2 Risks to Look Out For While Bargain Hunting During a Market Slump

“Wake me up when September ends” – the rock band Green Day

September’s been a rough month for the Singapore stock market to say the least.

After peaking at 3,550 points in April this year, the Straits Times Index (SGX: ^STI) then gradually started to fall. The descent intensified over August and September, culminating in the index closing at 2,793 points last Friday. This represents a 21% fall from the April peak.

While the slide may be gut wrenching, it may also be an opportunity to pick up some bargains. But, it’s important to be aware of any risks which may be present before we invest.

Here are two risks to note.

Risk No. 1: Watch the balance sheet – click here.

Risk No. 2: Industry Risk

A stock market slump can bring about lower stock prices. While a lower price tag is generally a good thing, it says little about the underlying risk that companies face in its industry.

One notable example of a company troubled by developments in it industry would be Sarine Technologies Ltd (SGX: U77).

Sarine Technologies is in the business of producing systems and products that help diamond manufacturers turn a rough diamond into a polished stone. Unfortunately, price differentials between rough and polished diamonds have been at unsustainable levels for the most of 2015. When diamond manufacturers are not able to earn a decent profit, this limits manufacturers’ ability to finance new purchases of products and systems from Sarine Technologies.

This has led Sarine Technologies to issue a profit warning for the third-quarter of 2015.

Sarine Technologies’ stock price has fallen hard over the past 12 months. And while there are times when a company’s share price decline may be unjustified, there are also times when the business developments of a company – be it due to company-specific factors or the firm’s industry dynamics – may warrant the fall. That would be an important consideration while bargain hunting.

A Fool’s take

Buying shares when they’re cheap can pay off down the road, but we should still be aware of the risks involved. Considering the company’s balance sheet and industry developments may be good places to start in assessing risk.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.