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Tips to identify winning stocks

April 21, 2008 12:19 IST

Since January 2008, the Indian stock markets have been on a decline. Investors, who had tasted success, with returns of over 40 per cent in the last few years, are now busy hunting for stocks that will give them stable returns.

So there are various theories such as low price-earning stocks, high dividend-yield stocks and turnaround stocks. Here, we take a look at turnaround stocks that are expected to do well.  

TURNAROUND STOCKS

 

Net Loss*

Net Profit*

 Price in Rs

 

 

2005-06

2006-07

Mar 30,07

Mar 31,08

% chg

V B Desai Financial

-0.27

0.23

9.56

76.59

701.15

Trade-Wings

-0.68

0.23

49.60

285.64

475.89

Jayaswal Neco

-34.73

22.48

11.94

32.04

168.34

VBC Ferro Alloys

-6.26

3.71

70.50

159.35

126.03

Khoday India

-13.82

10.13

47.00

99.65

112.02

Bombay Paints

-1.01

1.32

28.55

59.60

108.76

UB Engg

-19.86

2.62

41.00

85.55

108.66

Camlin

-1.53

36.07

121.90

182.40

49.63

Panyam Cement

-35.58

8.52

91.90

129.05

40.42

IFCI

-74.10

898.02

33.60

44.05

31.10

By definition, turnaround stocks are those companies, which were doing badly in the earlier years, but emerged profitable.

As a result, their stocks are also expected to do well. Of course, the process is tedious and time consuming, and even if you feel you've done all your homework, the pick could still go bad. A few tips on how to identify such stocks:

Management - As usual, the first thing that you need to look for is the management. In tough times, what will hold the company in good stead is the quality of management. So look for clues, whether the company is constantly looking to come up with fresh ideas or getting new people.

Even though fresh ideas and new people need not guarantee success, it surely makes sure that the company is willing to make changes to do better.

That gives a positive sign that there could be new products on the anvil and/or strategic acquisitions or other changes. It's important to take note of the new management team, in order to judge if there is a chance of improvement in the shareholder's value.

Product innovation/ new products: Looking at the attitude of the company. Are they still aggressive in the market? – Are there any new products that have recently been released? An indication of that can come from advertising spends of the company.

Often, a spurt in the advertising will bring in investors, who are gung-ho about the company's prospects. Also, any rise in the research and development (R&D) is a good indicator that a new product or service, or an improvement to an existing product or service, might be about to hit the market.

A look at the company's quarterly income statement would give you a fair idea on this front. However, rising spends are not the only indicators of success. But if you feel that the new product has a reasonable chance of increasing sales and profits, you could consider buying the stock.

Jump in the numbers: Any sharp rise in the sales numbers gives a clear indication that the company could be on the growth path.

The ability to predict a company's topline rise is an important exercise in determining whether the company is likely to do well or not.

For an outsider, who is looking at the company, from an investor's perspective, forecasting could be a difficult task. But looking at figures such as,

  • Market growth - Is the product category on the rise?
  • Market share - Is the company's market share in the category on the rise?
  • Pricing power - Is the company's market share helping it to hold prices or hike them?

    From such an analysis, the potential investor will be able to get an idea whether the company he is tracking, has the potential to perform in the days to come.

    Cost-cutting initiatives: Contrarily, if the company isn't showing dramatic growth in sales, it can still enhance shareholder value by opting for aggressive cost cutting.

    For instance, a manufacturing company's ability to reduce raw material costs or an IT or a BPO firm's cut on manpower is a good indication on the measures they are taking to cut costs and increase shareholder value.

    Buyback offers: Often companies are unhappy with their stock price and are willing to buy back their shares.

    When this happens, it may be construed as a sign that a company is in the midst of a turnaround or is expecting improved earnings.

    And more importantly, you don't have to get in at the beginning of a turnaround to profit, getting in on a rising company that looks to have long-term potential is still a solid investing technique.

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