3 Risks to Look Out for While Bargain Hunting During a Market Slump

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

To state the obvious, September’s been a rough month for the Singapore stock market.

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 2,791 points at the end of the latter month. That level represents a decline of 21.3% from the April peak.

The Straits Times Index has since made up some ground, but at yesterday’s close of 2,897, there’s still a long way to go before the April high can be reached again.

While the big slide in the stock market so far 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 three risks to note.

Risk No. 1: The balance sheet – click here.

Risk No. 2: Industry risk – click here.

Risk No. 3: Growth risk  

A stock which can produce long-term business growth can be a fantastic investment, especially when picked up during downturns at low multiples to its earnings. But, if its growth falters, then the investment may turn out to be ugly.

Take lifestyle product purveyor OSIM International Ltd (SGX: O23) for instance. The company has been a solid market beater from 2009 to 2014 with it posting consistent and strong growth. The past year though, has been a little different. OSIM’s shares have fallen close to 40% after its earnings dipped by 28%.

Finding a good growth stock requires a bit of work. Some pertinent questions to help in the endeavour could be:

  • Is there a history of sales, earnings, and free-cash-flow growth?
  • Where can the company’s future growth come from?
  • Is the company’s growth-path fairly predictable?
  • What percentage of the company’s revenue is recurring?
  • Is the business supported by long-term contracts?

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, industry developments, and future growth may be a good place to start in assessing risk.

Read more about investing and get more investing tips and tricks, FREE! Sign up here for The Motley Fool Singapore's weekly investing newsletter, Take Stock Singapore. 

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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 owns shares in OSIM International.