Traits of a better company
What type of companies should you invest in Pakistan? Here is the guide!
This is our last Jin. Do you what is unique about it? It is hidden but if you look closely it leaves a trail. And some are extremely obvious!
For all those who have just joined the community, we are discussing types of stocks that you should stay away from in Pakistan if you are a "one-time research and monthly inflow guy".
Sponsors that give no s**t about minority shareholders
If you haven't read this thread, go ahead and do that!
This will be the base for our discussion + more signs to look out for in other companies.
Hum Network would have been a much more valuable company than it is today. At least double. It was one of those companies that had a foreign shareholding rooting for it.
But due to their management’s complete disregard towards minority shareholders, this stock never recovered.
They will have to do a lot before shareholders trust them again!
But we can pinpoint Hum Network because we are looking in hindsight.
There are many companies screwing minority shareholders but either we don’t know them yet or they haven't blown up like HUMNL. The game is to find them in advance and stay away from them.
So let me divide these companies into two separate groups.
- Signs of bad management - Their stock prices won't go up like normal companies and
- The Topi stocks - they get listed just to screw investors
The most obvious signs
Less dividends more right shares!
If your company makes money, it should share these through dividends, right?
But what if, you're asked to give money many more times than the company paying you profits?
This is the first sign of a bad stock.
Every year they come up with a plan to get more money out of you. They call this the right issue.
What are the Right shares?
When a company needs money to increase its production or pay off debt, they ask for more money from existing shareholders.
This process is called issuing the right shares.
By the way, more rights aren’t bad.
If the company is continuously expanding or if the interest rates have gone up, of course, they would come to shareholders for more money.
But as a research-once and buy-monthly investor you should know how many times have they come before. I call this dividend to the right issue ratio.
If they keep coming back to you, this means they simply don’t know how to run a company.
They over-expand or they want to show earnings but not cash flows. All of these are bad signs for long-term investors.
How to do spot dividends vs right? Like this!
Instead, they buy their sister companies
There is a category of companies in the stock market that would give rights and get money from you but when that project starts to make money, they use it to buy sister companies instead of paying you dividends.
These are the worst of the worst.
How to spot their investment into sister concerns?
This isn't as easy as looking at a table.
For this, you will need to read their EOGM notices to see what are they doing. (I can write on it in detail if I get enough replies).
Technical assistance or royalty
There are a few companies that make their sponsors ‘gods’.
These are the companies that pay royalty fees or technical assistance fees to their major shareholders.
And do you know what the worst part is?
They deduct these fees from sales, not profits.
This means that for majority shareholders, it doesn't matter if the company we are invested in makes money or not, they will have their cut!!
Usually, these are foreign-owned companies.
Worst Auditors
“Salimullah-to-Kaleemullah and Sons and Daughters and Paroosi audit partners pvt ltd”
This is a sure-shot red flag.
Yes, I am exaggerating with this name but so many unknown audit firms have helped companies to cook their books that I can’t even count. Most of them implode in a few years’ time.
If you see that a company has changed its auditors and the new auditor is literally unknown RUN!
You will, again, find this in EOGM or AGM notices - a fancy way of saying annual board meetings.
The Topi Stocks
“We will buy Apple and Google and then merge them and after one year we will buy Amazon from Bezos because he isn't running the company properly.”
Have you ever read claims like these when a new company is getting listed or an old company is being acquired (reverse listing) when they are offering the right shares?
I have been burned by them myself. Some of their plans look so realistic and they back it up with numbers. But in the end, these are nothing but topi stocks.
Once again, if I get enough replies, I will dedicate one whole letter to explaining these companies.
These are NO GO AREAS FOR MY SUBSCRIBERS. Unsubscribe from this letter before buying even one share.
This will not only ruin your money but your investment journey.
4 Jins are done!
Now time to look at better companies!
What do they have special?
How do they save themselves from these jins?
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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