By Vipin Agnihotri
In my opinion, there are plenty of proven companies such as Reliance Industries, Bajaj Auto and Infosys technologies. But fact remains that they might be fully valued. There is no doubt that the whole market is watching their business routines and news relating to any change that may be positive or negative for those companies.
If experts are to be believed, the market quickly reacts to such information and as such their value would reflect their perceived business prospects at any given point of time. It is worthwhile pointing that the prices of such stocks may take a random walk on the basis of certain general news, which has a bearing on the overall market sentiments but having no effect on their prospects.
Generally speaking, those kinds of situations give opportunity to get into such excellent stocks at a price below the normal valuations. Remember that such events and news won’t often come. The pivotal factor here is that even if they occur also how will one know what is the right price to enter a stock. It is worth mentioning in this regard that volumes have been written on how to value stocks and volumes remain to be written on the subject. This is because of the simple reason that the circumstances keep on changing and new valuation parameters are designed and employed in such a way to meet changing circumstances.
Though, there are plenty of complex valuation routines you need to have a holistic analysis that the company is doing well on all counts and not just valuation. The India Street has decided to look into the methodology, which can help an investor adjust the limits of his parameters on the basis of overall outlook.
The methodology is more of quantitative in nature to get rid of subjectivity and needs good amount of past data regarding their balance sheet, profit and loss account and cashflows to pinpoint under-valued stocks. There is no doubt in my mind that this step-by-step approach can assist you in finding a few good undervalued stocks. But sometimes you may not find one also.
Yes, you guess it right! Finding undervalued stocks are like finding oyster pearl from deep inside the sea. In theory, the analysis involves 5 basic factors and selects only those that satisfy all the parameters used for each factor. It is up to you whether to relax a parameter because some other parameter is so good so that it will negate the weakness of the other parameter. The five factors to analyze the stocks in the market are stability, profitability, capital structure, management and valuation.
Stability can be attributed to the stable income generation capacity of the company and its potential to grow. Profitability, on the other hand means different things to different people. For a lender the total cash flow generated out of operation is pretty critical. But for an equity investor the Net Profit Margin is more important.
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