How to study a stock.. for beginners

Hope you liked the first post on how to get started with stocks. If not, please have a read here . Also please start reading the books mentioned earlier that will help you understand things better. 

Well assuming you have your demat account setup, next step will be how should one research a stock using basic free tools available and also understand what a company does. Let's go step by step. Remember this is not a text book approach, but something which is easy to adopt and helps one get a gist of a company. 

Being a firm believer of KISS (Keep It Simple Silly), I have kept this article as simple as I could. There is no point in reading 500 pages of a book on valuations just to regret later buying it. Still in case you don't understand any of the items, please feel free to comment on the blog below and I will revert. Or simply google it !!

Let's take a company whose product everyone would have used/seen.  Well almost everyone would have a cooker at their home, so the company we will study is - Hawkins cooker

What does the company do? :

I think the best source to understand this is to visit the website. Here you go: Hawkins Cooker

Look at the products. It has 2 major brands, Hawkins and Futura. These are the products which I believe everyone would have seen in their daily life. Try to think about the market for these products, who would buy them, what will help the demand to keep going. Well the answers are simple - families, hotels, eateries or anyone who has something to do with cooking would be the end customers. Since last decade govt has been helping increase adoption of gas cylinders/piped gas (free gas connections) all over India (including rural India), this coupled with culture of nuclear families will help fuel the demand. How did I arrive at it? Its just basic thinking and understanding of the developments that are happening in your surroundings. Take a moment and think about it, there is no rocket science in understanding this.

YouTube, google & investing forums:

YouTube is a great source of information to get hold of product reviews, management interviews, company ads, company videos, etc. Also various investing forums like ValuePickr can help you get detailed information about the company. Don't be boggled down by the information that is provided on these forums, remember you didn't clear your graduation on day 1. It takes time to imbibe this process; important thing is to start thinking on your own. Do spend some time here to understand the business that the company is into. Else you will just end up looking at the price of a stock and take uninformed decision. 

Growth, Future prospect and valuation:

Why do we buy a stock? Because we expect the company to grow. So unless future prospects look bright, there is no point in investing unless you see that the company is selling more products. Hawkins will keep on selling more cookers and cookware for years to come as it is a product which has not easily been disrupted for years. Think of the number of families in rural areas which still don't use cookers. So the demand seems sustainable atleast in near future. 

Look at how management gets new products each year into the market so it sells more products to same customers and more products to new customers. Also look at how the company is growing against its competition. It's taking away market share from TTK Prestige.

Check the current growth rate to understand the momentum of growth (Screener is a valuable resource for the same). See below snapshot of the growth the company has been showing.

 Checkout the metrics which I've added to understand the company's valuation, quality of growth

All this information is available for free.

Management: 

Well here comes the tricky part. I believe in a simple principle while gauging the management.. "You are a saint till you get caught". So few quick things you can do is to Google the following: “Promoter name + SEBI + case" or "promoter name + scam". Scroll few pages of Google search. In case you find something which points out that a promoter has been accused or fined for some allegations by SEBI or any other regulator, kindly stay away from them. In India barely 200 companies out of listed 7000 companies are investment worthy due to management trustworthiness. A shady promoter will give you returns in bull market but when the bear market arrives, you will be down 90% from the top. And believe me it's next to impossible to exit at the top. As Warren Buffet says: You never know who's swimming naked until the tide goes out.

Other than that you can look at are dividend payout (how much % of profits are paid as dividends), Return on Equity, whether company pays taxes, etc. (Will do a detailed post on these factors, but a simple glance can help you filter wheat from the chaff)

Hawkins management is literally a sage; in 2012 they fought a case with Punjab Pollution Control board for more than 1.5 months even though it meant taking a hit on production (few management could have taken other routes to put in under the carpet). They have excellent Return on Equity of 60% and pays out 75% of its profits as dividends. 

Reading concalls and quarterly presentation is also very important; unfortunately Hawkins doesn't do either of them, so you can plan a trip during August sometime for the AGM @ Mumbai - Churchgate. One thing you can read about the management though process is the AGM speech which helps you understand management vision 

Scuttlebutt: 

This is nothing but understanding on ground reality about the company. It means to go and talk to customers, dealers, search reviews on e-commerce websites, etc. to understand the actual on ground action. Hawkins' products are widely available in your nearby utensils store, go and check out the items on display, talk to the shop keepers, you would get to learn many things about the company like how frequently it replenishes it's stock, when it takes price hikes. Ladies in your house would also give you few important pointers about their products.

e.g.: an interesting fact I learnt about Hawkins is that usually they take price hike in April each year, hence in Feb-Mar dealers stock the company’s products, thus Q4 each year is the best quarter followed by Q2 due to festive season. Q1 is the leanest quarter due to some what muted demand from dealers post price hike. Also cost of transportation is usually high since the size of cooker is big enough though its weight may not be that much, so number of cookers which can fit into a truck increases the cost per unit. This is something no management will tell you or no business school will teach you.

Price chart:

Above analysis we did is a fundamental analysis (directed by fundamentals of the stock). There is another school of stock study called as Technical analysis which comprises of head and shoulder, necklines, trendlines, rounding bottom (not kidding at all). Well it's a different subject for study. For basic analysis you can just look at the stock trend and see if the stock is trending upwards.. Never ever invest in stock which is continuously trending down with a hope that one day it will turnaround and you will mint money. Remember, turnarounds seldom turnaround. Market is punishing it for a reason. 

Just google, Hawkins stock price & you can see it is hitting All time high on charts. In my experience in investing I consider this sign as one of the most important ones as it usually signifies that the company is doing well. 

Next steps: 

The above method of analysis is something which is pretty generic and I've taken the easiest stock to analyze to help everyone understand the same. Stay tuned to this blog to understand the process to help you get you into markets. Remember markets are a great source of creating wealth if taken seriously because it's the only place where you will get asymmetric returns.

Disclosure: I am not a SEBI registered advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog