Sunday, August 10, 2008

Are you ready to sell your stock when it crashes?

In the financial circle, end of each quarter is treated with both passion and caution. Assume that you have purchased a stock expecting that its quarterly results would be very good and with everyone’s expectation on the positive side, the value of the stock soars naturally prior to the declaration of the results. This situation is called “generation of hype”. If the results do not meet the street targets, the stock bears the brunt.

Do you think when the outcome does not meet the market expectations, you have to necessarily sell the stock or in other words, the company’s performance is not up to the mark? Then how will you assess the performance of the company and in turn the performance of the stocks? What to look for?There are some basic factors to be looked at while assessing the soundness of the stock and its worthiness to sell. Here are some…

One time expenditure
If fall in profit is due to one time affairs like legal disputes, VRS expenses for employees etc, it may not be given more importance while evaluating the stock. The contrary is true in that if the profit is due to any one time boost like sale of real estate and buildings etc. it has to be taken with a pinch of salt.

Seasonal business
Profit in some enterprises fluctuate depending on the season like Hotel business, cement industry etc. and hence the performance of a quarter alone will not reflect the health of the company in toto.

Trends in input cost
The cost of inputs determine the profit of a company and this is true in case of airlines and automobile industries. When the price of fuel goes sky high, the aviation industry incurs huge loss while the higher cost of steel dents the profit of the automobile business.

Expenses for the launch pad
By launch pad, I mean the cost incurred to launch a new project or scheme, which is of course not a continuous affair. This could also be due to expenses involved in the research and development of the product. Hence an investor shall be choosy and evaluate whether the launch pad cost really had an effect on the chosen stock.

To conclude, quarterly figures of a company need not necessarily reflect the true financial strength. Sustainability in earnings and general business conditions are more important. It is the duty and responsibility of the intelligent investor to see if there is a systemic decline in the business or profitability. If proved so, you can make the right decision to sell them off. If the fall is temporarily due to quarterly figures not meeting the street prices, then need not get panicky and sell your stocks.

The prudent investor will weather the bumps patiently to get a smart return and the wait will be definitely worthy!

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