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Friday, 4 July, 2008

When everyone is scared ...

When markets are choppy and everyone is scared, I think its the best time to identify some interesting opportunities. In fact WEB has this very famous quote "Be greedy when others are scared and be scared when others are greedy" that echoes the same thing.

Everyone from an individual investor to a Mutual Fund to an Institutional Investor is very very scared of Indian stock markets right now. Does this translate into oppurtunity? And if it does, how do we find companies that are worth investigating?

I am listing few things that I have used to identify stocks.

  • Look for companies where management (or insiders) have hiked their stake since this turbulence began in markets. Rationale: Management are the first people to know about the shape of the company and if they are covertly buying, that means that they are confident about the performance, and since Mr. Market is offering them a good price, they are buying.
  • Create a list of stocks where prices (after adjusting splits, bonuses, amalgamations etc.) are at the same levels as they were two, three years ago. Check if there has been a noticeable growth in terms of revenues, margins, return on capital employed etc. If there is, then these are being priced irrationally by Mr. Market and can be further investigated.
  • Look out for all the BSE and NSE notifications and updates. Since a lot of companies are being priced irrationally quite a few takeovers, buyouts, mergers would be on card. These notices might throw few very interesting ideas.
Please note that I am not trying to teach anyone anything here. I am just sharing my understanding of Mr. Market. Obviously a lot of it would be flawed and I hope someone will help me correct it.

How are you screening stocks? Is there another way to identify companies?