- 1 Unexpected Ways to Find Stock’s Decline That Can Give You Better Returns
- 1.1 Increased in Negative News Coverage
- 1.2 Debt Is Too High or Over Leverage
- 1.3 Industry Challenges
- 1.4 Insider Selling
- 1.5 Dividends
- 1.6 Top Executive Changes
- 1.7 Laudatory Analyst Reports
- 1.8 Revenue Slow Down
- 1.9 Earnings Growth Not Sustainable
- 1.10 Political Problems
- 1.11 Unexplainable Higher PE than Industry Average
- 1.12 Company Getting Out of their Core
- 1.13 Wrapping Up
Unexpected Ways to Find Stock’s Decline That Can Give You Better Returns
You have invested your hard earned money, and you want to ensure that you predict the fall of your stock much before other do.
Don’t mistake minor corrections for a selloff. Most people don’t get the maximum benefit from their investments, and they mistake minor corrections for loss.
Remember we had spoken about The Propensity Effect the habit of selling the winners and holding on to your losers. That’s one way of looking at it.
There are various other aspects to look while predicting a stock decline.
In this post, we are only going to talk about warning signals on a stock’s decline. How to treat a stock decline effectively and efficiently would be covered in the coming weeks.
Don’t mistake triggers with real actions. Stock price triggers are wrongly mistaken as stock’s decline wrong decision could be taken. The other way round also stands true. It has been rightly said by Safalniveshak “When In Doubt, Please Don’t Predict”
So, let’s take a look at some more of those types of glaring warnings in detail.
Source Photo by Foodie Factor on Unsplash
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Increased in Negative News Coverage
Marketers Lean towards negative news, I am not saying this top marketer is. Positivity and Negative are correlated with the with moves in the market.
Don’t take the news too seriously but neither should you ignore them.
Many times this is the reason for false triggers. At moments like this is when your ground research is tested. The Impact of the negative news and how long would it last is very crucial for analysis. If the negative news impact is fundamental to the company, then you don’t take it casually.
It’s very often said to buy the rumor and sell the news. Grapevine sometimes does the works for you.
Debt Is Too High or Over Leverage
Growth & Income are the schools of thought for investing.
Very often growth fueled by debt or leverage should be a sign of caution. Income can lead to a generation of growth. Achieving growth at the cost of income is a new school of thoughts which I don’t agree.
Also, you are buying today at the cost of tomorrow. Point of consideration while looking at the companies debt.
- Debt fueled growth rate should be sustainable.
- Debt servicing should ideally happen from profit and not capital.
- Usage of debt to acquire or enter into the unventured field should not be left unnoticed.
Company’s immunity to the sector challenges is very rare.
A predetermined analysis could go a long way. Individual companies ensure that insulation of their businesses from industry challenges. These are the ones who prosper in the long term.
There are many ways in which companies can insulate themselves. Industry slump is unavoidable. Especially in cyclical industries where up and downs are part of the industry. One can easily follow the industry or sectoral news to keep track of the situations.
Insider trading was not taken seriously a few decades back when relying on the grapevine was more than the information itself.
With the advent of informatics and the case of Satyam Computers insider selling caught the radar like never before. Early exits of share holders before the fallout of Satyam Computer has made this point very important.
Unlike early days, stock options are more used than ever before. This could be treated as one of the key triggers and ensure that either precautious step is taken or change the holding altogether.
Value investor believes that consistent dividends are usually profitable high growth stocks.
When one company stops paying dividends which it often used on a regular basis, this gives a lot of signals. One should make sure if dividends payout is effected of a slump in the market or economy which is unavoidable by the company.
But on a comparative basis if the company has stopped paying dividends it’s a sign of losing confidence. At certain times when the enterprise dividends one should also consider if they have a better opportunity of deploying of funds. There are certain companies who have never paid dividends which do not fall under this particular point. But otherwise, dividends are crucial.
Top Executive Changes
Change management is always a challenge. The only thing which is permanent is Change.
Is the top executive change planned or a result of unexpected circumstances? Things to look out for when the change is at the top.
- Planned or Unexpected Circumstances.
- Top Executive familiarity with the Company and its workings.
The stock market takes the change in a negative way. Yours should not necessarily be the same.
Laudatory Analyst Reports
Ladatory analyst report is my favorite. Individual research papers from the top research houses are so flattering that it can be quickly found out something is not working fine.
Being over ambitious is one thing and having a favorable forecast for the company with unusual growth estimated and target price estimates. Favorable growth forecast would be a certain cause of worry to me. Companies with such reports should not leave the hindsight.
Revenue Slow Down
Growth in earning and income are the top priorities of the corporate boardroom. Chances are at times that slowdown in revenues has not affected the earning’s. Earning not getting affected is a significant point.
Let’s look into the aspects of revenue slow down before concluding.
- When did it Slow down?
- The reason for the slow down?
- How slow is it?
- Profit margin pressure
- Creative destruction.
- The closing of non-profitable and capital consuming products?
Once you have the answer to the above questions, you could conclude yourself on stock’s decline.
Earnings Growth Not Sustainable
The main target of the companies boardroom could be revenue and earning growth. What looks good for the company is to necessarily good for the investor per se.
The earning growth is coming at what cost is very important. One should always check the companies growth ambitions and sustainability.
- Cost of the Growth
- Being Realistic about Growth
- Growth Versus Shareholder Value
Political instability discourages the investors. Most of the time political coup are unplanned and when political unrest happens it affects the economies. Political challenges is a more of an emotional phenomenon.
Political instability for state companies could be different from that of national companies. It also plays a major role for state-wise larger companies. The gained political faction in a state where your invested companies have no ties with the leaders could be a matter of concern.
Unexplainable Higher PE than Industry Average
High PE ratio explains that the price of the stock is highly priced.
Evaluating it against the industry average is the ideal thing to do. Or else higher PE ratio should be justified with higher earnings and PE contraction. It is rightly said by Hexagonwealth the valuation of the company should be broadly done by four parameters.
Company Getting Out of their Core
Keeping dual core competencies or creating new core competencies could lead to the death of the core competencies itself. Rapid disruption is causing the companies to realign their core competencies.
More often than never this has lead to a tailspin.
The chances of success are rare with a diversion from core competencies. Becuase companies resources are compromised and over pressurized to perform. Investing in altogether a different group with different core competencies is acceptable than entering new core competencies itself.
Here at Alpha Trading, we literally have hundreds of ideas that you can apply to Investing, Trading, & Passive Income. It’s what the blog was founded on.
In order to make your investing work, you have to make monitoring the stocks the right way fascinating.
Do you have an interesting idea to predict the fall in the stock price? Let us know about it in the comments
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About the Author
Chintan Chheda is the owner, brand strategist, and Head Trader at AlphaTrading. Chintan Chheda is an entrepreneur, marketer, and writer. He authors in-depth guides, hacks, tutorials that teach about Investing, Trading, Personal Finance & Passive Income. He also authors on long/short equity, Deep Value, special situations, Growth.