It is said that knowing when to sell a stock is much more difficult than knowing when to buy a stock.
Yes, if you end up selling too soon and the stock rises further, there’s a feeling of regret. Similarly, if you don’t sell and the stock crashes, the pain is much deeper.
We believe, there can never be a perfect trade, i.e., you end up buying just at the bottom and sell at the peak. Even if it happens, be rest assured, it will be a fluke and don’t expect the same to repeat over and over again.
Rather than regretting over such decisions, it’s much more important to formulate the processes and sticking to them.
Like, at the time of buying the stock itself, you should have some factors in mind as to when you will sell the stock. Knowing the basics like the nature of the business (extent of cyclicality), valuations, phase of the CAPEX the company is in, current profitability in comparison to the past, etc. help a lot.
Similarly, it’s important to review the performance or the developments at the company against your expectations or the investment thesis on regular basis.
Let me share with you an example of a stock we sold recently in the Model portfolio:
- Stock Name: Gujarat Ambuja Exports Ltd (GAEL)…can read the initiation report (free access) – HERE
- Date of Initiation: 24th Jul’20
- Price at the time of Initiation: 79.50
- Date of Closure: 5th Jun’21
- Price at the time of Closure: 163.30
So, despite the company reporting more than 20% growth in sales, 90% growth in EBITDA and 150% growth in PBT in FY 21, why have we closed the coverage and sold the stock in the Model portfolio.
Well, we believe the nature of the business of GAEL is cyclical and this is what we shared with our members in our 5th Jun’21 coverage closure note (in blue color):
Over the years, it’s been observed that the EBIT margins of the other agro processing division have averaged around 4-5% while that of Maize division have averaged around 12-14%.
For FY 21, the company has recorded 6% EBIT margins in the other agro processing division and 18% in Maize division.
While the company has a strong footing in the Maize division and expanding capacities at regular intervals, the commodity nature of both the major divisions and a significant surge in the profitability in FY 21 makes us question about the sustainability and the growth in profits for the next 1-2 years.
We believe, there’s a reasonably high probability of 10-20% dip in profitability in FY 22 in comparison to FY 21.
On account of the reasons above, we have a negative rating on the stock and also closing coverage on the same.
It may happen that the company may further grow its profits and the stock could end up moving higher; however, as mentioned above, we don’t intend to catch the peak, but rather follow the processes.
If you are looking for Low Risk Strategy for investing in potential High Gainer Stocks, you can subscribe to premium memberships Alpha or Alpha + at LINK
Disclaimer: GAEL has only been used an example to demonstrate the thought process. It’s not a recommendation to buy or sell the stock. I don’t have any investment in the stock.
Research Analyst Details
Name: Ekansh Mittal Email Id: [email protected] Ph: +91 727 5050062
Analyst ownership of the stock: No
Details of Associates: Not Applicable
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Disclosure (SEBI RA Regulations)
Whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company/companies and the nature of such financial interest – No
Whether the research analyst or research entity or his associates or his relatives have actual/beneficial ownership of 1% or more securities of the subject company (at the end of the month immediately preceding the date of publication of the research report or date of the public appearance) – No
Whether the research analyst or research entity or his associate or his relative has any other material conflict of interest at the time of publication of the research report or at the time of public appearance – No
Whether it or its associates have received any compensation from the subject company in the past twelve months – No
Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past 12 months – No
Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months – No
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months – No
Whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided – No
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