How to Generate Stock Ideas and Decide about Small Companies, Interpret Negative Capex & Bulk/Block Deals by same Buyer/Seller

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The current article in this series provides responses related to:

  • How to generate stock ideas for investment?
  • How to make decisions about small companies with less information?
  • How to interpret bulk/block deals with same buyer buying & selling the same stock?
  • How to interpret a negative capex figure?
  • How to track stocks portfolio performance online?

How to generate stock ideas for investment?

How to make decisions about small companies with less information?

Dear Dr. Vijay Malik,

Greetings!

I have been following you for quite some time and look for some sort of guidance on investing. First of all, I want to thank you for the articles on your blog.

I am reaching out to you to seek guidance on broadly two basic points below.

1) First of all, how does one generate ideas: general walks of life as Peter Lynch says or by using stock screeners?

The investing process articulated by you can be followed only by having some research universe in place. I have read your blog wherein you have suggested screening using the following queries:

  • Sales have grown at a compounded annual growth rate (CAGR) of 15% for last 10 years.
  • Price to earnings ratio is less than 10
  • Debt to Equity ratio is less than 1
  • Cash generated from operation is positive and
  • Market capitalization is greater than INR 25 cr.

I also look for the last three queries. However, I need your wisdom on the first two. What I mean essentially is, if a company has posted 15% CAGR in sales for 10 years, it would have reached some reasonable scale and one might not be entering in early as a decent price appreciation would already have happened.

  • How do we spot companies which would post 15% sales CAGR for the next 10 years? I mean how to find that very inflection point in a company’s business operations?
  • Can you share your experience on how you spotted your good picks such as Mayur Uniquoters Limited etc.?
  • Do you read all BSE announcements?
  • What are the pointers you generally look at?

In order to look for stock ideas, I read magazines such as Capital Market, Dalal Street, MoneyLife etc. However, this is something, which I am not liking anymore. I want to do some primary research (I am definitely finding Screener very useful). Could you suggest some process/habits?

2) Having found your research universe, how do you gather information for these early-stage companies which are thinly traded and tracked?

I mean for micro-cap companies (say a market cap of less than Rs. 100 crores), you don’t find quarterly presentations, con-call transcripts or detailed website. Some of them do publish detailed annual reports; however, you get them only after a year. The quarterly results of most of these companies is a mere one pager P&L account with just numbers and no management commentary. How do you conduct detailed due diligence and monitoring/follow-on research in such circumstances?

In my quest to get the answers to above questions, I have been trying to meet/talk to successful investors and taking their valuable guidance.

I look forward to your guidance on the above queries and getting connected to you.

Thanks,

Author’s Response:

Hi,

Thanks for writing to us. We are happy that you found the articles useful.

1) We use screener filtering function to generate ideas. However, there is no absolute right or wrong way for idea generation. If an investor feels that she likes primary research for idea generation, then she should follow it.

Also read: Shortlisting Companies for Detailed Analysis

Also Read: How to Use Screener.in “Export to Excel” Tool

In “Peaceful Investing” we do not make future projections. We analyse the past performance and believe that the management is the best judge for future. We try to find out the reasons for the good past performance. If we are convinced that the good performance is because of the strength of the business and the management, then and we associate with the management for our future investment journey while staking our faith on the management to do the best for the business and the shareholders.

We read all the announcements made by companies to stock exchanges.

The following series of articles will help you understand the process used by us in making a stock selection:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

You may choose to take guidance from the same.

2) The information about small companies, which is available in public domain, is less than the large companies. Therefore, an investor has to make a decision based on limited information. Many times, it is the constraints of deciding within the realm of less information, which is the reason for resultant higher returns obtained by investors in small companies as many investors avoid these companies due to lack of information.

On our part, whenever we need clarifications about any aspect of the business of companies we write to them by email.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

How to interpret bulk/block deals with the same buyer buying & selling the same stock on the same day?

Hello Vijay Ji,

Since some time, I have seen many bulk and block deals where the buyer and the seller are the same for the exact quantity and even the per share price is almost the same or it may have a difference of ₹0.10 or ₹0.20 i.e. very marginal difference. What might be the reason for the same?

I tried to google it. But I could not find the answer as most of the search results just give definitions of bulk and block deals.

I’ll be thankful if you can please advise me.

Author’s Response:

Hi,

Thanks for writing to us!

Two reasons come to our mind:

1) It might be normal intra-day trading. Just like retail investors do i.e. buy and sell on the same day using the margin to make some quick money.

2) This case is applicable when there is a sale transaction first and then there is a buy transaction later. It might be to book short-term losses, which might be used to set off against other short-term gains. As a result, the overall portfolio composition remains the same and the investor can reduce its tax liability due to short-term gains in other transactions.

Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

How to interpret a negative capex amount?

Hello Dr. Vijay,

I have been using your excel template for analysis of the stocks.

Dr Vijay Malik’s Stock Analysis Excel Template (Compatible with Screener)

Sometimes I find that the capex value is in negative. Could you please provide some details what does a negative capex value mean? Or it is because of some formula limitations. I was analyzing Shree Pushkar Chemicals & Fertilisers Ltd and for March 2015, it gave me a capex of -1294.

When we calculate 10-year capex, then because of this negative capex, overall capex value decreased and because of this FCF looks very much attractive. Could you please throw some light on this?

Regards

Author’s Response:

Hi,

Thanks for writing to us!

When a company invests in fixed assets, then the capex is a positive number. Similarly, when any company sells fixed assets or writes down fixed assets due to revaluation etc., then the capex will be a negative number.

You may use this logic to make interpretations and make necessary adjustments while interpreting the total capex and thereby the resultant free cash flow (FCF) in such cases.

Also read: Understanding the Annual Report Of A Company

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

How to track stocks portfolio performance online?

Dear Dr. Vijay,

Please advise what is the best software/app/website to log and track our portfolio?

Author’s Response:

Hi,

We maintain our portfolio at valueresearchonline.com, which suffices our requirements.

We do not have experience with other websites.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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