InvestorQ : When I get a stock trigger, how do I decide if it is actually actionable?
Deepa Salunkhe made post

When I get a stock trigger, how do I decide if it is actually actionable?

Crowny Pinto answered.
3 years ago

Please conduct a sensitivity check of the news and gauge how it will hit the top line. Check if the news or event is likely to enhance the top-line of the company. Normally outperformance starts from the top. Look at how Motherson Sumi grew its top-line as the global market for auto ancillaries outsourcing expanding at a frenetic pace. That is the kind of data that is truly actionable. The first question you need to ask about any trigger is if it is going to be positive for total revenues. More often than not, it is actionable and positive. Take the case of Tata Motors and JLR!

The one margin that really matters in business is the operating market or the OPM as it is better known. It is the profit from operations of the business. That is the sustainable part of the business and hence it matters. Data is actionable if it is going to impact operating margins. Either your raw material costs are falling sharply or pricing power is coming back to the industry. Look at how metal stocks have rallied in the market since January 2017 due to better realizations on steel, aluminium and copper. Look at the operating costs. Normally, oil prices have an important impact on costs. Average OPMs in India going up is a classic sign of an improvement in performance and that is actionable…

Is the news making a tangible difference to the leverage of the company? Either the debt levels of the company have to come down or the interest burden of the company has to come down drastically. If either of these is going to happen, then the news is really tangible and actionable. Just look at the way the government announcement on the recapitalization of banks has made a vast difference to the way Indian PSU banks are being valued in the market.

Is it about a disruptive technology? This can be slightly complicated and hard to fathom, but there are examples galore. Look at how online retailers have disrupted the retail model in India. Look at how digital banking is disrupting the traditional banking model in India. These data points are extremely relevant and actionable as the impact on valuations can be substantial.

Is it about a new macro risk in the investment scenario? Take the case of tapering of bonds by the US Fed. The item may appear to be distant but the impact can be actually immediate. A taper will lead to a liquidity crunch and higher bond yields in the US. That means FPIs will prefer the safety of US bonds and we could see fund outflows. These are actionable and the impact could be immediate as we saw in 2013.

Anything pertaining to the management of the company is relevant and actionable. Are the promoters selling out of the company? Have the promoters pledged too much of their stake with banks and financiers? Are the promoters in a situation where the debt is growing faster than the revenues and the margins. These are actionable data points and as prudent investors you need to act immediately.