3 Wrong Reasons to Hate a Stock

What is the fuss?

Retail investors invest in the stock market to make money ??. Sometimes, they invest in stocks that give them good returns; sometimes, they do not ????. For various reasons, investors may discard a stock as a bad pick and never look back at it ????. They may even start hating the stock and comment on online forums and finance blogs advising other investors to dump it ?????.

Why do retail investors hate a stock? Well, there are many reasons to dislike a stock. Some might be genuine, such as a fundamentally weak company, news of a downturn, or fraud cases against the company or top management. However, some reasons may need to be corrected to put a stock in your bad book.

In this post, I cover three common and wrong reasons to hate a stock. I also share my way of being aware of these reasons and tackling them ?????. If one of these reasons is true for you, give that stock a fresh look. Let's get started.

Reason 1: Price goes down after you buy a stock

Buying a stock by retail investors is often driven by stock recommendations on social media. Or by price targets given by fund houses such as ICICI Securities, Kotak Securities, Goldman Sachs, Jeffries, etc. However, once bought, the price starts falling. Sometimes, just after a day, the investor is sitting in losses. The investor might think- "The price targets given by fund houses turned out to be false. The recommendations given by social media influencers turned out to be fake. I will forever stay away from this stock. I will also suggest that all my friends avoid this cursed stock.”

Example: HDFC Bank

In July 2023, Motilal Oswal gave a price target of INR 2,070 for HDFC Bank, trading at INR 1,679 in July 2023. This target can give investors a 23% profit in less than a year of the price target. Investors believing in this report by the reputed financial service firm Motilal Oswal might have bought this stock in July 2023 at INR 1,679. However, in Jan 2024, HDFC Bank is sitting at a price of INR 1,480. This investor would have made a loss of -12 %.

How do you evaluate stock when its price is falling?

Set Right Expectations

Stocks go up and down all the time. So, set your expectations right. Expect a 30-40% loss from any stock in the short term (3 months to 1 year).?

The second expectation you should have is when reading stock recommendations. No one can predict stock price movement. If stock price targets were true all the time, everyone could follow them and make high returns. However, this is not the case. The stock market is a zero-sum game. If you are making money, someone else is losing it.

The majority of price targets given by professional fund houses are not met. This does not mean that these target reports are not helpful. They are useful in learning more about the company and helping you understand whether the company has a positive sentiment around it. Apart from that, take the actual price target with a pinch of salt and add your research ?????♂?.

Go Back to Basics

When in doubt, go back to the basics of evaluating a stock. Does good management run the company? Does the company have a moat? Has the company delivered on its past promises? Is the company's future growth story intact? If the answer to these questions is yes, you may want to stick with the company, even in bad times.

Understand the Reason behind the Price Decrease

Price increases or decreases almost always have a story behind them. Find that story. You can search news online or listen to the company’s conference calls to learn more. If the reason behind the price drop is uncontrollable and macroeconomic-related, then it is ok to stick with the company. Overall, there is nothing to worry about if the company is not faltering in its growth strategy. You can use this opportunity to buy more shares of the company. However, if the dip is because of company-specific reasons such as management rejig, compliance failures, fraud-related investigations, etc., you are better off exiting the company.

Reason 2: Lower Returns than the Index

Many investors compare their stock investment returns with the index. This is also recommended. Comparing returns to the stock market index gives you an idea of whether your stock picks are working better than or worse off than the index. The aim is to beat the index. If not, a retail investor can simply invest in the index fund and chill.

What happens when your investments consistently perform poorer than the index? You get frustrated. Your months or years of learning stock market investment are not reaping results. You run out of patience and start blaming the stocks you invested in. Something must have gone wrong with these stocks for them to perform poorer than the index.

Example: ITC is a monopoly stock in the cigarette sector in India. Apart from the cigarette sector, it is a leader in the Hotels segment and has a fast-growing FMCG business vertical. Despite this, ITC gave low returns from 2014 to 2019, only 33% in 5 years. However, the Nifty 50 index gave 53% returns in the same period, 50% more than ITC. This was despite ITC’s topline (revenue) and bottom line (profit) growing consistently every year from 2014 to 2018.

How do you evaluate stock returns vs the index?

Compared with the Sector Index

One should compare a stock's returns with the industry sector index and not with the overall market index. Example: Nifty 50 is the overall stock market index, with the top 50 listed companies as part of it. However, these 50 companies are from multiple industry sectors, such as Banking and finance, Metals, Infrastructure, IT, Oil and gas, etc.

We have industry sector indexes, such as Private Banking index, IT sector index, Metals Index, IT Index, etc. One should compare a stock with these industry sector indexes for a closer performance comparison. If the stock consistently performs poorly compared to the industry sector index, it is a worrying sign. In this case, go back to basics and re-evaluate the company's fundamental strength.

Understand Up and Down Cycles

Each sector goes into some form of an upcycle and downcycle. Tailwinds and high revenue and earnings growth mark Upcycles. Headwinds and stagnant or low revenue and earnings growth mark Downcycles. These cycles typically last 1-3 years. Understanding these cycles will help you realise if the stock you invested in is in an upcycle, hence growing in price. Or the stock is in a down cycle, hence decreasing in price.

For example, in 2022, the Indian IT sector was in a down cycle due to recessionary fears in the West. This led to many tech giants, such as Amazon, Adobe, etc., reducing their new investments. However, in 2022, the Indian Banking sector is in an upcycle, given the rising credit growth and interest rates by RBI.

Going back to the example of ITC, this stock tested investors’ patience for a long time before giving a breakout in 2022. ITC stock gave 54% returns in 2022, beating the Nifty and Cigarette and FMCG indexes. Investing gurus are not entirely wrong when they say, ‘Patience is the name of the game’ (game here refers to stock market investment).

Reason 3: Reducing Dividends from the Stock

Some investors invest to get a side fixed income. In the world of equities, this translates to investing in a dividend-paying company. However, a company can decrease its dividends or stop paying dividends altogether. This might upset those investors who want a fixed income from their stock investments.?

Example: Indiamart Intermesh is India’s largest listed B2B commerce player. Indiamart decreased its dividend by 92% in 2022 compared to 2021. This might upset investors who were looking forward to a dividend payment similar to 2021.

How do you evaluate a company with decreasing dividends?

Investors should note that reducing dividends or stopping dividend payments is not a bad sign. In fact, it can be a good sign. Top tech companies worldwide, such as Amazon and Google, do not pay dividends. There are many valid reasons for decreasing dividend payout. Some of these are below.

Investing in R&D

Some companies must continuously research and develop to pave the path for future growth. Pharma and API companies must research to create new drugs, molecules, and efficient production processes. These companies might increase R&D expenses to strengthen their future product pipeline and decrease or stop paying dividends.

Investing in Capex

Companies expand by building new manufacturing facilities or expanding existing manufacturing facilities. This is typically true for companies that manufacture end products, such as automobiles, Wires, cables, etc. These expansions are funded by internally accrued free cash flow or by debt. Debt is not preferred to fund capex; therefore, companies might reduce dividends and divert that money to facility expansion.

Acquisitions

A company can grow inorganically by acquiring other companies. These acquisitions help the company expand into a new geography or new verticals of services that synergise with the services offered by the parent company. Going back to the example of Indiamart, it has acquired multiple companies after its IPO in 2019. This might be a reason for a temporary decrease in its dividend payout in 2022.

In summary, look at the reason for a company's decreasing dividends. It is okay if there are valid reasons behind the dividend decrease that spur the company's future growth. It means the company is pursuing its growth strategy, and you will get returns on stock price appreciation over time.

If you need a fixed income, you should pick stocks with a higher probability of paying dividends. These are government-owned companies, such as Coal India and Indian Oil Corporation. These public companies pay dividends to meet the government’s expenses. Hence, they will most likely be regular in paying out dividends. Note that capital appreciation in government-owned companies might not be much or limited. It is not advisable to only invest in stocks based on dividend yield. Other good fixed-income investment options are REITs and INVITs, which are mandated by regulations to distribute their earnings as dividends to their shareholders.

Parting Thoughts

We all invest with a goal in mind. One should be good as long as the goal is reasonable and our expectations from the stock market returns are realistic. The golden rule to make money from the stock market is to be patient and utilise the extreme mood swings of the market between pessimism and optimism to the fullest.

The next time you start disliking a stock, dig deeper. Which expectation of yours from the stock was not met? What is the reason behind the expectation? Does your research of the company's basics still show good future growth? Are other companies in the same industry sector also facing a similar situation? If yes, then hold on to the stock, and you will likely reap returns in the future.

What is one stock you hate, and why? Do share in the comments below.

Happy Investing!

Disclaimer: This post is not financial advice. These are my opinions based on my personal experiences. Please do your research before investing.