Saturday, January 21, 2017

Stock-Picking Strategies: Qualitative Analysis


Courtesy : Investopedia

Fundamental analysis has a very wide scope. Valuing a company involves not only crunching numbers and predicting cash flows but also looking at the general, more subjective qualities of a company. Here we will look at how the analysis of qualitative factors is used for picking a stock.


Management 
 
The backbone of any successful company is strong management. The people at the top ultimately make the strategic decisions and therefore serve as a crucial factor determining the fate of the company. To assess the strength of management, investors can simply ask the standard five Ws: who, where, what, when and why?

Who?
Do some research, and find out who is running the company. Among other things, you should know who its CEO, CFO, COO and CIO are. Then you can move onto the next question.

Where? You need to find out where these people come from, specifically, their educational and employment backgrounds. Ask yourself if these backgrounds make the people suitable for directing the company in its industry. A management team consisting of people who come from completely unrelated industries should raise questions. If the CEO of a newly-formed mining company previously worked in the industry, ask yourself whether he or she has the necessary qualities to lead a mining company to success.

What and When?
What is the management philosophy? In other words, in what style do these people intend to manage the company? Some managers are more personable, promoting an open, transparent and flexible way of running the business. Other management philosophies are more rigid and less adaptable, valuing policy and established logic above all in the decision-making process. You can discern the style of management by looking at its past actions or by reading the annual report's management, discussion & analysis (MD&A) section. Ask yourself if you agree with this philosophy, and if it works for the company, given its size and the nature of its business.

Once you know the style of the managers, find out when this team took over the company. Jack Welch, for example, was CEO of General Electric for over 20 years. His long tenure is a good indication that he was a successful and profitable manager; otherwise, the shareholders and the board of directors wouldn't have kept him around. If a company is doing poorly, one of the first actions taken is management restructuring, which is a nice way of saying "a change in management due to poor results". If you see a company continually changing managers, it may be a sign to invest elsewhere.

At the same time, although restructuring is often brought on by poor management, it doesn't automatically mean the company is doomed. For example, Chrysler Corp was on the brink of bankruptcy when Lee Iacocca, the new CEO, came in and installed a new management team that renewed Chrysler's status as a major player in the auto industry. So, management restructuring may be a positive sign, showing that a struggling company is making efforts to improve its outlook and is about to see a change for the better.

Why?
A final factor to investigate is why these people have become managers. Look at the manager's employment history, and try to see if these reasons are clear. Does this person have the qualities you believe are needed to make someone a good manager for this company? Has s/he been hired because of past successes and achievements, or has s/he acquired the position through questionable means, such as self-appointment after inheriting the company?

Know What a Company Does and How it Makes Money 

 
A second important factor to consider when analyzing a company's qualitative factors is its product(s) or service(s). How does this company make money? In fancy MBA parlance, the question would be "What is the company's business model?"

Knowing how a company's activities will be profitable is fundamental to determining the worth of an investment. Often, people will boast about how profitable they think their new stock will be, but when you ask them what the company does, it seems their vision for the future is a little blurry: "Well, they have this high-tech thingamabob that does something with fiber-optic cables… ." If you aren't sure how your company will make money, you can't really be sure that its stock will bring you a return.

One of the biggest lessons taught by the dotcom bust of the late '90s is that not understanding a business model can have dire consequences. Many people had no idea how the dotcom companies were making money, or why they were trading so high. In fact, these companies weren't making any money; it's just that their growth potential was thought to be enormous. This led to overzealous buying based on a herd mentality, which in turn led to a market crash. But not everyone lost money when the bubble burst: Warren Buffett didn't invest in high-tech primarily because he didn't understand it. Although he was ostracized for this during the bubble, it saved him billions of dollars in the ensuing dotcom fallout. You need a solid understanding of how a company actually generates revenue in order to evaluate whether management is making the right decisions. 


Industry/Competition
 
Aside from having a general understanding of what a company does, you should analyze the characteristics of its industry, such as its growth potential. A mediocre company in a great industry can provide a solid return, while a mediocre company in a poor industry will likely take a bite out of your portfolio. Of course, discerning a company's stage of growth will involve approximation, but common sense can go a long way: it's not hard to see that the growth prospects of a high-tech industry are greater than those of the railway industry. It's just a matter of asking yourself if the demand for the industry is growing.

Market share is another important factor. Look at how Microsoft thoroughly dominates the market for operating systems. Anyone trying to enter this market faces huge obstacles because Microsoft can take advantage of economies of scale. This does not mean that a company in a near monopoly situation is guaranteed to remain on top, but investing in a company that tries to take on the "500-pound gorilla" is a risky venture.

Barriers against entry into a market can also give a company a significant qualitative advantage. Compare, for instance, the restaurant industry to the automobile or pharmaceuticals industries. Anybody can open up a restaurant because the skill level and capital required are very low. The automobile and pharmaceuticals industries, on the other hand, have massive barriers to entry: large capital expenditures, exclusive distribution channels, government regulation, patents and so on. The harder it is for competition to enter an industry, the greater the advantage for existing firms.


Brand Name
 
A valuable brand reflects years of product development and marketing. Take for example the most popular brand name in the world: Coca-Cola. Many estimate that the intangible value of Coke's brand name is in the billions of dollars! Massive corporations such as Procter & Gamble rely on hundreds of popular brand names like Tide, Pampers and Head & Shoulders. Having a portfolio of brands diversifies risk because the good performance of one brand can compensate for the underperformers.

Keep in mind that some stock-pickers steer clear of any company that is branded around one individual. They do so because, if a company is tied too closely to one person, any bad news regarding that person may hinder the company's share performance even if the news has nothing to do with company operations. A perfect example of this is the troubles faced by Martha Stewart Omnimedia as a result of Stewart's legal problems in 2004.

Don't Overcomplicate
 
You don't need a PhD in finance to recognize a good company. In his book "One Up on Wall Street", Peter Lynch discusses a time when his wife drew his attention to a great product with phenomenal marketing. Hanes was test marketing a product called L'eggs: women's pantyhose packaged in colorful plastic egg shells. Instead of selling these in department or specialty stores, Hanes put the product next to the candy bars, soda and gum at the checkouts of supermarkets - a brilliant idea since research showed that women frequented the supermarket about 12 times more often than the traditional outlets for pantyhose. The product was a huge success and became the second highest-selling consumer product of the 1970s.

Most women at the time would have easily seen the popularity of this product, and Lynch's wife was one of them. Thanks to her advice, he researched the company a little deeper and turned his investment in Hanes into a solid earner for Fidelity, while most of the male managers on Wall Street missed out. The point is that it's not only Wall Street analysts who are privy to information about companies; average everyday people can see such wonders too. If you see a local company expanding and doing well, dig a little deeper, ask around. Who knows, it may be the next Hanes.

Conclusion
Assessing a company from a qualitative standpoint and determining whether you should invest in it are as important as looking at sales and earnings. This strategy may be one of the simplest, but it is also one of the most effective ways to evaluate a potential investment.



74 comments :

  1. Sir , your views on electrosteel steel

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  2. Sir wats ur view on uniphos enterprise

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  3. Sir your valuable views on India home and Krebs thanks a ton as always

    ReplyDelete
    Replies
    1. India Home is in a sector with reasonable potential, only question is Whether JM is serious about it.

      As you are aware there was delay in commercial production from Krebs , Still hopeful.

      Delete
  4. Hello Sir,

    What does indicate when promoters holding increases, decreases again increases (and sometime loop goes on). Does it indicate that promoters also get into making quick bucks?

    ReplyDelete
    Replies
    1. Many investors are checking only the percentage change in share holding pattern and reaching wrong conclusion. Fall in promoter share holding may happen because of allotment of fresh equity to non promoters and not solely due to selling of promoters.

      Delete
  5. Dear vp ji
    Thanks for the knowledge sharing.
    What's your opinion about tata coffee? Coffee prices are increasing. The business showing good improvement. Its right time to consider?

    ReplyDelete
  6. Hello sir,
    I have been reading your investment guidelines carefully and making long term investments. what would be your view on these if one is holding them at no cost( already taken out the profit).

    shemaroo
    Ceat
    BHEL
    MRO tek

    ReplyDelete
    Replies
    1. Tracking only Shemaroo which earlier recommended @ Rs.208 . Neutral at CMP Rs.420

      Delete
  7. Hi VP Sir,

    HINDUSTAN OIL EXPLORATION received much awaited clearance for Assam project.. Only 8 Km pipe line construction is pending which might take 1-2 months based on some news paper article.

    Your view on the development and valuation in current scenario.

    ReplyDelete
    Replies
    1. Hope worst is over, but considering the nature of business it may take some time to start and scale up production.

      Delete
  8. Sir, Are you tracking APAR industries, and if so, can you please provide your view on the stock ? The company has made an open offer to buyback at 630 Rs ....... would you consider this as a sign of strong future prospects ? Thank You.

    ReplyDelete
    Replies
    1. Stock already become a four bagger from suggested level, Neutral at current rate.

      http://value-picks.blogspot.in/2014/01/apar-industries-repeat.html

      Delete
  9. Sir, any improvements expected in SKM, with overseas market having bird flu creating temp demand , thanks

    ReplyDelete
    Replies
    1. Not expecting any serious positive impact this time.

      Delete
  10. sir please share your view on visaka ind and dcm shriram industrirs ltd

    ReplyDelete
  11. hi sir,
    pranam sir>> thr is one company goldstone infratech ltd.. it is now did a JV wid BYD chinese company to manufacture electric buses..they just got the order from BEST to manufacture 6 electric buses..how u see this compnay as a whole..

    ReplyDelete
    Replies
    1. Not much idea about promoter quality , hence no comments.

      Delete
  12. Hi sir, your views on electro steel casting.
    Views on orient green power company sir? They have made a deal with Il&fs. Company made a profit in this quarter. Multibagger in the making considering that the government is going to spend in the renewable space?
    Views on tanla considering mobile transactions to increase hereafter.
    Thanks in advance Sir.

    ReplyDelete
  13. Sir, any update on SKM, there is sudden movement started in it with price movement of over 50% upside within a month, Sir anything happening here?

    ReplyDelete
    Replies
    1. Not aware of any reason for drastic improvement in performance, as of now.

      Delete
  14. Hello Sirji, Your View on CONCOR(Container Corporation on India),Is it decent for long term and for a core Portfolio Stock at this price point?

    ReplyDelete
  15. Do u track aarey Drug cmp 65.. & sphere global @ Rs 75

    ReplyDelete
  16. Sir your opinion on v2 retail bumper results?

    ReplyDelete
  17. Sir what's your call on Astraa microwave ??

    ReplyDelete
    Replies
    1. Suggested around Rs.40 earlier , neutral at CMP

      Delete
  18. Dear Sir,

    The management of Vakrangee Ltd. has recently announced that the company is debt free.
    This stock has been going up steadily over the last few months,posting good numbers and has hit an all time high of around 310 now.
    Vakrangee has tie ups with Amazon India for their e-commerce business in rural areas and also with other major names.
    I am holding some shares of Vakrangee and I would like to know your views about this stock.

    ReplyDelete
  19. Hello sir,

    whats your view on salzer electronics after merger of wire business ?

    ReplyDelete
    Replies
    1. Stock price stuck in a range for a longtime . I think it mainly because of the not so good situation in the whole industry company is operating and expected to revive there is overall improvement in sector.

      Delete
  20. Do u track AYM syntex& Ruchira soya at cmp?

    ReplyDelete
  21. Can u track poddar pigment at cmp264

    ReplyDelete
    Replies
    1. Average risk takers can book at least part profit.

      Delete
  22. Dear Sir, Your views on Godawari power Tks

    ReplyDelete
    Replies
    1. Overall revival in sector and recent coal linkage may help the company.

      Delete
  23. Sir do u think power mech has potential to perform in near future?

    ReplyDelete
  24. Sir, please share your view about A K Capital.

    ReplyDelete
  25. Dear sir
    Kindly share your ideas about bartronics, bengal&assam, taneja aerospace. Thanks always.

    ReplyDelete
  26. Sir, kindly share your valuable views on Vikas ecotech, Hindustan adhesives & Jasch industries. Thank you

    ReplyDelete
    Replies
    1. Skeptical on first one and not tracking others.

      Delete
  27. Sir any updated from Q3 results of Fiberweb? thanks much in advance

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  28. sir your views on ganesh benzo.

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  29. Sir, do you track MAJESTIC RESEARCH SERVICES & SOLUTIONS LTD?

    ReplyDelete
  30. sir,any views on these scripts...
    pnb gilts
    inidan toners
    alpine housing
    sobha developers
    sir I am a long term investor, kindly suggest me among these scripts

    ReplyDelete
  31. Respected Sir,

    What your take on Sterling Tools and shree rama multi. Can I invest in them at CMP. Please advice.

    Thanks and regards
    Preeti

    ReplyDelete
    Replies
    1. Adjusted to stock split ,Sterling Tools already turned as a Ten bagger from suggested level , nothing to comment specially at CMP

      Delete
  32. Please share your views on Canfin and Yes. Both have turned multibaggrs from the time you recommended. Should we hold, book partial profit or still worth adding. Thank you

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  33. Sir your views on pecos hotels and pubs

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    Replies
    1. As of now a small company but in a business with potential.

      Delete
  34. Hi Sir, your views on Divyashakti Granites in case you track it?

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  35. Hello vp sir any idea in vardhman poky ?

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  36. Any hopes on Binny ltd stock recovery? Any news on Binney ltd land sale OR construction ?

    ReplyDelete
    Replies
    1. Latest Binny result announcement shows that cash has Sir, started flowing in due to bookings

      Delete
  37. Sir
    Are you aware of any debt restructuring in Bilcare.Looks like somebody is accumulating huge Qty every day.Is it a turnaround story

    ReplyDelete
  38. sir plz share ur views on intellect design, fortis health & healthcare global...regards

    ReplyDelete
  39. Sir,please share your views on Sree rayalaseema hypo, Kanpur plastic, nitin spinners, PNB gilts, Rishiroop, Ommetal infra at CMP

    ReplyDelete
  40. Sir please share your views on T&I global ltd.

    ReplyDelete

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