Hexun Investment Advisor Wang Yan: Annual Report Market Rally - What Types of Risks Should You Avoid?

As the annual report and first-quarter report disclosure periods approach, market attention to performance significantly increases, and two types of risks require special caution.

The first type involves stocks where major shareholders significantly reduce their holdings before the annual report is disclosed. Shareholders, as insiders, have a clearer understanding of the company’s operations and performance trends. If they sell off large amounts before the official release, it often indicates a lack of confidence in the company’s future performance or even a premonition of potential risks. Essentially, this behavior exploits informational advantages to exit early, which is more common in tech companies and small- to mid-cap firms. For example, if a company plans to release its annual report on April 30 but experiences a large reduction in holdings before March 30, high alert is necessary. Such companies are likely to have hidden risks and should be avoided if possible.

The second type involves companies with a high proportion of goodwill. Goodwill is an asset created when a company pays a premium in mergers and acquisitions. If the acquired company’s performance falls short of expectations, it can trigger goodwill impairment, significantly impacting current profits. During the annual report season, cases of goodwill impairments are frequent. Investors should pay close attention to companies with a high ratio of goodwill to net assets, especially those that have engaged in large-scale acquisitions through stock issuance. Even if their accounting performance appears solid, these companies may experience a sudden change in performance due to goodwill impairments.

During periods of intensive annual and first-quarter report disclosures, avoiding these two risks is more important than pursuing short-term gains.