This is the second post in our series:What football can teach you on Stock Investing? There are four player-positions in football-Forwards, Midfielders, Defenders and Goalkeepers. We can draw direct analogies from how they perform different roles but work together as a team to score goals and also prevent opponents from scoring goals. Companies and their stocks have different characteristics and perform differently under different conditions. You need to understand these differences and use it to your advantage to build a well-diversified portfolio that will deliver healthy-high returns.
This post we talk about companies that can play the role of Forwards in your portfolio.
Who are the Forwards?
Forwards are aggressive players, who play most of the time in the front and are responsible for scoring goals but not for defence. They wait for the ball to come to them and then they race towards the opponent’s goal. In a portfolio, high growth companies play this role. When the economy and market conditions are favourable, their prices rise very fast. That’s because a favourable economy helps such companies grow faster and deliver a very good performance. And if the market is also bullish it tends to price such stocks very high. Thus both the earnings increase and the P/E multiple take the stock prices up very rapidly. Their presence in your portfolio has the effect of generating very high returns in these periods.
However, Forwards don’t play a role in defence. When the ball is in their own half, Forwards fall back to the centreline and wait with very little to do. So too during tough economy and markets conditions these companies’ stock prices tend to fall sharply. That’s because market players have high expectations of company performance factored in the price which these company are unable to match during tough situations. So the prices of such stocks correct very sharply and very fast. That’s when you see losses in your portfolio. If Forwards are a sizeable part of your portfolio these loses are large and even seasoned investor struggle to accept it. Most investors sell and even exit such stocks. And it may at prices that don’t earn them good returns.
Which companies qualify as forwards?
In the list of forwards we typically have companies in sectors that have a long run way to grow in the future. However, it includes only those companies which achieve the high growth with high return on capital. The long runway available to these companies could be for the following reasons:
- Low penetration of the products
- Rapidly growing demand
- Companies expanding geographically and focussing on exports market
- Continuous innovation
- Unorganised to Organised shift in the market for well penetrated categories