Traits of a better company
What type of companies should you invest in Pakistan? Here is the guide!
If you are not looking properly, this Jin will screw you!
For new subscribers, we are discussing 4 types of Jins in the stock market that can ruin the company you are invested in. This is the second one. Here is the link to the first (link)
The fittest Jin - The Price Caps
Why am I calling this Jin fittest?
Cox this one walks with the company and keeps finding a way to latch on to it.
This is the price cap Jin!
Created by the government, through different regulators, to make sure companies don't charge more money than “they should”.
Read the words “they should".
This means that 99% of the time it's applicable to companies that make daily use or most important stuff for awam.
High demand technically means that companies get the power to charge a higher price for their products and make more money for us, shareholders.
But the government wants them to make the least amount of money, enough for them to just survive. Not more, not less.
Most obvious example: The Pharma Sector
This is the most obvious but there are more, keep reading!
The Pharma sector is the worst hit by this Jin.
The government through the Drug Regulatory Authority of Pakistan determines the final price of medicine.
When it's going good for the government they will make a transparent pricing formula but when it's not, their regulator will become a Jin and latch on to companies to not increase medicine prices.
What is a Pricing Formula?
The pricing formula tells pharma companies in advance how much price can they increase per year.
It is necessary for pharma companies since every year cost of doing business goes up but unlike normal companies, they can charge that increase in prices.
For pharma companies in Pakistan, it is usually linked to inflation.
Not-so-obvious examples
I said pharma is the most obvious but there are other regulators that don't necessarily cap prices, instead they cap the profit a company can make per unit they produce or restrict paying out those profits as dividends.
Like:
- Oil marketing companies (PSO, SHELL, APL etc) - the government through OGRA tells them how much can they profit per litre of petrol or diesel they sell or
- Oil Refineries (ATRL, NRL, PRL etc) - the government doesn't stop them from making money, they stop them from payout dividends from the money they have already made and paid taxes on.
Should you not buy companies like these?
You can but after doing your research.
And if you are someone who wants to do research once and keep buying companies for a long time then NO, DON'T BUY!
I am saying this because whenever there is this Jin attached, the companies will trade at lower multiples than an average company in the stock market.
And since you don't know when will this Jin get attached to the company you have no idea when will they stop performing.
Example?
Pharma companies stopped making money. It has been 4 quarters that their profits and stock prices are falling.
Why?
Because rupee is depreciating, they get their raw material in dollars, they can't increase their prices on their own and right now the government is in no mood to let them raise prices.
This means investors are shunning these companies for good ones.
Another example?
Refineries are making so much money lately.
ATRL has earned Rs225/sh in 9 months of this fiscal year and this is 33% more than its stock price.
So why isn't the stock 3/4 times its earnings like a normal company?
Because the government doesn't allow them to give dividends. What are earnings without dividends?
So these are not the companies or sectors that you can research once and keep pouring money into. They work in cycles.
So SIP guys, stay away from this is Jin!
The next Jin brings sure-shot misery but they always look attractive!
This article is just the tip of the iceberg. A lot more understanding is required to choose the best investment for you.
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