Investment idea generation is not a math or science, it is an art, an art that does not come with an air of luck! Most of the investors always talk about quantitative screen with filtration parameters like ROCE, ROE which can generate a list of potential stocks for your consideration. However, if everything in the world of investing was as simple as picking stocks by running a screen to beat the market while earning returns, then investment managers like us would surely be out of a job. While the issues of running a filtration screen are beyond the scope of this piece, rest assured that this is a deeply flawed method because of the entire ‘garbage in, garbage out’ problem—we mean the illusion of better profit than exceptional objects, the reward. Ratio and overall an excellent working business.
As investors, we all face a similar hurdle, time! There are a lot of companies out there, and if we started digging into all of them, our entire lives would be gone in a jiffy! Our time constraints force us to prioritize and hence it is clear for every investor to have only one filtration criterion, what passes for your precious time and what not.
There can be many strategies for idea generation and we have listed only a few, but remember this is just the first step. It can only point you in the right direction, it tells you what’s worth your time.
That being said, the first source of idea creation can come from stories on capital expenditure, or capex. Keep an eye on the sectors which have been bad in the last 4-10 years. And if you look at any company that announces capex, it’s time to start digging into this public display of capex bravado when the entire sector is facing a crisis. Is it maintenance capex (needed to continue operations in its current form) or growth capex (new assets or expansion of existing capacity, intended to increase the capacity of the business)? Maybe you just discovered a goldmine if this is the story of growth capex.
Another possibility could be that capex is done either to reduce costs or integration with the supply side to gain control over raw material expenses by the company. The sector may be undergoing consolidation, and although the sector is not doing well, there is a possibility of the company successfully stealing market share from other existing players. If so, then again, something big could be brewing here!
Don’t think of this as a scenario where the entire industry is at a turning point and every company in the sector is investing in capex. Because only then the crowd becomes more and everyone’s eyes are on the same thing. A good management paying off your debts consistently can also be a powerful source of idea generation. This is regarded as one of the biggest signs of a turnaround in the business, provided, if and only if it is done out of the company’s available free cash flow, and not by raising more capital from the open market. And if that same management plan is in the pipeline, as they anticipate demand in the near future, that would be the icing on the cake.
Apart from checking the pledging of the company’s shares, investors should also monitor any change in the shareholding pattern of the promoters or the management. If the promoters/management of the company are buying shares from the open market, they are actually seizing the opportunity provided by price corrections to consolidated holdings. It shows their confidence in the business created by them or its benefits for economic improvement and future plans of the firm.
IPOs create a great investment opportunity because the business is under-owned, mutual funds and other funds have yet to participate and small floats can make big moves. If the stock is touching a new 52-week high almost every day, there is something that has caught the market’s attention. A word of caution- Evaluate the company carefully, especially in a bull market. Even poor businesses try to squeeze their way in to get listed.
A common theme around any investment idea creation strategy is vigorous reading of everything from corporate announcements to financial reports, especially during earnings results season, as it allows the ideas to be taken in that use the filtration screen. Can’t find using . This, along with keeping a close eye on any market updates, will help you connect the dots to understand the areas of market turbulence that could be huge investment opportunities for tomorrow.
Kaushik Mohan is the Fund Manager and Head of Research at MOT Financial.
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