We always look for next Multibaggers stock to bring in our portfolio and to create wealth from Stock Market. But have you ever given a thought to which type of stocks you should not buy?
In this article we will look for different parameters which will help you to decide which type of stocks you should not invest in. If you know what you should not do, chances of mistakes will be less.
Specially when it is matter of money be very careful. In Stock Market if you can protect your capital in early days that is also an achievement.
Now Let’s discuss one by one:
- Company with High Debt: One of the very famous US Market Fund Manager Peter Lynch says if a company has no debt it cant go bankrupt. If you want to protect your capital and also don’t want to take too much risk then look for debt free or lower debt companies. High Debt companies are more dangerous investment in a rising interest rate environment.
- Having Corporate Governance Issue: There can not be only one cockroach in the kitchen. When you find any issue with corporate governance in any company, the very first thing you should do is to sell it. Don’t wait for more issues to come in public. Always look for honest management who take care minority shareholders’ interest.
- Having High Promoter Pledging: High Promoter Pledging in a company is also not a good sign and investors should be cautious while investing in such companies. Generally, companies having promoter pledging above 20% is not good for investors who want peaceful investing experience.
- Correction of more than 70% without any reason: Investors should be very cautious while investing in any company which has fallen more than 60-70% from recent high without any concrete reason. In Market crash companies do fall 30-50% but if a company is continuously falling, then there must be something wrong with the fundamentals. If you find it cheap without any deep research, it can prove to be a trap for you.
- Inconsistent Earning: If you find inconsistency in earning of a company then either it is in cyclical industry or management is not competent enough to take timely decisions. In this case investors who are looking for consistent compounders should avoid such company. As cyclical stock need deep analysis of that particular industry and entry near the bottom and exit near the top is very important in Cyclical Stocks.
- High PE with lower growth: If you find a company trading at 70-80 PE, but its top line is growing at 10% only, then you will find either it has to bring growth, that will justify its valuation or otherwise such companies wont generate super returns in long run. Stock Price is a function of PE X EPS. Stock Price will move up only when either PE gets rerating or EPS keep growing. If EPS is growing in single digit or lower double digit then only similar return you can expect provided market don’t derate the PE otherwise chances of zero or negative returns can not be rejected.
There are other reasons too, which you should look for when investing your hard earn money in stock market and picking stocks like avoid companies having lower promoter holding, market cap below Rs.500 Cr (Penny Stocks), Fraud Promoters, Loosing Market share, Laggard in Industry, Companies having too much Govt Interference etc.
Hope after this article you will be very careful about what type of companies you should not invest in if looking to create wealth from Stock Market in long run.