Not all stocks are equal. At any given point, each stock can belong to one of the below categories.
Knowing which category your stock is in can make a big difference to your decision making and eventually your returns.
A 🧵.
Knowing which category your stock is in can make a big difference to your decision making and eventually your returns.
A 🧵.
Category 1: Stocks which the market likes right now. These are stocks which are being re-rated. The re-rating process typically takes 6-9 months. Over this period you will see these stocks trending up.
Typically these stocks are being re-rated for one or more of the below two reasons:
✅ Surprise earnings in last 1/2 quarters
✅ Some story or narrative that promises good earnings down the road
Your portfolio should have some exposure from this category to outperform.
✅ Surprise earnings in last 1/2 quarters
✅ Some story or narrative that promises good earnings down the road
Your portfolio should have some exposure from this category to outperform.
Category 2: Stocks which the market hates right now. These stocks are being de-rated because :
✅ After good earnings for many q now the earnings have started to turn sour or expected to turn sour.
✅ After so so earnings for a while suddenly there is a big fall in numbers
✅ After good earnings for many q now the earnings have started to turn sour or expected to turn sour.
✅ After so so earnings for a while suddenly there is a big fall in numbers
✅ Corporate Governance issue has surfaced. Expect a major major de-rating
✅ Story stocks where story has not played out. Markets were suckered.
✅ Story stocks where story has not played out. Markets were suckered.
Typically this category will full of mid/small cap stocks.
If you own anything from this category you need to revisit your thesis as these type of stocks will be dead money for a while.
If you own anything from this category you need to revisit your thesis as these type of stocks will be dead money for a while.
Category 3: Stocks where nothing good or bad is happening. They are just idling back and forth. These are stocks which have gone through category 1 and 2 phases and are now somewhere in the middle.
This is where value investors find value. No one is interested in these stocks. If they go to category 1 it’s a successful value investment and if they go to cat 2 it’s a value trap.
This is also where blue chip stocks will remain after their re-rating. Think HDFC bank, Kotak bank, HUL over last 2-3 years.
Essentially in this category market is waiting for a catalyst which can be either good or bad.
This category is ideal for smart long term investors to pick value or accumulate blue chips. If a not so experienced investor dabbles here it can be very frustrating.
So ideally portfolio should be a good mix of category 1 and 3.
Category 2 is what drives your returns down. So try to ensure that a large part of your portfolio is never in Category 2.
Category 2 is what drives your returns down. So try to ensure that a large part of your portfolio is never in Category 2.
I think this type of clarity of thought about your portfolio will improve decision quality drastically. Let me know if this type of portfolio break down makes sense to you.
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