How can you pick out-of-favor stocks 1

How can you pick out-of-favor stocks

by

The age-old way to make money in stocks is “buying low and selling high”. At first glance, it may sound very easy; but do you know how to implement it?. Well, only the smart investors know the answer of this  million dollar question. Investing with emotions is a serious error, but you can benefit from emotional extremes of others to pick out-of-favor gems for your portfolio. The key to identify profitable out-of-favor stock is to apply sentiment analysis and some simple stock picking techniques as explained below.

What is Sentimental Analysis?

Sentimental analysis is the process of measuring investor attitudes toward the securities markets. The goal is to determine if investors, or the crowd, are bullish or bearish toward the market.

History of Stock Market has repeatedly proved that investors are not always rational. Just as they can bid up the price of a growth stock too high because they are so enthusiastic about its prospects, they can also pummel a good stock that has momentarily slipped to unrealistically low prices. That’s where bargain hunters swoop in.

When studying market sentiment, the smart investor often takes a contrarian approach especially during extreme highs or lows in the Stock Market. That is, if others are predominantly bullish, the smart investor will be bearish (sell stocks). If, on the other hand, the crowd is bearish, the smart trader will turn bullish (buy stocks).

When everyone around you is bursting with enthusiasm, as is the case in a profitable bull market, smart investor may take contrarian view and get out to what their heart (and net worth) is saying. Conversely, buying when “blood is running in the street” takes nerves of steel. But it’s this contrarian way of thinking that can help you to avoid buying the tops and selling the bottoms.

How to identify Out-Of-Favor Stocks?

The easiest way to spot neglected stocks is by looking for low PE ratios. A PE ratio of less than 10 signals that investors do not have much hope for the future of the company, which may, in fact, be an incorrect perception of the situation. The moment the company reports better-than-expected results, perceptions can change quickly, and the stock price can shoot up. Do your research first. Don’t be tempted to buy any stock with a low PE ratio, however. Some companies deserve their lowly valuation and, in fact, will not recover. Moreover, in certain industries even a PE of 20 could be considered cheap.

For example, to provide you a good starting point; here is a list of Stocks that are available at less than half of their 3 year highs & less than 20 times PE & are experiencing on the ground recovery as apparent from their sales & profit growth, both on an annual as well as sequential basis.

Company BSE Closing Price (as on 24/01/2011) PE (x) % Fall from 3 Year High 1 Yr Net Profit Growth (%) 1 Yr Sales Growth % Q on Q Net Profit Growth (%) Q on Q Sales Growth (%) Qtry Net Profit Growth (YoY) %
Comp-U-Learn Tech India Ltd 13.00 2.7 -66.32 127.08 165.06 23.13 47.86 178.09
Grabal Alok Impex Ltd 40.45 4.5 -71.52 33.77 76.35 28.66 26.50 58.36
HB Portfolio Ltd 40.70 4.6 -51.49 486.70 22.10 192.50 170.25 64.79
Powersoft Global Solutions Ltd 7.42 4.9 -54.48 44.05 92.84 56.44 26.36 80.85
R R Financial Consultants Ltd 37.10 5.0 -77.01 61.13 29.88 43.09 37.74 74.26
Tulsi Extrusions Ltd 21.20 6.6 -84.34 411.02 38.88 225.00 35.95 225.00
Twinstar Industries Ltd 3.01 9.2 -56.94 44.44 126.46 600.00 24.15 600.00
Lokesh Machines Ltd 47.55 11.0 -52.25 983.78 30.78 23.58 28.85 50.50
Ramkrishna Forgings Ltd 112.50 11.5 -60.04 141.14 26.40 63.32 29.83 105.93
Vijay Shanthi Builders Ltd 26.75 12.6 -70.49 32.37 33.67 33.14 26.54 222.54
Edserv Softsystems Ltd 153.50 13.7 -50.15 388.35 516.80 129.22 144.72 180.60
Ajcon Global Services Ltd 15.40 13.9 -59.47 70.00 54.01 118.75 159.26 150.00
Alok Industries Ltd 26.65 15.8 -64.44 82.80 43.23 71.58 32.08 40.00
Omaxe Ltd 142.15 18.7 -57.80 144.29 25.34 69.20 40.12 63.26

In addition to a low PE ratio, bargain hunters usually look for industries that are currently out of favor. They also seek stocks with low price-book value ratios because such stocks are typically out of favor. Another sign of benign neglect is when few of the shares are held by institutional investors, such as FIIs, DIIs, or mutual funds, because it is not fashionable to own such depressed stocks. Finally, if brokerage analysts do not pay attention to a stock, it is probably out of favor.

What you should look for is a stock with a fair chance at turnaround. You may infer that a recovery is on the way if sales and earnings are no longer deteriorating or if the company has a new product or service that has the potential to restart its growth. Another way to check for signs of life is to determine whether company executives are buying the stock themselves and whether they are increasing capital expenditures. If the people who know the company best are investing in it heavily, that could be a tip-off that recovery is at hand.

However, you need to remember that not every ugly duckling turns into a swan. If your stock remains depressed after a year or more, you probably should turn it in for another one. It takes only one or two dramatic recoveries for this strategy to pay off.

36 thoughts on “How can you pick out-of-favor stocks”

  1. I havent any phrase to understand this post…..Really i am impressed from this post….the one that create this post it was a fantastic human..thanks for shared this with us.

  3. Does your blog have a contact page? I'm having trouble locating it but, I'd like to shoot you an email. I've got some recommendations for your blog you might be interested in hearing. Either way, great blog and I look forward to seeing it grow over time.
    Stop Foreclosures Ontario

    • I really do not like what you've bought here, how are you and how safe the period during which you say it. We make it fun, and still care to keep it smart. I look forward to reading more from you. This is a really great web site.

  4. I have been absent for a while, but now I remember why I used to love this web site. Thanks , I'll try and check back more frequently. How frequently you update your website?
    I do love the manner in which you have presented this problem plus it does give us some fodder for thought. However, from what precisely I have witnessed, I simply just wish when the actual feedback pack on that folks continue to be on issue and in no way start on a soap box of the news du jour. Anyway, thank you for this exceptional point and although I do not concur with it in totality, I value the perspective.
    iqbal academy

  5. Pretty insightful publish. Never believed that it was this simple after all. I had spent a good deal of my time looking for someone to explain this subject clearly and you’re the only one that ever did that. Keep it up handcrafted jewellery

  10. I usually don't comment on blogs but this blog inspired me to make one compliment as I know it's not enough for the meaningful context in your writing as one could understand it easily, will refer this blog to my friends to gather such informative insights

    • Great job. Well with your permission allow me to grab your rss feed to keep up to date with incoming post. Thanks a million and please keep up the delightful work.

  14. I think I am quite anxious about this technical meeting and I want to know the feedback of this meeting. I am sure it will be an extremely informative one and all those will attend it will be quite beneficial. catering equipment suppliers

  15. alcohol affiliate
    I've been surfing online more than three hours today, yet I never found any interesting article like yours. It is pretty worth enough for me. In my view, if all webmasters and bloggers made good content as you did, the web will be much more useful than ever before.

  18. Nice post. I was checking continuously this blog and I'm impressed! Extremely helpful information specially the last part I care for such info much. I was seeking this certain information for a very long time. Thank you and best of luck.
    cigarette affiliate program

  20. perfume affiliate
    I'll right away grab your rss as I can not find your email subscription link or e-newsletter service. Do you've any? Please let me know in order that I could subscribe. Thanks.

  21. Article very useful and encouraging. I wish I can do all that in a short time. But I am convinced will produce results. I'm trying to spread the word to the first blog and link back to you last. With a lot of those suggestions.

  22. Hi! Great theme! I am wondering if it's possible to put titles of past entries from the archive in the sidebar, or categorize by tags, rather than having to go back every page. Thanks!

  25. I am very glad to learn alot from you this meaningful knowledge. From an article describing your unique way , we can see that you are an approachable , humorous person. Not only that, your article is rich with a lot of useful knowledge and helpful information.

  26. Does your weblog site have a get in touch with page? I'm having problems finding it but, I'd like to capture you an e-mail. I've got some suggestions for your weblog site you might be enthusiastic about listening to. Either way, excellent weblog and I look ahead to seeing it develop over time.

  27. I usually don't opinion on weblogs but this weblog motivated me to create one enhance as I know it's not enough for the significant perspective in your composing as one could comprehend it quickly, will relate this weblog to my buddies to collect such useful ideas

  28. Content very useful and motivating. I wish I can do all that in a few months. But I am assured will generate outcomes. I'm trying to distribute the phrase to the first weblog and backlink to you last. With a lot of those recommendations.

Comments are closed.