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.