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This Is How You Reject Dud Stocks Like Gitanjali Gems

Feb 26, 2018

Rahul Shah, Editor, Profit Hunter

Dear Reader,

Did you notice today's essay comes to you under a different banner?

Smart Contrarian is now Profit Hunter.

Why this change? You can read a detailed explanation here.

Here's the gist anyway.

We've just expanded our panel of experts.

You've already been hearing from me about my Sensex-beating system - Microcap Millionaires. And from Richa Agarwal, our smallcap guru. Now you will also hear from Apurva, our master trader, and Prasheel, the Cryptowallah.

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And finally, since we have broadened our horizons by getting new experts on board, we also need a name that's much broader in appeal: Which is why Smart Contrarian is now Profit Hunter.

And in fact, we are launching this new Profit Hunter as a celebration of the 10-year anniversary of our most popular small cap recommendation service, Hidden Treasure.

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Let's hunt for big profits together.

With this small introduction out of the way, here's today's issue of the Profit Hunter.

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Here's my favourite Steve Jobs quote.

  • People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things.

Tell you what, this quote will feel at home in the world of investing as well.

If innovation is saying no to 1,000 things, successful investing also requires saying no to the thousands of stocks out there and focusing on the ones that would make a real difference to your long-term returns.

Learn to Just Say No

Here's Warren Buffett's version of it.

  • The difference between successful people and really successful people is that really successful people say no to almost everything

Buffett says no to a lot of things.

He even has a box labeled TOO HARD on his office desk... Anything that he doesn't understand, or is too complex, simply goes into this box.

By his own admission, an overwhelming majority of things that come his way, end up in this box.

Check out Warren Buffett talking about his TOO HARD box at 1 min 40 sec of this video.

Source: CNNMoney

In our Microcap Millionaires service, we also toss away an overwhelming majority of the stocks we come across.

What Makes a Stock TOO HARD?

Essentially, we say no to all the stocks that trade at a premium to their book values and have high debt on its balance sheet. For us to even include a stock for further analysis, it must be trading at a discount of at least 20% to its book value and the debt has to be no more than equity.

If a stock doesn't pass through any of these filters, it simply goes away into our TOO HARD box.

Last time we checked the box, we saw Gitanjali Gems amongst other names, lying there.

The company that's in the news for all the wrong reasons has been knocking on the doors of Microcap Millionaires since long.

After all, at a price that's a huge 90% discount to its book value, it qualifies on the first condition by a mile.

However, a big reason we've not let the company in is it fails on the second parameter. Whenever we've had a look at it, we've always found its balance sheet loaded with more debt than equity. This is not a good sign.

More Debt = More Risk = TOO HARD

A consistently high debt usually means the promoters are taking more risks than required; or the business model itself is weak.

With the chickens of financial mismanagement finally coming home to roost, and the stock being taken to the cleaners, looks like we made the right choice after all.

The real test of a sound investment strategy...

If it sends many Gitanjalis to the TOO HARD box, it really has something going for it.

Mind you, the strategy should also do the opposite, ensure that genuine wealth creators make it to your portfolio.

While Jobs and Buffett were experts at saying no 95% of the time, they also ensured that the other 5% they said yes to really raked in the moolah.

Is this true with your strategy as well?

Are you choosing stocks that give great returns?

If not, maybe it is time to tweak the rules.

After all, successful investment is not just about how many duds you avoid. It is also about how many winners you are able to identify.

Good Investing,

Rahul Shah
Rahul Shah (Research Analyst)
Editor, Profit Hunter

PS: Just for Profit Hunter readers - a celebration offer on our most popular smallcap recommendation service. If you never sign up for a single recommendation service in your life but one, let it be Hidden Treasure. It is the service that will safeguard your future - without causing you to compromise your present in any way. See your special offer here.

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