Signs to looks out for while buying stocks

Falling markets are always the ideal time to buy ‘wonderful companies at fair prices’. But if you need more assurance, a great indicator is when the Promoters (founders, owners) of the company buy their stock.

Come to think of it is very much like eating what you cook. 

Much like a chef preparing a gourmet dish, the recipe for spotting an out-performer requires a lot of ingredients. Understanding the present and prospective business, talking to the client, suppliers and assigning a fair value etc. But the one element that is a strong indicator of long-term value is when an insider to the company is buying its stock.

And who better than the promoters themselves. They are the ultimate insiders. The flag bearers of the company that decide everything. They understand it best and know the true picture of the existing business, corporate governance, it’s prospects etc. So if they eat more of what they have cooked, it means a lot. And is a strong positive. It indicates:

  • All is well with the company

  • That the company is available at a discount to its fair value

  • That they believe in the bright prospects of the company over the long-term

 

Even now when the markets fell during the onset of the COVID-19 crisis, several promoters flocked to buy more shares of their companies.

Asian Paints

CRISIL

IDFC First Bank

Maruti Suzuki

Swaraj Engines

Alembic

Dabur 

Indostar Capital

Mayuri Uniquoters

Tata Chemicals

Alembic Pharma

Deepak Nitrate

JK Lakshmi Cement

Mindtree

Tata Consumer 

Aurobindo Pharma

Escorts

KRBL

Motilal Oswal

Tata Power

Bajaj Auto

Glenmark Pharma

JK Paper

MRF

Tata Steel

Bajaj Holding & Investment

Godrej Industries

Jindal Steel & Power

Mold Tek Packaging

Voltamp Transformers

Berger Paints

Godrej Agrovet

Sun Pharma

PVR

Zydus Wellness

Cadila Healthcare

Grasim

Supreme Industries

Shoppers Stop

United Spirits

Chambal Fertilisers

Greaves Cotton

Hindalco

Shakti Pumps

HCL Technologies

Source: BseIndia

Now, I am not condoning buying purely based on this one indicator. As I mentioned before, it is one of the many ingredients that go into making a gourmet (great) stock. But nothing, and I mean nothing beats in-depth research when it comes to spotting the next multi-bagger.

Especially in these times. When there is still so much uncertainty surrounding us all. 

You must focus on the fundamentals along with special attention towards the leverage levels before investing in a company.

Consider looking at:

  1. A healthy balance sheet - Low levels of leverage, a high debt-equity ratio, and high-interest coverage ratio is positive. Imagine owning a business with a large pile of debt facing a sudden collapse in demand. Repaying loans or even the interests payments might become difficult.

  2. Strong cash flow generation - a company with strong cash flow will take a lot less time to re-start operations. As they won’t need additional money/funding for the same.

  3. Attractive valuations that provide a margin of safety - buy a stock with a margin of safety. In case your expectations don’t pan out the way you imagined, then you have a cushion to absorb the shock.

  4. Competent management to handle the crisis

  5. Bright business prospects –Market leaders in their fields are always preferable. The company should either boast a great relevant product or service. Just steer clear of companies that have been ruined by competition or have outdated products and services.

 But what happens when promoters divest from the company?

As many promoters increased their shareholding, some sold. These include Axis Bank, Apollo Hospitals, Bajaj Consumer Care, Havells, Mahindra & Mahindra, Page Industries, Wipro, Jubilant Foodworks, Jyothy Laboratories etc.

Does that mean the business is not in good shape and has a bleak future?

Not necessarily. In the past, there are several instances where promoters reduced stakes but the company went on to perform well. Hence, as alarming as promoters offloading stake might be, you must look into the reasons behind it. Maybe they have to do it due to regulatory requirements, to raise more capital, for deleveraging, for new investors etc. 

But a big negative is when promoters reduce stakes consistently. Look for the level of promoter pledging and any other reason for the stake sell. Go through the fundamentals of the company and ensure that the reasons you bought it originally still hold.