Which Type of Stocks You Should Avoid Investing Now and Why?

SAFE AND RISK FREE STOCKS TO INVEST



This is one of the worst times in the markets where there is continuous downtrend from last one month and everyday we are seeing some or other new bad news or uncertainty coming. The high performance stocks made experienced investors look like dumb. The intensity of correction which happened in those high performance stocks than made people realized the importance of risk management and investing in good quality stocks.

As the market correction and down trend is becoming uncontrollable , though large indices don’t reflect the true value erosion in the portfolio of many investors. This is not the time when one should be holding some of the not so good companies but even if you happen to be holding it, it is time one should either book loss from that stock completely or even if you believe in them, do not average them or even don’t buy at lower levels.

The investment decision shouldn’t be based on how much the stock has fallen from its top.

The Reason I see for Correction and the current market correction or extreme down trend is not only technical in nature but it also has been triggered due to fundamentals reasons or macro concerns for correction. The 3 most important reasons I see are:

Higher Global Crude Oil Price

Increasing oil price is never a good sign and a major concern for an oil importing company like India. It means India has to spend and pay more to import the oil.

High-Interest Rates 

RBI has made its stance clear it will work towards curbing the inflation in times to come to control the fall in the rupee. Higher global crude oil price means higher inflation and so Reserve Bank of India will have to increase interest rates even further to curb inflation and if they didn’t the inflation will shoot up drastically.

Falling or Depreciating Rupee

Though huge depreciation in rupee in last month is good for export companies, India still has a more import compared in terms to its export. Because of such unstable balance of payments means import to export trade deficit depreciating rupee hurts overall economy but the falling rupee is assumed to boost exports in the near term.

Where One Shouldn’t be Investing?

The above factors which are real matter of big concern aren’t going to be resolved any time soon, one should look at companies that can survive the tough times ahead.

 

AVOID INVESTING THIS TYPE OF STOCKS

 

High Debt

High Debt stocks should also be avoided for investments because in today’s scenario it becomes even more difficult where interest rates are rising and getting more corporate debt is also very difficult.Taking debt is not bad and sometimes Companies take enormous debt to finance their short term or long term projects but as the interest rate cycles changes and rate increase, the expense of interest increases for the companies and ultimately dent the profits and the bottom line.Because the profits will be under pressure, the PE multiple for the companies may squeeze. One should avoid investing in companies where interest cost will impact profit margins. Some companies also try to refinance their current debt and may not be able to even survive the incremental rise in interest rates. And lots of rating agencies also terms as a negative factor like increase in interest expense as a unfavorable factor to their profitability.

Crude Oil as Raw Material

Companies which depends on crude oil as a major and basic raw material means gets into rough times peiodaclly. Because when the global crude oil price increases than cost of the raw material will also increase for the companies and so the profit margins may also come under pressure.

So at the time of analyzing the stock every investor should be very careful in such companies and consider only those companies that will be able to pass the increase in raw materials to its customer and don’t take a hit on the operating profit margins.If companies aren’t able to pass the increase in raw material prices to its customer, again the price to earnings ratio needs to come down.

Companies which are totally depended upon Imports

With there is a huge of fall in rupee, the major impact will be on companies that are totally depended upon imports like for raw material or even for finished goods. It is usually seen that the companies which are directly depended upon imports of any products or raw material see the impact but there some companies where royalties to the parent company or in joint venture are paid in USD may also see an impact.

One good stock like Maruti is a very good investment after the recent deep correction of almost 35% from its top. But why it has corrected compared to its local peers. The primary reason one has to understand that why there was big correction in the share price of Maruti. The main factor is that it is a subsidiary of Suzuki corporation which is in based in Japan and so the payment of royalty for Maruti increases in rupee terms as the forex rates changes or when rupee becomes weak. there was also rumors that Maruti is in talks to make indian currency to make the payments.
Second reason that there is increase in interest rates means the cost of a loan for the customers of Maruti may rise creating a low demand and sales for its products.
Third reason is that nowadays customers are also worried by the rise in petrol and disel prices which has shoot up drastically in couple of months. As a result the customers might also change or delay the purchase of vehicle seeing an huge increase in fuel prices.
All the above reason which i explained mean the price of the stock has to correct and this is the main factors for the correction in the prices of Auto stocks especially Maruti in comparision to its peers.

Where to look for Safe Investment in Stocks?

During this volatile times in Indian Stock Market and also when Indian Macros are worsening one has to be very careful in investing and identifying Safe and Good Stocks.

Consumption based or Consumer Based Comapnies

It really doesn’t matter to the people how bad the interest rate scenario be or how high the oil price be, the basic consumption growth story is likely to continue in India for next 10 years. One can delay the purchase of a car or buying a home but one can’t delay the purchase of basic items like clothes, grocery and food items etc.

Such businesses are worth investing. I agree it is tough to find good business at reasonable valuations but the corrections can come to these stocks as well. Keep your shopping basket ready and see if you can add some good quality consumer based stocks in your portfolio.

Exporters

Falling and depreciating rupee is an big boon and advantage for the export oriented companies. IT and Pharma companies are a couple of sectors that are predominantly export-oriented and are looking very good for safe investment.Growth in the US and falling rupee can be a double trigger for growth in these sectors. If the scenario remains favorable for these export-oriented sectors, these sectors can be the next market leaders for sure.

Market Leaders

Any company that is a market leader or having majority of market share in its industry is bound to get more business because when the worst business scenario arises, small business and other small players in that industry either wind up or gets acquired by the leading player in the market making it favorable position for the market leaders.So market leaders and companies that have Quality management, better cash flow and balance sheet can do some acquisitions to fuel inorganic growth and capture more market share and expertise at a faster rate.

So one should look for such stocks, companies and businesses as well for the safe returns and better returns of the equity portfolio.

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