stock while your brokerage house mints money in the process.
Be Informed. Be Safe. Be Smart

Posted by Rahul Gosain