This is Dangerous

This is a daily timeframe chart of Choice International.

As you can see on the chart, I have marked the base here with a red color rectangle.

This is base number 10 on the daily timeframe chart.

Usually, a stock which is in a confirmed stage 2 uptrend goes through 5 different bases, from base 1 to base 5.

The distance between each subsequent base is roughly 20 to 25%.

If the stock goes beyond 25% from the previous base, I consider it as an extended stock.

Most leading stocks of the past have gone through 5 bases within a confirmed stage 2 uptrend.

This particular stock, Choice International, has reached base 10, which means it is extended.

This is one reason I would reject the stock.

The second reason is that, if I open the weekly timeframe chart, the same stock shows base 1 on the Market Smith platform.

This adds to confusion.

To clear the confusion, what I do is, I zoom out a little bit on the weekly timeframe chart.

I see that the stock is currently trading at roughly INR 850 and 5 years ago, the stock was trading somewhere around 20 rupees.

That's 42 times from its price, 5 years ago.

The stock has been a multi-bagger.

It has gone up 42x in 5 years.

This is another reason why I would reject the stock; it is probably extended.

If a stock goes up 42x in 5 years, that is not the time to buy a stock.

So, this would be a second reason to reject the stock.

The third reason not to get involved in this stock is the fundamentals.

Broadly speaking, in fundamentals I look at 4 factors:

1 - Sales

2 - EPS

3 - Margins

4 - ROE

Within sales and EPS, I look at annual and the latest 3 quarter numbers.

I also look at the latest 3 year numbers.

I prefer these numbers to be growing & accelerating.

For margins, I look at what the margins have been 3 years ago, 5 years ago, and 10 years ago.

I prefer increasing after-tax margins.

And for ROE, I look at minimum 17%.

So, just glancing over these numbers, I find that the stock doesn't fit my fundamental criteria.

That is the third reason I would reject the stock.

I am trying to help you understand how risk factors start piling up in a stock.

I am not saying that this stock cannot go up from here.

Who knows: It could double from here. I have absolutely no idea.

All I am saying is that, when risk factors start piling up one after the other, it is better to stay away and look for some other opportunities in the market.

If the daily timeframe chart is showing base 10, and if the weekly timeframe chart shows base 1, that further adds to the confusion.

I feel that the ability to reject a stock is far more important than the ability to select a stock, because the market will keep throwing challenges at you.

You have to decide whether you want to compromise on your standards or not.

So, I strongly recommend that you use this risk-first approach.

Try to find out factors that add to the risk of a particular stock.

And if too many risk factors begin to pile up, the decision to stay away from the stock becomes much easier.

Regards,

Rohit Musale, CFA

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