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Stockmarkets: A key lesson from 2010
Mon, 27 Dec Pre-Open

The Indian markets have had a reasonably good 2010, at least till about the penultimate week of the year. The BSE-Sensex and the NSE-Nifty have gained around 16% each over the past twelve months. And there have been several blue-chip stocks that have gained even more. Stocks like Bajaj Auto, Tata Motors and TCS have performed very well during the year.

But amidst these gainers, there have been some stocks (among the large caps), which have disappointed with their performers. The graph below shows the performance of the worst five of the lot.

Source: Yahoo Finance

The performance of these five stocks, we believe, provides a key lesson for investors. And it is - the importance of studying a business' financial strength before investing in its stock.

Almost all these companies were the darlings of the previous bull-run that ended in January 2010. They were the markets' favourites. Whatever business plan they announced was received with much enthusiasm by one and all. These companies were growing fast, and they were looking to grow even aggressively. This is where they mis-stepped.

Take the case of Suzlon. The promoter of this company had the distinction of rising the fastest into India's billionaires club. And this was made possible by the company's IPO that came out a few years back and was received with much aplomb. The company also seemed to be doing well - growing fast, raising capital for future growth, and making large scale acquisitions.

This was until it hit upon a speed breaker in 2008. Its wind-power equipments started breaking down. Customer complaints piled on. Some of them even cancelled ongoing contracts. Its balance sheet started showing stretch marks. Its cash flows dwindled. Overall, its financial position went from bad to worse. The stock took a severe beating, and has still not recovered its losses. Instead, investors continue to bleed as the company's performance is getting worse by the day.

Anyways, the story is not much different for the remaining four companies though the magnitude might differ. In all, the key take-away from the performance of these stocks is that you as an investor must be very clear of the companies you are looking to invest. Look at their past financial performance. Also study what heir managements are saying of the future. If things look way too volatile and flashy, it is advisable to stay away.

Hot stocks might do well in good times. But they might leave you no place to hide when the tide turns for the worse.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.