Saturday, May 18, 2013

Value picks v/s Value traps

 What are the value picks? How to protect value picks from turning to value traps while purchasing the shares. How can be cautious?   
     The word ‘value pick’ is referred to the investment method that, while a company is selected to invest, the current share price of which doesn’t resemble its upcoming growth.  Infosys, L&T and Bharati Airtel were the value picks of a time.

     When the IPO of Infosys were issued, there were lacking the sufficient number of applicants.  Share price of Bharati Airtel was slumping to Rs 21 within a year after the issuance of its IPO at the price of Rs 45.  Majority of investors didn’t realize the possibility of growth of these companies at that time.  In the meantime, those who invested in those companies, realizing the upcoming growth, held the stocks in a long-term perspective and harvested unbelievable profit.

     But there is one more side for this story.  People, who are being attracted to less priced stocks, thinking that it would become multi-bagger like Bharati Airtel or Infosys in future, probably get trapped.  It is in such kind of searches the investors always reach to penny stocks and small micro-cap shares. 

     It is a common tendency of investors that the interest in penny stocks and small micro-cap shares.  There is a wide spread misconception among the investors that the term ‘penny stock’ is used to mark the share that has a small price.  People are attracted to penny stocks because they think that if they buy one stock of SBI, they need to spend Rs 2250 while, with the same amount, they could buy 225 shares of a company that has the share price Rs 10.  Investors, in such occasions, forget the basic thing that the value of a company is to be evaluated not based on its share price.

     The value of a company must be evaluated through the efficiency of management, growth possibility and economic strength.  The ratios of book value v/s share price and the earning per share (EPS) v/s share price also to be considered to review the value of a share. Based on this review, a share of Rs 10 may be more expensive than the one with Rs 1000 share price.  However the share price may be, an investor should consider its value only. But a handful of investors only take time to have an independent study while most of the investors are running behind the 'momentum stocks' and the value pick calls of companies.

     There are investors who search value picks among the micro-caps that have the market value of below Rs 1000 Cr and the small-caps that have the market value of below Rs 2000 Cr.  Most of them fail to foresee the possibility that such kind of picks may form the real ‘value traps’.  It is not yet to forget the stories like that of RNRL (Reliance Natural Resources Limited), the multi-bagger of a time, which shed tears to a number of investors.  It is always recommended to have at least a minimum level research ourselves not to turn value picks to value traps. 


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