Company Tags

Before investing in a stock, it is important to understand it qualitatively and have a solid understanding of what factors contribute to the financial data it yields. Financial data alone is almost never enough. It is important to know the underlying causes of the financial data churned out by the company.

To enable you to understand the qualitative factors that define your

investment strategy

for a stock, we are introducing a new feature that is now a new part of your Subscriber access -

The Company Tags.

What are Company Tags?

Company Tags seek to group companies having similar fundamental characteristics and potential investment strategies by investors. These tags are inspired by

Peter Lynch's investment style

–
that companies can be categorized in this manner. The categories are:

The key characteristics that define each category - along with a few examples from the Indian context - are explained below:

Cyclical

The fortunes of cyclical companies tend to be linked with economic cycles. If the economy does well, the performance of these companies - and that of their stock prices - goes up. Mining and power sectors have cyclical companies that do well when the economy can afford them large contracts.

NMDC

Sesa Goa

are examples of cyclical companies. In one sense,

cyclical companies

can be risky to invest in. Catching a cyclical company at the wrong part of the cycle means it could be years before you realise any returns. Timing is critical here and you need to look for signs that the downward cycle is reversing to invest in them.

Stalwart

Stalwarts are big companies that are capable of generating good profits. They typically tend to have a portfolio of strong brands - diversified for different markets. In case one brand fizzles out, a stalwart is still capable of generating solid results.

ITC

Nestle

are typical stalwarts.

Of course, if a stalwart gives you a windfall return not in keeping with its characteristic returns, it might be time to sell the stock to protect yourself from a correction in its price.

Fast Grower

Fast Grower stocks

are what every investor is hunting for. Which company is likely to grow multi-fold in the next few years? Growth stocks lie in emerging sectors as the entire sector is in a growth phase and has enough steam to pull the stocks along. Think IT and Pharma - sectors which still haven't matured yet. Growth stocks include

DiviS Labs

KPIT Technologies.

When looking for Fast Growers, always look for debt-free balance sheets and steady profit growth. Also, remember not to overpay for growth.

Value

Value stocks

are another popular group of stocks among fundamental investors. Why? Because their market cap is lower than the value of their assets. This makes them bargain-buys for a savvy investor. For e.g.

SAIL

and

Neyveli Lignite

could qualify as Value stocks.

While looking for value stocks, it is important to assess the total asset value correctly. All assets may not be tangible that could jeopardise your calculations.

Slow Grower

Slow Growers

tend to be companies that are both incapable of rapid expansion and unable to milk a growth sector. Think

HUL

and

L&T

One way of identifying a Slow Grower is if the company pays

high dividends

. Since its profits are not reinvested for growth, they tend to return them to investors by paying them high dividends.

Question Mark

The

Question Mark

tag is assigned to companies that seem to have lost their way or are on the verge of losing their way. These companies may have been Fast Growers/Slow Growers at some point but have seen questionable value creation over the past few periods and face an uncertain future.

Tata Steel

is an example of a 'Question Mark' company.

Question Marks are typically

stocks to avoid

unless they show strong signs of finding a way out.

Turnaround

These are the most interesting and sought-after stocks. A turnaround company is one which has been battered on all fronts but is capable of making a dramatic comeback. Think of companies which are being spun off or are undergoing restructuring activities.

Wockhardt

is an example of a company which managed to turnaround.

Of course, turnarounds are rare. More often than not, in looking for a turnaround, you might end up with a sinking ship. Always proceed with caution on this one!

The Company Tag for a company will be visible on its Decision-Maker. A sample Decision-Maker with a Company Tag is given below

The important thing to note here is that a company can have multiple tags over its lifetime. Hence these tags will be revised periodically to reflect which tag suits a company best at that particular point in time.