Feature of a Good Company
- Good financial performance
- Efficient Management
- Good corporate governance practices
- Social responsibility
- Reputed company
So good company gives good return.No! Not always. There can be times when we can get carried away by a ‘Good Company’ tag and ignore the fact that it may not be a good investment. She penned them down:
Overpricing
The market usually prices stocks of these companies higher; this premium is for the high quality of management and the firm. They are traded at hefty PE and PBV multiples. But, if the market exaggerates this value, the stock could lose its luster over time, thereby leading to a drop in the price. Rupali checked the stocks in her portfolio and found that she had indeed invested in them at very high prices.
High Expection
Whenever Sachin Tendulkar walks out to bat, the country expects him to score a century. Even if he scores a half-century, we are disappointed and the media has a field day with reports of how Sachin could not live up to the expectations. Similarly, investors expect a well-managed company to consistently deliver higher growth than its peers. If the company fails to live up to these expectations, it is penalized by the market by a reduction in the stock price.
Mature Business
The fact that these companies have earned a reputation for themselves indicates that the companies have been around for some time. With age, the company may face stagnancy in business prospects and this may lead to a stage where it cannot sustain such high growth rates in the future. Such stocks will thus have low growth prospects unless the company can innovate or do something to revive its growth.
Sector Impact
The industry to which the company belongs to also plays an important role in determining the stock prices. If there is positive news for the sector, all companies in that sector will trade at a premium. Similarly negative news like regulations that may hamper growth can send the stocks plummeting downwards.
Now You can clearly understand. In order to put her knowledge to best use she decided to invest in the good companies only after necessary checks. Let’s have a look at what these were.
The best strategy to buy a good company is when it is undervalued by the market. Sounds ironical, doesn’t it? If a company is good and can give superior financial performance compared to its peers, how can it possibly be undervalued?
The answer lies in short term problems like fall in demand, fire in factory, cancellation of projects, recent acquisitions, etc. When such companies are at the center of some negative news, market may sometimes overreact even if the news might not affect the company over a long term. At such times the stock will usually trade at a low P/E, P/BV multiple, thus giving us a golden opportunity. What we need to check, however, is whether the company can overcome the short term problem and grow well in the future.
Posted By-Kavita Kedia
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