Before you invest in a stock you must have obviously done your homework and your due diligence and then committed your hard earned money. But then your job as an equity investor does not end with identifying a stock and investing in it. Monitoring the same is equally important. What are the key things to consider when buying shares? What factors to consider when buying stock? If you have invested in equity funds, how to monitor mutual fund performance? There are 10 factors you need to consistently monitor once you have invested in an equity share. In fact, there are 10 probing questions you need to ask..
1. What is the business outlook of the company?
Not all great businesses are able to deliver stock market returns consistently. For that the business outlook has to be sound and the company must be able to capitalize on the same. When it comes to investing in commodities, monitor the global commodity cycle. When you are investing in FMCG stocks monitor the margins and the pricing power of the company. When you are investing in auto stocks look at the monthly sales figures and the trend. If you are investing in oil refiners then look at the gross refining margins (GRM) and compare with the global benchmark. Business outlook is at the core of stock performance.
2. Whether any completion for the product or service is emerging
Is there new competition emerging for the company? Look what happened to Nokia when Apple and Samsung flooded the market with smart phones. The company went from leadership to bankruptcy in no time. Take the case of Kingfisher Airlines. The company just could not withstand the onslaught of higher fuel prices and airline competition. Remember, competition can emerge from direct competition or from indirect competition. Banking, for example, is facing sharp competition from NBFCs and MFIs. You need to track all that!
3. Is the company sustaining growth in top line and bottom line?
Stock market is all about growth in top line and the bottom line. Look at what happened when L&T and BHEL turned from flat to negative growth post 2011 when the capital investment cycle turned downward in India. Look at what happened to PSBs in India when the burden of NPAs became too much. Look at how education companies in India just crumbled under the weight of debt when their business models turned out to be too non-remunerative for their cost structures. Your stock is good as long as growth is good.
4. How is the company able to maintain and improve its margins
Margins are all about efficiency and it begins with operating margins (OPM). That shows whether the operations of the business are sufficient to address the residual costs. Also focus on net profit margins as that is what the shareholders get. A good company is one that can sustain margins even when sales are not growing. That is what made mid cap stocks outperformers in the Indian markets in the last 5 years.
5. Is the company taking on high cost debt
Debt is a strict no, especially high cost debt. When you take on high cost debt the first casualty is your interest coverage and that is how most companies in India went bankrupt. Look at the companies referred to NCLT under the IBC. Companies like Amtek, Bhushan Steel, Videocon and Essar just could not handle the debt burden. The likes of GVK, IVRCL and GMR were no different. A company with low levels of debt has a better chance of creating wealth for shareholders.
6. Does the company have un-hedged foreign currency exposure
It could be your exposure to imports or it could be exposure to foreign currency borrowings (FCNR). Either ways, unsustainable levels of debt cannot run for too long. In case of foreign currency liabilities, a strong dollar can make things much worse. Keep a close tab on this front.
7. Has the auditor qualified the annual reports
Normally, auditors qualify the report if they are not satisfied with the transparency and disclosure levels. They can also qualify if they have serious concerns over the financials of the company. There could also be a case for qualification if the contingent liabilities are threatening to get out of control. Keep a tab on auditor qualifications and that can be a major negative for stocks.
8. Has the SEBI initiated any investigations into the stock price
If it is a routine inquiry then you need not be overly worried. But if there are SEBI concerns like circular trading by select brokers consistently, or if there is a case of insider trading by the management, you need to be cautious. Such cases can do long term damage to the image and the financial strength of the company.
9. Is there too much churn in the top management of the company
To be fair, every company does see churn at the top level. But we are talking about situations like Gitanjali Gems where the top brass left almost en masse from the company. Such situations are not normal and indicate that something larger is brewing. You need to immediately act on the stock in such cases. En masse resignations at the top level should be the first signal that all is not well with the company.
10. Is the stock outperforming the benchmark index
That is the proof of the pudding. You invest in a stock to outperform the index. Otherwise you are better off being in an index fund. Why should you take the trouble to select equities and monitor them if you are going to get just index returns? Occasional underperformance is understandable. But over a longer period if you find the stock underperforming quarter after quarter, then surely all is not right!