A few years back, the stock market reaction to quarterly numbers was not too high and stocks would rarely move by a few percentage points. Now a days, it is quite common to see a 5-10% swing in the stock price, based on whether the company has beaten or fallen short of expectations. Most of the times, the expectation is around the net profit with minimal analysis beyond the reported numbers.
If you can keep your emotions in check and look beyond the headlines, you can make some sensible investments during such emotional reactions
Homework
For starters,
one needs to have done his or her homework before hand. You have to constantly
look for new ideas and analyze them in detail on a regular basis. A lot of
times, the company could be performing well, but priced for perfection (high valuations).In other cases, the company could be going through a cyclical downturn and the stock price would be reflecting the near term bleak prospects (though the long term could still be good)
In all such cases, one should do a detailed analysis before hand and have a trigger price in mind. If you are lucky, a excessive reaction to the result could give you an opportunity to act.
Digging
through the results
Once the
annual / quarterly results are announced, it is important to analyze the
results in detail and look beyond the obvious numbers.For starters, look at the lead indicators. For example, in case of banks and financial institutions, disbursements / approvals start rising before the topline and profits pick up. If you keep a track of this indicator and see it rising, it is a good indicator that the performance of the company is likely to turn around soon.
If the price is right and the lead indicators point in the right direction, it may make sense to start a new position in the stock.
Have a sense
of the business cycle
In addition
to the obvious indicators, one needs to have sense of the business cycle too.
You don’t have to predict the exact timing of the turn, but a general sense
will help. This is relevant for the cyclical industries such as capital goods
or materials (cement, steel etc) and banking too.The quarterly results could give you a sense of the drop from peak to trough (drop from the peak profit levels) and can be used as a rough guide to plan your purchase.
Read /listen to the conference call
The conference call is unique source of information which is not available through any other channel. One should read the transcript or better yet, listen to the conference to gauge the thought process of the management and the direction of the business.
All the above suggestions may sound fuzzy to you and do not provide a clear buy signal at any point of time. The problem is that by the time the signals are clear and loud, it obvious to everyone that the company is doing well and the price starts reflecting the same.
If one wants
to generate above average returns, then it is crucial to keep your emotions in
check and look for the faint signal in all the noise. One needs to look at the
results holistically and digest both the quantitative and qualitative information
to arrive at a conclusion (which often means doing nothing). It is not as
difficult as it sounds, but requires a different mindset and practice to have
some success at it.
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.
Hi Rohit,
ReplyDeleteThanks for another insightful article.
Regarding conference calls, where can one get information about these calls - when they are taking place, how to join these calls, eligibility to join these calls (anyone or shareholders only?)
mkd
Agree completely. The volatility in stock prices have been so high of late, that it is indeed good times to be a value investor. :)
ReplyDeleteHi Rohir,
ReplyDeleteIts been a long time!.......These results are just triggers, operators set the game well in advance quoting from Gaurav's blog....."Insider Trading ~ Stocks being allowed to run beyond merit ~Selective Punishment ~ Circular Trading ~Biased IPO Gradings ~ High Frequency Trading making a mockery of Research & Fairplay"
Regards
Anurag Awasthi
hi mkd
ReplyDeletea lot of times you can find the conf call on the company website itself
rgds
rohit
hi anurag
ReplyDeletetrue ..operators are always gaming the market. at the same time, you can choose to focus on the long term and avoid getting trapped by them
welcome back
rgds
rohit
Hi Rohit,
ReplyDeleteCan you please explain this- "in case of banks and financial institutions, disbursements / approvals start rising before the topline and profits pick up. If you keep a track of this indicator and see it rising, it is a good indicator that the performance of the company is likely to turn around soon."
How to keep track & decide when to go long in banks & NBFCs?