Bargain Hunting For Stocks

The market’s recent flare-up – or flare-‘down’ – has created three camps in the investor community: those who have turned bearish, those who have become nervous enough to reduce their equity exposure, and those who remain bullish over the longer term and see this as an opportunity.

stockaxis belongs to the last camp.

In our opinion, investors should view market corrections as an opportunity to invest in the leaders. Market dips provide you with attractive opportunities to pick stocks of companies with strong businesses, unique and superior products/services, robust financials and good prospects of growth. These companies have the potential to generate the highest return on equity, the largest profit margins, the strongest sales growth, and the most dynamic stock-price action.

It's true that while equity offers the highest potential returns among all asset classes, it also carries a higher level of risk. But all stocks are not the same; in other words, every stock has a unique risk-reward ratio. The key to successful stock picking is to spot companies that offer the highest rewards with reasonable risk. The market recognizes such companies by driving up their stock prices. Instead of pondering over a ‘high priced’ stock being ‘expensive’, reverse your view on the stock by judging its prospects. In all likelihood, a high price will run up even further as the company grows its business and expands its markets.

A number of our clients have been making enquiries about stocks that have seen a steep fall recently with the intention of picking them as they are available ‘cheap’. However, these stocks have weak financials, suspect managements and poor prospects. We continue to advise our clients to opt for stocks of fundamentally strong companies… and there is no dearth of such companies.

Here are some pointers on spotting winning stocks that should form part of your portfolio:

1. The company should belong to a leading industry. Every bull market has its own set of leaders which are almost entirely different from the leaders of the previous bull market. To identify which industries are on the forefront, some research and analysis will give you clues on these leaders.
2. The stock is trading near its 52-week high (at least 20% from this level).
3. The stock’s price trend is showing strength, which can be judged from the return it has generated in the last few months in comparison to its peers.
4. Most importantly, the company should record growth in its earnings and other leadership qualities as explained above. Higher earnings should be the result of higher sales and increased margins.

Bottom Line for Investors

Markets are going to continue being volatile thereby presenting multiple opportunities to investors. However, some ‘opportunities’ may not hold any weight since the price drop in the stock could be justified by lack of earnings, poor financials and suspect management. It’s always advisable to dig deeper to assess the reasons for the price fall in order to decide whether it truly presents an opportunity or otherwise.