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10 ways to identify a poor stock, sell it and scoot!

June 29, 2014 14:12 IST

10 ways to identify a poor stock, sell it and scoot!

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P V Subramanyam

Immaterial of whether the market is at 18700, 13800, or 9800... or 76,000 these steps will keep your life, wealth and happiness intact!

Everyone says sell poor stocks. But what is a poor stock? Read this for an answer!

Markets are up and your portfolio is doing well (presumably) and you are euphoric. You just started a new SIP and also put a lumpsum into one of the funds in which you are doing a SIP.

Or you just ended up buying some more shares of a company whose shares you already have. You are feeling great, right?

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.

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...

Please click NEXT to continue reading


Photographs: Dominic Xavier/Rediff.com
Tags: SIP , SELL , ETF

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1. Has a negative cash flow

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And not because of growth investing. If the company is still 'buying' markets, establishing itself etc. in difficult market conditions, the capital market will punish such companies real hard during hard times, so be careful.

Some high growth companies could also be here, so a detailed analysis is a must. Look at FCF (forward cash flow) for say 5 years before you jump to conclusions.

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 get 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 (special purpose vehicle) fall in this category; be selective, avoid over-leveraged companies.

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Photographs: Dominic Xavier/Rediff.com
Tags: FCF

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3. Warnings before quarterly results

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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.

4. If the price has gone up more on PE (price earnings) 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.

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Photographs: Uttam Ghosh/Rediff.com

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5. Following what a company says

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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.

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Photographs: Uttam Ghosh/Rediff.com

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7. Somebody selling a stock in huge numbers

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See the origins of bulk sales of the company's 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.

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Photographs: Uttam Ghosh/Rediff.com
Tags: 1

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9. Sudden executive flights

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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. Market regulator's action

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.


Photographs: Courtesy, Outlook Money
Tags: SEBI , IRDA

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