Saturday, December 12, 2009

Why I will invest in Power Stocks?

Energy and Power security plays very important role in international politics let alone its importance to India’s growth. In fact it was one of the important reasons for the recent Iraq invasions and is widely and openly accepted as well. Stephen Leeb, Author of the Book “The coming economic collapse: How you can thrive when the oil costs $200 a barrel” predicted few things that turned out to be true during the recent economic collapse but more unnerving thing is yet to come. He says that the energy resources are reasonably adequate at this point of time, but it is going to be a scarce commodity in the near future and the countries will fight each other to get the share. Advanced countries with more muscle power will win that war eventually. But to be considered as an “Advanced country” India needs to produce at least 15 times of what they produce right now. In this context I feel private sector has a huge opportunity to cash in the demand.


Major Players
Majority of the India’s power generation is controlled by public sector undertakings notably National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC) and Nuclear Power Corporation of India (NPCI). But there are number of private players like Tata Power, Reliance Infrastructure, CESC, Torrent Power and Jindal Power. Few other companies like Adani Power, Reliance Power and Indiabulls Power have generated huge amount of money through IPO Route recently to setup power plants with ambitious projection capacities and I do think there might be few more players joining the club.




Numbers Game
Usually the power sufficiency is understood by per capita usage and India is way behind the other leading economies. Canada leads the nations with the per capita power consumption of around 17500 Kilowatt Hrs followed by USA (13500 KWh), Australia (11500 KWh), Japan (8500 KWh), France (8000 KWh), Germany (7500 KWh), UK (6500 KWh), Russia (6000 KWh) and Italy (5800 KWh) while India’s per capita stands at mere 620 KWh. Even among the so called BRIC countries (BRAZIL, RUSSIA, INDIA, CHINA), India’s position in terms of power production and usage is last. Power consumption is so unequal within the country that Gujarat’s per capita is 1300 KWh while the per capita for Bihar is 90 KWh. So in that sense, India needs to catch up with other countries in order to meet the power requirement for her industrial growth and economic prosperity. Residential consumption is also so low that more than 40% of rural households do not have access to electricity and even for the population, who does have access, power cuts are very common and that’s how India is remembered in western countries.

India currently has the installed capacity of 147,000 MW, out of which 93500 MW comes from thermal power plants and the remaining capacity from Hydro Power (36500 MW), Renewable Power (13000 MW) and Nuclear Power (4000 MW). But this demand is going to increase by 10, 00,000 MW by 2030 according to many projections and the government has in fact already planned to increase the installed capacity by 80000 MW by 2012. The government has also set some ambitious plans like 20000 MW solar power and 30000 MW Nuclear Power by 2020 and it is different matter whether it will be executed as planned or not, but at least they do understand the importance of power generation and are taking some steps towards that direction. Wind power is the major renewable power source and that’s where wind turbine manufacturers like Suzlon Energy has a huge role to play and the stock price for that particular company has been staying in expectation of that. Of course the stock price plummeted in recent times due to huge debt, but in the long term, Suzlon will come out of it for sure. Even companies like Elecon Engineering who produces parts and accessories will do well in the future.

Market Players

Tata Power is the largest private power producer in the country and they produce only 2700 MW. Others such as CESC, Reliance Infrastructure and Torrent Power produce less than 1000 MW each and that’s precisely the reason Reliance Power and Adani Power has ambitious plans to generate more than 20000 MW each by 2020. Realizing the opportunity in the power sector, players like Indiabulls who does not even have any background or past reputation in the power business have entered the market. So, looking at all these facts and figures, I strongly believe that Power Sector Stocks will give excellent returns over the long term as the gestation period for power investments is significantly lengthy. Even companies associated with power sector like Power Grid, Power Trading Corporation, Rural Electrification Corporation, Elecon Engineering and GVK power will stand to gain.

List of Power Sector Stocks

I am just giving here list of potential companies in this sector, but there are lot of other associated companies like Bharat Bijlee, EMCO and Transformers and Rectifiers which I am not listing here to keep this article short.
NTPC
NHPC
TATA POWER
CESC
RELIANCE INFRASTRUCTURE
RELIANCE POWER
ADANI POWER
TORRENT POWER
NEYVELI LIGNITE CORPORATION
CROMPTION GREAVES
ELECON ENGINEERING
POWERGRID CORPORATION
POWER TRADING CORPORATION
RURAL ELECTRIFICATION CORPORATION
JINDAL POWER (IPO)
GVK POWER AND INFRASTRUCTURE
INDOWIND ENERGY
Kumaran Seenivasan

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Friday, November 20, 2009

Stocks (Market) that puzzle

The relation between stock price and its earnings is well known and most of the investors believe that stock price is the function of earnings. But there also exists some “other” phenomenon which I do not have clear idea about and I am sure many people are in the same boat. The stocks that I am going to mention about are trading relatively with huge volumes these days. I do know that stocks of some of the companies with good growth opportunities are fully priced in well before the “so called” earnings are realized. But what I do not understand is the fact that some of these companies have not even announced the opportunities that exist but are hot favorites in the market. Let’s see one by one.

BF Utilities (Price: Rs.1356)

This is the company promoted by Kalyani Group to meet their own power requirement. The total capacity of the power plants is 19 MW according to their website. Sales per year stand at mere 20 crores and the EPS is around 1.5 rupees. Book value is Rs.60. Just a month back, this stock was trading at Rs.752 (Nov 3, 2009) and I have not read any path breaking corporate announcements since then. But the stock is trading now at Rs. 1356 (PE Ratio of 1100), whopping 80% increase within 40 days. In fact over 2.5 lakh shares were traded on Friday (Nov 20, 2009). Market cap stands at 5100 crores.
The only reason that I can think of for this huge unbelievable valuation is that they have set up wind farms to generate power and people might be thinking that they would venture into wind power industry. Even with that scenario, the stock price is not justified. As of now it is a captive power plant for kalyani group which is the truth. If anyone understands better or have more information, please share in the comments section.


Shree Global Tradefin Ltd

Price: Rs.428
Market Cap: 8800 Crores
Revenue/Year: 307 Crores

EPS and thus PE ratio is in the negatives. Book Value can’t be mentioned here. What kind of growth opportunities investors foresee in a company like this is not well understood. In the earlier days, companies like Airtel and Praj Industries had to prove their worth to command higher valuations. But the days have changed where companies attract huge investor base just based on the “assumed” opportunities which is not a healthy sign for a real investor. It might well turn out to be true that this company might become a giant and reward the share holders handsomely but my point is, would Warren Buffet invest in a company like this? Would Benjamin Graham spend a minute to look at the financials of this stock? I strongly suspect that happening. Even if the traders and investors found something special in these companies, how did they come up with the earnings projections that command these valuations?



Kwality Dairy

Price: Rs. 1197
EPS: Rs.5.26
PE: 227
Book Value: Rs. 11
Sales/Year: Rs.583 Crores

Even though I knew about this stock for a long time, I never bothered to look it up. But one of my blogging friend’s Shabu mentioned this stock in his blog and I wondered what on earth increased this stock price from mere Rs.20 in Nov, 2008 to Rs.1200 in Nov, 2009. The price has increased 60 times in a year (You are right, 6000% return in a year) but I do not know if the investors realized the increase in sales or earnings have not grown anywhere near. I wish I have the ability to spot this speculative trend so that I do not need to work anymore!!! To find few more stocks like this, you can go to the following link.



Likewise there are several other companies commanding very high valuations based on the “Assumed” or “Projected” growth opportunities and I have mentioned some of them below as these stocks have been in the limelight more in the past week.

Jai Corp
Dynamatic Technologies Ltd
Edserv Soft systems

I have mentioned my points based on what I have read, but there could have been some reasons for which the companies are commanding high valuation that I might have missed. If anyone knows about that, please comment on it.

Kumaran Seenivasan

www.stockanalysisonline.com

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Friday, October 30, 2009

Correction in Stock Markets

“Correction” is a relatively well known word in stock market circles and for someone who does not understand clearly what it stands for, this article might help finding what it is.

Deriving the Definition / Meaning

The definition for “Correction” lies in the word itself, but one just needs to associate that with stocks markets. The standard dictionary meaning for the correction is,

- an action to rectify something
- an action to set right (Correct) the anomaly
- to set right an error or misunderstanding

So, if rectifying something is termed as correction, many would be wondering what went wrong in stock markets to rectify. Here is my explanation.

Stock prices usually discount the future earnings into its present price. People buy stocks at a particular price expecting that the company’s earnings (EPS) would stand at a specific level which they call it as forward earnings. Sometimes they buy based on the present valuation as well. SENSEX levels just imbibe the same concept. Let me explain in detail.

Consider SENSEX as a company just like State Bank of India. Usually SENSEX trades around the PE ratio of 21 -22 at peak valuations (SENSEX PE is calculated by adding the 4 quarter earnings of all the 30 SENSEX companies) and sometimes in a crazy bull market it even goes above 25.

People expected that the Financial Year 2009 (FY2009) SENSEX EPS would stand around Rs.850 – 900. If we multiply the PE and EPS (21*850), we get 17850 and that’s the SENSEX target Indian Stock market was trying to achieve. So, stock prices shoot up from the March lows of 8000 to 17100 and we had a sharp rally based on the prediction that SENSEX EPS for FY2009 would be about Rs.850 - Rs.900.

Had the companies announced good second quarter results, there would have been no problem and the SENSEX might have moved up and even the FII’s (Dawood Ibrahim’s of Indian Stock Market) would have been confident about the India growth story. But since companies by and large announced muted and negative results, market realized that the FY2009 EPS would not be what they actually thought (Rs. 850) and it would be less than that. So, market realized the mistake that it took the SENSEX too far (Ahead of Earnings) and wanted to rectify the mistake or error which we call it as “Correction”. We can see number of corrections happening in the Indian Markets since 2002 in the following graph.


Foreign Institutional Investors (FII) started selling the equities (Domestic instituations followed and will follow as well) and market has declined to the SENSEX level of 15896 as of 30/10/2009. It would correct itself till what market decides the right EPS and PE in the short term. Please see the following graph to understand the relationship between net inflows from the FII's and SENSEX.


So the “correction” can be termed as a self provoked mechanism by which market automatically rectifies the errors or excesses committed by its participants. Historically if the decline is 10 percent or less then people term it as “corrections” otherwise it would qualify for a “Market Crash”.


My Opinion (31/10/2009)

Based on the BSE website, the current EPS is Rs.786 and PE is 20.21. But what they calculate is trailing 4 quarter earnings and not the FY 2009 EPS. So, let us reduce our expectation of FY2009 EPS of Rs.850- Rs.900 to Rs.800 - Rs.850. US market is trading around the PE of 14-15 and so does other developed markets. If we assume the same PE, then multiplying the PE of 15 with our new assumed EPS of Rs.800 to Rs.850 gives you the SENSEX level of 12000 to 12750. But India being a fast developing country with a growth rate of around 6 percent for the time being (Growth Rates might increase to the levels of 8 if all the parameters combine well), Investors are ready to put a premium on our scrips and hence we need to take that into account. So, we need to add that premium and there is no hard and fast rule to do that and I just personally assume the PE of 3 - 4 for the “India Growth” Premium and adding another 2400 to 3200, the SENSEX would stand at 14400 to 15200 to make sense.

We can also cross check this number by another method. Corrections are called Corrections if they decline by 10 percent or less historically. It just depends on who is calling it. Some people call it corrections even if the decline is 20 percent. But we will take it as 10 percent. So 10 percent of 17000 is 1700 and if we deduct that from the SENSEX level of 17000 which we had just a week back, then the SENSEX would stand around 15300 and SENSEX level of around 15000 seems to make sense. I am not into any technical analysis or any predictions but just looking at these numbers tells me that the SENSEX level of 15000 makes sense for our markets for the time being and I thinks thats where market is heading to. Anything less than that would be an undervalued market and anything more than that would be an over valued market. If the outlook for the earnings increases, then we might be forced to revise our assumptions and markets might head up. But the overall long term uptrend is intact particularly in case of our Indian Markets and I have no doubt that all these corrections are just aberrations in long term growth story and also an opportunity for the investors to accumulate good stocks.




Some Recent Major Single Day falls in SENSEX

1. January 21, 2008 - 1408 Points
2. October 24, 2008 - 1070 Points
3. March 17, 2008 - 951 Points
4. July 6, 2009 – 870 Points
5. January 22, 2008 - 858 Points
6. February 11, 2008 – 833 Points
7. May 18, 2006 – 826 Points
8. October 10, 2008 – 800 Points
9. March 13, 2008 – 770 Points
10. December 17, 2007 – 769 Points


Am I expecting a fall like this in near future?? Hell no hopefully. But anything can happen in these markets.

Kumaran Seenivasan

www.stockanalysisonline.com

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Monday, October 19, 2009

Best Mutual Funds in India - 2009

Since I started writing this blog, all my posts have been about individual stocks and stock markets oriented information. But there are people who can’t invest in individual stocks due to resource constraints or who would not like to get involved in the stock market directly. Mutual Funds are an option for them and I will discuss in detail about the same.

What are Mutual Funds / Why Mutual Funds?

As we know, lot of retail investors enters into the stock market and only the ones who have the knowledge and skill come out with good returns and other people return not only empty handed but with huge burden due to lack of even some basic knowledge. Also there are people who can’t afford to buy individual stocks or invest anywhere else (Like land or gold) as their monthly savings is in meager amounts. They will have very low risk appetite and ideally they would want to invest in companies like State Bank of India, Reliance Industries, Infosys Technologies, BHEL and L&T but to buy a single stock in any of these companies, one would require about Rs. 2000 and not everyone can afford it. To address the above discussed problems, Mutual Funds originated way back during the start of the 20 th century in USA. Here is my definition of a Mutual Fund.

“Mutual Fund is a pool of money collected from investors and managed by a professional fund manager to invest in stocks, bonds and money market instruments and the net profit is shared among the unit holders or investors based on their proportion of investment”. The diagram below explains in simple terms.


So, Mutual Funds collect the money from investors and funds usually generate anywhere between 1 Crore to 10000 Crore Indian rupees and is professionally managed by fund managers who have the required knowledge in the stocks markets. These managers invest the pooled money mostly in stocks and bonds and based on the performance of the fund’s investment portfolio, unit price is decided on daily basis. Unlike stocks, small investors can even buy the units in fractions and they can redeem it anytime just like stocks. Hence, Mutual Funds offer small and unknowledgeable investors a chance to invest in the stock market indirectly and get benefited without knowing anything about it and more importantly they can invest any amount.


Advantages of Mutual Funds

Professional Management: This makes the life easier for people who does not have any knowledge in stock markets or who does not have enough time to do the research on their own.

Diversification: The funds invest in large number (30 – 100) of stocks thus minimizing the risk of losing the entire capital. The idea behind diversification is to invest in a large number of stocks so that a loss in any particular stock is minimized by gains in others.

Low Cost: Since the fund buys and sells in large amounts, the cost is spread out among all the investors which brings the per head transaction cost low.

Simplicity: Anyone can invest and any amount can be invested.

Liquidity: Can be redeemed at any time.


Disadvantages:

The same advantages which I listed above can turn out to be a disadvantage as well. For example, professional management is a very vague concept and many a times, people with common sense beat the fund managers in terms of returns as fund managers have to go through lot of regulations and sometimes they lack flexibility as well. So, performance of the fund managers is a key here and most of them are closely watched. Also, there might be hidden costs which investors should be careful about. Mutual Funds do not operate as a non profit organization and they are primarily in business to make money.

Stocks or Mutual Funds

The answer should vary depending on individuals. If you are someone who have the adequate knowledge in stock market and do not panic in tough times, then stock investment can be an option for you. But if you are someone who does not know what stock is all about and fear losing money, then individual stock is not for you and better go for Mutual Funds. Mutual Fund is good even for someone who has knowledge in stocks but do not have enough time to do research and buy stocks. Hence, Mutual Funds are an option for everyone irrespective of knowledge and skill but stock is for ONLY knowledgeable investors.

What returns one can expect?

Good Mutual Funds return compounded annual return of anywhere from 10% to 30% depending on the fund manager's performance. Some selective high performance funds report even more than that. For example, DSPBR Top 100 Equity Fund has returned 38% annually since its launch in 2003. HDFC Top 200 fund has returned 32% annually in the last 5 years. If you are someone who will be happy with an average return of about 20% without spending much of your time, then Mutual Funds can be an option.


HDFC Top 200 Fund Summary (Till June 2009)


Best Mutual Funds in India

Large Cap Funds: These funds invest only in blue chip companies and large corporations.

DSPBR Top 100 Equity Fund
HDFC Top 200 Fund
Franklin India Blue Chip Fund
HSBC Equity Fund
Sundaram BNP Paribus Select Focus
Birla Sunlife Top 100 Fund
Kotak 30

Diversified Equity Funds: Money is invested in all the companies based on the growth opportunity irrespective of the size of the company.

Birla Sunlife Frontline Equity Fund
DSP BlockRock Equity Fund and DSPBR T.I.G.E.R Fund
Templeton India Growth Fund
Reliance Growth Fund
SBI Magnum Contra Fund
Fidelity Equity Fund
HDFC Equity Fund

Small and Mid Cap Funds: Money is invested in small and medium sized companies.

Sundaram BNP Paribus SMILE Fund
Birla Sunlife Midcap Fund
Sundaram BNP Paribus Select Midcap Fund
Franklin India Prima Fund
DSP BlockRock Small and Midcap Fund
Reliance Regular Savings Fund
Tata Growth Fund or Tata Midcap Fund

Kumaran Seenivasan

www.stockanalysisonline.com

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Tuesday, October 6, 2009

When to Sell a Stock?

The most intriguing question in the stock market has always been “When to Sell a Stock? This is in fact as much important as “When to Buy a Stock?” The selling point depends on what kind of investor you are. I just leave out the day traders as they have to sell it on the same day and group other investors into

Short Term Investors
Medium / Long term Investors

The selling point for the short term investors sometime differs from the Medium / Long term investors. If we consider 5 years or more as “Long Term”, then we would experience several corrections (over 5 year period) which would be very significant and each one of the troughs could be a selling point and one can sell at the troughs and then buy back the same stock at a lower price.

Short Term Example:

If you are a short term investor, it is better to fix a selling price or return percentage while you buy the stock and sell it as soon as the stock hits the target price. Because, often times price decline happens apparently for no reason and may be that’s the reason technical analysis was born in the first place.


Example: Venus Remedies

This stock was trading at Rs.210 in July 2009 and company has good fundamentals. In the recent rally, the stock reached the short term peak of Rs.310 (50% returns) and started declining and is available now for Rs.220. There was no change in the company fundamentals and nothing has changed since July. So, if one had set the “Target Price” in the first place, he / she could have profited significantly and can buy the same stock now at a lower price. Hence, setting a “Target Price” is one way of identifying the selling point.

Long Term Example

Long Term selling point should ideally be a “Maturity” value for your investments and it is one of the most difficult things to come up with. Again setting up a “Target Price” would be very helpful for the long term investment as well, but it is one of the very difficult things that I can think of. Because, in the short term, one can set 50% return as the target price. But it can’t be the “Selling Point” for the long term investment. If the company is really good and you fix the “Target Price” as 50% return, then you could potentially miss the multibagger. So, my suggestion would be to keep invested as long as the fundamental does not change significantly and market sentiment is positive. If you feel the market is reaching unsustainable levels, then just sell it even before peaking. Two things can be done to sell the long term investment.

1. Identifying the Market Peak and sell
2. Sell when the stock is heating way above the company fundamentals



Example: Reliance capital

Reliance Capital was trading at Rs.2875 on Jan 10, 2008 and the expected earnings per share for the full year at that time was about Rs.45 (PE Multiple of 64). Even if you have failed in identifying the “Unsustainable market” levels (SENSEX breached 21000 during that time), you could have certainly predicted that valuation for reliance capital at Rs.2875 was stretched for its fundamentals. Again it is a risk we need to take. Sometimes you might sell the stock thinking that the stock has reached the peak, but market sentiment or over optimism may drive up the stock price to unbelievable levels. But it is better to take profits rather than become a slave to the market crash.


General Guidelines to sell a Stock

The following points needs to be considered to sell a stock irrespective of the duration of investment. But, it is important to remember that you can’t get the “Selling Point” right all the time. Selling signals can come either from company itself or from the market.

Company Related Changes

Change in Fundamentals is the most important thing that one needs to consider while selling a stock. Certainly the following are the ones that come to my mind.

1. Earnings stop growing or Decline in earnings
2. Slow growth of Operating Cash Flow
3. Decline in Market Share
4. Negative Regulatory action specific to the company
5. No New Products or Enhancements
6. Decline in research spending
7. Change in Top Management
8. Increase in Debt without any expansion plans
9. Decline in the same store sales
10. Acquiring seemingly unrelated companies or relying on it for expansion
11. Increase in raw material cost
12. Patent Expirations
13. Cutting costs as a way of keeping the earnings

Market Related Changes

1. Stock is heating up way above the fundamentals
Ex: PE of company A is 60 without any specific reason while the peers are trading at the PE of 20.

2. Market in general is reaching new highs signaling over optimism
3. Insider Selling or even no insider buying
4. Increased competition
5. Negative Regulation for the entire industry
Ex: Just Yesterday (Oct 06, 2009) we saw TRAI announcing per second tariff plan and all the telecom stocks declined by 10%.

These are some of the points that I could come up with to identify the “Selling Point” but there could be others specific to the situation. I expect more discussions in the comments section related to this post as it would help everyone to learn few things in terms of selling a stock.


Kumaran Seenivasan.
http://www.stockanalysisonline.com/

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Saturday, September 12, 2009

When to Buy a Stock?

The success in stock markets depends heavily on when we buy the stock and when we sell it. In the next couple of articles, I will write about when to buy a stock and when to sell the same. Though there is no specific time to buy a particular stock and can be purchased at any time when the fundamentals of a particular company is better than the stock price, there are few situations where we can take advantage of the market. Let me list out the opportune times for buying stocks and explain it with examples.

1. Fundamental's Vs Stock Price Analysis
2. Market Melt Down or Market Crash
3. Market Reaction to Company's own Action
4. Market Reaction to Regulatory Action or External Influence


1. Fundamental Vs Stock Price Analysis

As we all know, it is very difficult to time the market. Undervalued stocks are available at all times and we should manage to find such companies. We should research with all the available quantitative tools to find a stock which is trading at a low price but the respective company has great fundamentals. Hence, the take away here is, when we find a stock where the fundamental does not support such a low price, then we should go ahead and purchase it.

Example:

JVL Agro Industries:This company sells vanaspati in North and Central Indian market and has a significant market share particularly in Bihar and UP where it commands 30 % market share. They are also planning to setup a SEZ and have already got approval. EPS stands at Rs.45 per share and the book value is Rs. 110. Debt position is not bad at all. The recent quarter sales of course was down than the previous years but they managed to reduce the cost as well. So, I think the company has good fundamentals but it is trading at Rs. 117 and the fundamentals command better price than that even at this level. It is not moving up as small caps tend to do well only when all other blue chips in peak valuation. People can consider this stock for long term investment.


Likewise, you can look at the fundamentals of Parekh Aluminex, Compact Disc India, Koutons Retail, Canara Bank and Reliance Communication.

2. Market Melt Down or Market Crash

This situation happens in every few years time and we should be able to make up our minds to buy some wonderful companies at dirt cheap prices. We in fact witnessed such an opportunity in September / October, 2008 and March, 2009. Times like this do not come often and we should have grabed that opportunity with both hands to accumulate for the long term or even for short term gains. Market crash happens for various reasons including global scenario, financial mesh up, GDP decline or inflation, but that affect many companies with strong fundamentals as well.

Example:

Grasim Industries: It’s true that market crashed and earnings reduced world over. But the overall sales increased for Grasim and it’s in a diversified business including viscose staple fiber, textiles, cement and chemicals. Present 12 month EPS stands at Rs. 175 and the previous year EPS stood at Rs. 243. Grasim has been giving dividends for a long period of time and more than 200 percent since 2006. It was available at Rs.850 – 900 ranges for couple of months in Nov/ Dec, 2008 period and it was hugely undervalued for its fundamentals due to market sentiment. One should have bought this blue chip at that time and if not, we should take this as a lesson for the future situations. No wonder this stock is trading at Rs. 2650 these days.




Other Examples: Larsen & Toubro, BHEL, Aban Offshore, Axis Bank, Sterlite Industries, Wipro and to name many.

3. Market Reaction to Company’s own Action

This type of situation happens when a particular company does something for its own benefit but the market does not respond kindly to that. Market sentiment brings the stock price down very significantly with an assumption that the specific action would bring down the fundamental quality but it turns out to be false often times.

Example:

Crompton Greaves: This Company is involved in manufacturing light bulbs, transformers, gears, motors, engineering products and home appliances with good fundamentals. This company entering into an agreement and buying a stake in a power company does make sense and it should be a beneficial thing. But market viewed it differently only to realize the folly later. Crompton greaves was trading at Rs. 138 on March 24, 2009 and it bought a stake in a power company on March 25, 2009. Market reacted sharply and brought down the stock price by 26% to Rs.100. I do not know how many people realized this and bought this stock at that time. But the stock increased to Rs. 170 within 15 days to give 70% return, huge by any standards. It is trading at Rs. 305 these days. Imagine the percentage returns if you had bought it on March 25, 2009 for Rs. 100.


ICICI Bank invested some money (a small amount for its size) in mortgage backed securities that brought down the stock to Rs. 250 and it was trading at that Rs.300 range for a long time due to the market reaction. Larsen & Toubro raised the stake in Satyam computers (Bad Investment at that time) that brought down the stock of this Engineering giant to a dirt cheap price of Rs. 560. These kinds of opportunities come and go now and then and one should find a way to get into it.

4. Market Reaction to Regulatory Action or External Influence

Sometimes a government or a regulatory body takes actions that affect the related companies significantly.

Example:

Sun Pharmaceutical Industries: This Company is one of the major drug producers in India and has very good fundamentals. This is evident from the fact that its 52 week low is Rs. 953 and the market melt down did not affect this company as much as it did for others. Sun Pharmaceuticals was trading at Rs. 1350 in July and FDA issued a regulatory notice to its US Arm for safety standards. The stock came down to Rs.1075 within couple of days as the market reacted sharply. It is trading at Rs.1200 these days.



Titagarh Wagons: This Company manufactures wagons for Indian railways and has good fundamentals. But the Indian Railways minister’s budget did not have enough expansion plans which affected this stock significantly. Titagarh was trading at Rs. 440 in July and the budget announcement brought the stock down to Rs. 280 eventually and it has not moved up significantly still then. This stock is available at Rs.310 even now and people can consider it for long term investment.

Similar things happened with Ranbaxy Laboratories as well.


Conclusion: I have explained four scenarios where we should buy stocks. Not that these are the only times where we have to buy stocks, but buying stocks at the above said situations will bring greater returns for our investments both in short and long terms. Readers can comment their applicable experiences in the comments section.

I will meet you soon with “When to Sell the Stock” post.

Kumaran Seenivasan
http://www.stockanalysisonline.com/

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Friday, September 4, 2009

Stockanalysisonline.com: Performance Review

I started writing this blog in February, 2009 and have already posted 35 articles. I just wanted to review few of those where I have predicted few significant developments that were to occur after that. In the meantime, the blog has attracted 125 readers which encourages me to keep writing. After all you need someone to read your articles else my time and energy would be a waste.

Significant Predictions

1. “Stock Markets and Business Cycles” on March 1, 2009.

http://www.stockanalysisonline.com/2009/03/stock-markets-and-business-cycles.html

In that article, I discussed about business cycles and its association with stocks markets and tried to predict when the recession would end. If you read the conclusion, I have clearly indicated that bottom would be formed by June, 2009 and it turned out to be that way. Markets bottomed out in March and by June we made sure that there was no retesting of lows.

I also indicated that economy might improve by first quarter of 2010 and again at this point of time, I think it is a reasonable prediction. It’s true that stock market has bounced back, but that does not mean economy has improved. World Economy is still struggling and it will take another 6 months to give some sort of definite relief.


2. “My Portfolio and Historical Perspective” on March 11, 2009

http://www.stockanalysisonline.com/2009/03/my-portfolio-and-historical-perspective.html

I have listed my portfolio of stocks which I had at that time and also included two historical graphs indicating that my portfolio would recover soon. I am delighted to inform you that my portfolio has not only recovered but also has given 26% overall returns. This is a significant thing considering that I started investing when the SENSEX came down to 18000 levels from 21000 levels.

3. “Best Indian Stocks for Long Term Investment” on March 14, 2009

http://www.stockanalysisonline.com/2009/03/best-indian-stocks-for-longterm.html

Stock prices were so cheap that I was so confident back in March second week that market has bottomed out. I immediately posted the above named article with a list of stocks for long term investment and I do not need to tell you the rest. You can best understand the impact of that article if you calculate the returns for all those stocks I have mentioned.

4. “Best Small Cap Stocks – India 2009” on March 18, 2009

http://www.stockanalysisonline.com/2009/03/best-small-cap-stocks-india-2009.html

On March 18, 2009 I again came up with another list of stocks where I have included only small cap stocks and as I said earlier, most of the stocks I had mentioned then are multibaggers now.

5. “Best Stocks – Aggressive Investors” on May 21, 2009

http://www.stockanalysisonline.com/2009/05/best-stocks-aggressive-investors.html

I posted the above article on May 21, 2009 with list of aggressive stocks and who ever invested in those stocks might have become rich by now.

6. “Best Stocks – Defensive Investors” on May 30, 2009


http://www.stockanalysisonline.com/2009/05/best-indian-stocks-defensive-investors.html

This list of defensive stocks was posted on May 30, 2009 and those who did not invest in March had another chance to invest at least in May, 2009. Again almost all the stocks have given impressive returns.

Significant Failure

1. "Strategies – Recent Rally and General Elections" on May 2, 2009

http://www.stockanalysisonline.com/2009/05/strategies-recent-rally-and-general.html

I posted this article on May 2, 2009 in which I discussed about general election and I believed that government formation would be difficult. I thought that no one would have majority to form the government and I was wrong. Election results came as a surprise to everyone including our PM Manmohan Singh and Sonia Gandhi. Apart from this, I think I have done a reasonable job in terms of market prediction and stock selection.

Please share your views in the comments section.

Kumaran Seenivasan
www.stockanalysisonline.com

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Saturday, August 22, 2009

Market Watch: Opinion Piece

Market is range bound these days as investors are very cautious to go long. Though Excess liquidity helps the upward movement, any sort of bad news pulls the market back significantly. Also traders and Foreign Institutional Investors book profit at higher levels and this will continue till the global cues form a definite direction.

IPO View

IPO season has also started and personally I am not investing in IPO’s. I believe that money is made in secondary markets better than in primary markets these days. Though pricing of recently announced IPO’s were reasonable, I thought the prices were not in line with the market scenario. It seems they price it as if the condition is back to normal but we have a long way to go. I think stocks like Reliance power and NTPC are better plays than Adani Power and NHPC. I would be interested in IPO’s only if the IPO price offers significant discount to the prevailing market price of concerned peers. Oil India IPO is next in line and I would buy only of the price is at least 10 - 15 % discount to the ONGC stock price. My contention is if the price of Oil India is going to be the same as current trading price of ONGC, then what is there for us to try our luck? I would rather buy tried and tested ONGC.

Stocks with Reasonable Valuations

I have published many posts with stock names and most of them are priced in and it is very hard to find good stocks at a great price in the current market scenario. At the present valuations, I would consider the following stocks for accumulation rather than digging deep to find “Hidden Gems”.

Reliance Power

With planned capacity of 33500 MW, Reliance Power is going to be the giant in power space in the next 6-7 years time period. If we assume that Reliance Power maintains the same efficiency as that of TATA Power, then the stock is going to be trading at least 10 times the current market price. Even in worst case scenario, it would be at least trading at 5 times the current stock price. Notwithstanding the Congress Government’s biased attitude towards ADAG group, current market price (Rs. 156) offers reasonable entry point for accumulation (Great if you had bought it at Rs. 100 or even less than that). It is available almost 50% lesser than the IPO Price (If we revalue the IPO Price by including the initial bonus shares). This is strictly for long term investors who intend to have concentrated portfolio.

Accumulation Range: Anything less than Rs. 175




PSL Limited

Largest producer of HSAW pipes, they have significant operations and orders from US and UAE. With the booming infrastructure sector in few months time, this company is going to attract more orders for oil, gas and water transmission. One should have bought this at lower levels, but current market price is not bad either considering the company fundamentals.

Accumulation Range: Rs.100 – Rs.150

Gitanjali Gems

Largest diamond jewellery manufacturers in the country, they operate in three segments namely diamond jewellery, lifestyle products and SEZ’s. Gitanjali Group’s SEZ business has not started yielding anything. With an improved disposable income among consumers in a year or so, this stock is going to do well in the long term. Closest competitor Titan Industries is trading at a PE Value of 30. Current market price of Rs. 107 is not attractive but a fair price considering the fundamentals and growth prospects.

Accumulation Range: Anything less than Rs.125

3i infotech

With all other large IT Companies trading at peak valuations considering Market situation, we are left with only midcap IT plays. 3i Infotech is Trading at about 5 times the FY2011EPS (Rs.17) and I think this stock is Available at a discount to her peer’s. High debt is a concern but ICICI Bank being the promoters, they are in decent hands.

Accumulation Range: Anything less than Rs.100


Madras Cements
This company is the fifth largest cement manufacturer in the country with 10 million tonnes of production capacity. They also operate in wind power and ready mix concrete segment. Ramco Super Grade is one of the most popular cement brands in south India with a good brand presence. One of the very few companies with captive power plant that reduces the production costs significantly. Increased infrastructure spending in the coming years will help this company grow at a decent pace. Again current market price is a fair price if not great to accumulate this stock.

Accumulation Range: Anything Less than Rs.110


Parekh Aluminex

Parekh Aluminex is the largest producer of Aluminum Foil Containers and I personally feel that this business is going to be growing at a faster pace than ever. I very much like this business and the stock is trading at a mere 3.3 times the current EPS. They supply the product to the well established clients like Indian Railways, Air India, and Singapore Airlines. This stock is available at a decent price and long term investors can accumulate.

Accumulation Range: Any price less than Rs. 120

Genesys International Corporation

Company is in a niche geospatial, engineering and IT solution services and it is going to gain strength in the coming years. This stock is trading at 5 times the current EPS with almost no debt. Long term investors can accumulate this stock if they have increased risk appetite.

Accumulation Range: Any price less than Rs.100


All the above mentioned stocks are for long term investors who have the practice of accumulating at every fall. Most of these stocks are under performing currently and that’s why I have picked up these as I see good growth prospects. One may also consider Federal Bank and Value Industries in this list.

If there are other good opportunities, please share it in the comments section.

Kumaran Seenivasan

www.stockanalysisonline.com

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Friday, August 14, 2009

Investment Prudence: Dividend Paying Stocks

Before I begin with, I would like to thank all the readers for their support. The Blog now has more than 100 readers which I am happy about. I am unable to post more articles these days as my work does not leave much scope to do so. But I will try my best to share my opinions whenever I have time and something in my mind as well.

Investors follow many different approaches towards investment and this post is for the investors who would like to preserve the capital first and gets satisfied with decent return through capital gains. In fact many legendary investors have followed this strategy and they have been mostly successful. Yes. I am talking about investing in the “high dividend paying stocks”.

What is Dividend?

It’s the portion of corporate profit paid to shareholders by a company. High dividend yielding stocks usually have high reputation among defensive investors. It’s widely believed that a company is effectively managed if the shareholders are paid dividends continuously.



Approach

The notion that high dividend yielding stocks do not appreciate much is not entirely true at least if we look at the stocks I have mentioned below. All of these stocks performed well over the year apart from paying out decent dividend yields.

Madras Cement
Graphite India
Varun Shipping
GE Shipping
Ambuja Cements
MIRC Electronics
Chambal Fertilizers
HCL Technologies
Tata Steel
Tata Tea
Lakshmi Machine Works
Shipping Corporation
GAIL India Ltd
Sesa Goa
Canara Bank
Bank of Baroda
Punjab National Bank
Hindustan Unilever Ltd
Marico Ltd
Indian Overseas Bank

If you are a long term investor and do not have high appetite for risk, then investing in the “high dividend” yielding stocks not only protects part of your capital but also gives you decent return. I will explain with an example.

Ex: Varun Shipping

Assume that you bought 1000 shares of Varun Shipping at Rs. 40 / share. Total investment comes out to be about 40000 thousand rupees. Assume that you are a long term investor and have plans to hold the stock for next five years. Varun Shipping has the history of paying Rs. 5 – 6 per share as a dividend (50 % of the face value) every year and we assume Rs. 5 / year as the dividend for next 5 years.

First Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). The dividend yield itself is 12.5%. Even if your Cost price was Rs.50 per share, the dividend yield would be 10 % which some stocks do not even give as a capital gain. Suppose you deposit this Rs. 5000 in a bank and you get 7% as interest. You get Rs.350 as interest and the total amount for the first year is Rs.5350.

Second Year Dividend: Rs. 5 / share (Rs. 5000 / 1000 shares). Add this amount with the first year amount. Rs. 5000 + Rs. 5350 = Rs. 10350. Interest at 7% for Rs. 10350 is Rs. 725 and the total amount at the end of second year is Rs. 11075.

Third Year Dividend: Rs. 5 / Share. Do the same calculation. Rs. 11075 + Rs. 5000 = Rs. 16075. Interest at 7% for Rs. 16075 = 1125. Total amount at the end of Third year = Rs.17200.

If we follow the same calculation, we will have Rs. 31000 after 5 years which is 78% of your initial capital investment. This will go along with the capital gains that you get because of appreciation in stock value. If we assume that Varun Shipping matches the market performance which is around 15% CAGR, then we will have Rs. 81000 after 5 years and adding that with dividend + interest income will give Rs. 112000 as the total value of the investment after 5 years. The calculation is based on a conservative approach which gives 180 % return. But if the stock performs better than the market, then the return might well go above 200 % which should make most of the investors happy.

Similar stocks are available with similar dividend yield and investors with less risk appetite may opt for these kinds of stocks and follow the above explained strategy. In fact most of the stocks I mentioned above have performed better than the market and some are even in the aggressive investor’s portfolio. So, we just need to try this approach once to see the effectiveness.

Kumaran Seenivasan
http://www.stockanalysisonline.com/

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Saturday, August 1, 2009

Investment Prudence and “Multi Bagger” Concept

Investment in Stocks has been increasingly becoming very popular and one reason that everyone invests in stocks is to make money in multiples or at least better returns than any other form of investment. But do they end up getting that “dream” return in their investment? Yes and No. Some people do and some don’t. Investors who are very prudent with “stock market” patience usually complete the race while people who just come with expectation of making in millions by investing in mushrooming “Multi baggers” or doing futures and derivative trading, end up as a sorry figure. Stock investment can be compared to a Marathon rather than 100 meter dash.

Though I have not made in millions, I do feel that my investment has generated decent returns and more importantly, I have not lost single penny during one of the most difficult investment climate in history. From my experience, there are three important things that influence the “health” of a stock market investor. What are they?

1)What price you paid for the stock?
2)Which company or stock you have bought?
3)How many of the same stock you bought?

Investment Prudence

The price you pay for the stock is the single most important factor that not only decides your short term return but the long term success as well which is why I have mentioned it first. Why? Simply because, if we buy, even a average stock at a dirt cheap price, there is a chance to end up getting a decent return. But if you buy a great company at an exorbitant price, then you have dug a grave for yourself. But to be successful in stock investment, all three has to be in harmony with each other and may be that’s the reason Warren Buffet has mentioned I quote

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and “Wide diversification is only required when investors do not understand what they are doing”.

Real Example:

Investor Name: Rakesh Jhunjhunwala.

First Big profit stock: TATA TEA

Price paid for Tata Tea: Rs.43

Selling Price: Rs.143

Number of Shares: 5000

Profit Made: 5 Lakhs (715000 – 215000)

Duration: 3 months

My Experience

I actually had a similar experience recently but I have not made 5 lakhs simply because of the third reason (How many bought).

Investor Name: Myself

First Big profit stock: YES BANK

Price paid for YES Bank: Rs.42

Current Price: Rs.160

Number of Shares: 500

Current Profit (Still Holding): Rs.59, 000 (80000 - 21000)

Duration: 4 Months

Hope you see what difference the number of shares makes. So, all I want to mention here is not to go for too much diversification. If we find good stocks at a great price, we should buy it in huge quantities without even flinching for once. Had I bought 5000 shares of YES Bank, I would be worth 8 Lakhs from YES Bank alone. But I failed to take that extra risk which now gave me a lesson and good experience.

Had investors applied the above three things in the last 1 year period, I am pretty sure they could have found many “Multi Baggers”.

The concept of “Multi bagger” has been misinterpreted by many people. I read many articles where Small Cap stocks with good business potential have been mentioned as “Multi Baggers” and that’s where I beg to differ. Multi baggers can be found among large and midcaps as well.


Multi Bagger

By definition “Multi Bagger” is a stock that goes up in price multiple times of the initial investment. So, if we apply the definition as it is, then almost half of the big companies have been the “Multi Baggers” in this recession leading up to the current rally.

Example:

GRASIM: The price of GRASIM when the SENSEX was around 8000 in 2008 November - December period was Rs.831 and current price of the same stock is Rs.2740. It has appreciated more than 3 times.
BHEL: Rs.1000 to Rs.2300, 2.3 times appreciation.
Educomp Solutions: Rs.1400 to Rs.4100, 3 times appreciation.
Aban Offshore: Rs.250 to Rs.1050, 4 times appreciation.
Axis Bank: Rs.300 to Rs.900, 3 times appreciation
Asian Paints:Rs.700 to Rs.1415, 2 times appreciation (Defensive Stock)
Tata Steel: Rs.150 to Rs.460, 3 times appreciation
Sterlite Industries: Rs.170 to Rs.650, more than 3 times appreciation
ICICI Bank: Rs.255 to Rs.760, 3 times appreciation
Jaipraksh Associates: Rs.50 to Rs.250, 5 times appreciation

So, the notion that “Multi Baggers” are found only among small caps is wrong and I hope I have provided ample proof for that. In the above 10 examples, I have purposefully left out small caps and even if we take small caps into account, not many small caps have appreciated as much as what I listed above. Hence, I strongly feel that any stock that fits into the definition of “Multi Bagger” should be considered as a “Multi bagger” and my suggestion for retail investors is to practice the three things that I mentioned in the first section which will give an opportunity to find less risky “Multi Baggers” from the pool of large caps. Only thing is investors need to grab the opportunity that "Mr. Market" presents.

Your sincere comments and discussions are invited.

Kumaran Seenivasan
http://www.stockanalysisonline.com/

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Sunday, July 19, 2009

Quarterly Results

Stock market investors very eagerly wait for the quarterly results and I would like to through some light in this regard why it is important for the investors. Sure, we know that companies have to perform well financially but we also need to understand that it is very difficult to announce the market beating results every time. So, quarterly results are one among the many that we need to keep watching to understand the companies.

Quarterly Result

Quarterly result is the short term financial performance of a company which helps the management as well as the retail investors to understand the progress of a company. Companies typically announce the quarterly results four times a year and the results can be found in the company website or with SEBI or in any brokerage firm’s website.


Quarterly results can often be misleading and it is very important to pay careful attention. Example: Recent Quarterly result by L & T. On the outset, the result says that the company has earned Rs.27 a share for the first quarter of 2009-10 period. But if we look at the statement carefully, we can see clearly the result includes a one time exceptional gain of Rs.1020 Crores through the Ultra Tech stake sale. Excluding the exceptional gains, per share earnings would be just Rs.10 for this quarter.

Short and Medium Term Investors

Quarterly results are very important for short and medium term investors while the magnitude of importance decreases for the long term investors. It is also very important for the investors who are thinking to stay for a long term but are just starting. For the short and medium term investors, it helps to either maximize the profit or minimize the loss as the stock price shows volatility based on the result most often than not. In the short term, stock price heavily depends on the market sentiment, external forces like budget and rainfall, and company performance like quarterly results. So, if you are a short term investors, you do not want to take the risk of investing in a company whose recent quarterly income stays in the negative.

If you are a medium term investor, quarterly results help churn the portfolio. In the medium term, if we see or anticipate a bad result, then we can sell those stocks and buy stocks that are promising and are expected to announce good results. If the company is good, and we are able to anticipate the bad result, then we can sell before the result and buy it back after the result when the stock price comes down. Sometimes, great companies fail to announce good result in one quarter and prices comedown significantly. Times like those offer very good opportunity for investors to buy them at a low price.

Long Term Investors

Quarterly result again helps in many ways for the long term investors. If you are thinking to keep invested for a long term but just starting, quarterly results help you to select good stocks and build a great portfolio. But what about the long term investors who have already invested? In fact quarterly results many times are not that important for the long term investors who already invested, had they selected good stocks in the first place. But it is not always possible to build a portfolio without some average stocks. So, quarterly results help those investors in couple of ways. They can either sell the companies that have announced bad results and are expected to decline going forward or they can rejig the portfolio by selling average stocks and then invest back the money in good companies.

But if you are a long term investor, and have selected the stocks after careful consideration and fundamentals remain very strong, then you do not need to worry about the quarterly results till you reach your target price. Because, it is not possible to announce great results all the time and companies might encounter either operational or marketing or administrative difficulties in some quarters and are bound to announce bad results. But if you are a smart investor, you have to grab that opportunity to accumulate the stock rather than panicking and selling the stocks that you currently hold.

Recent Results

Most of the Indian companies have announced good results this quarter and that has made experts all over the world to believe in the so called “India story”. Companies like Axis Bank, Infosys, TCS, L&T, Opto Circuits, Colgate, Crompton Greaves, Welspun Gujarat, PFC, HDFC Bank, Indowind Energy, and Geojit, have announced decent results if not exceptional. In fact Indian companies have been announcing decent results throughout this recession period which makes me believe that the stock market might reach new highs in the next five year period. Long term investors can buy some selective stocks even now and they would be up for a good return if they stick with it. Most of the Indian companies are managed with a conservative mindset which reduces the potential risks associated with business in general. Hence, India is poised to attract more FII investments and once they start buying, our domestic funds and institutional investors will show more interest and that would be the crazy next Bull Run.


Kumaran Seenivasan.

www.stockanalysisonline.com

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Thursday, July 2, 2009

Rupee Vs US Dollar: How the Exchange Rate is Determined and Its Impact

All of us have seen 20% increase in the value of dollar against rupee within a year and it is fluctuating these days within a small range. Someone has asked in the comments section about what determines the exchange rate and how it is fixed and I would like to provide some of my thoughts in relation to that.

What determines US Dollar exchange rate?

There is nothing extravagant to tell you about this as the rate is determined by market forces just like how the price of goods and commodities is fixed. The value of any currency is based on the demand for it. If the people buy more of a particular currency, value of that currency increases vice versa. The same thing holds true in case of US Dollar Vs INR as well. There are few other factors that play a role in determining the exchange rate particularly when you leave the currency value to the market forces and I will list them below.

Growth of the Economy
Inflation
Strength of the Economy including Export and Import
Employment / Unemployment
Government
Public Debt
Interest Rates
Sometimes speculation and fear.

Again all these factors either increase or decrease the demand for US Dollar or any other currency. If all the factors mentioned above are favorable, people across the world get confident about the stability of a particular country and investment climate, which in turn creates the demand for the currency.

Example: Rupee appreciated significantly in 2006 – 2007 and the first seven factors I have mentioned above were the reasons for the Rupee appreciation since India had stable government with favorable economic climate. USA and other multi-national companies started investing in India and they bought more Indian Rupees and the demand for rupee increased which in turn appreciated the rupee value.




What if a country does not have all these?

People will not have confidence in that country and the demand for the currency will come to a halt and then we will see a list of failed nations. Example: Zimbabwe. You might have read in news that a loaf of bread in Zimbabwe cost 1 million Zimbabwean dollar which means nobody values that currency in essence.

But what about the eighth factor speculation and fear? That’s what made the US Dollar appreciate 20% versus most of the international currencies in 2008 – 2009.

US Dollar Appreciation

To recap, I have mentioned that Demand for the currency increases the value of that particular currency. So, what made the people to demand for more US Dollar? That’s where speculation and fear came into play and I list out few points that were responsible for recent US Dollar appreciation.

1. During tough economic times, people get scared and they start moving all their foreign currency assets to more stable currency like US Dollar.

2. US Based Mutual Funds, Hedge Funds and stock investors played a huge role as well. US Funds invested huge amount of money in India during 2003 – 2007 period, but the funds saw a huge redemption pressure due to the fear of retail investors in US. People invested in mutual funds and hedge funds panicked and started redeeming the units and the Funds were in a huge liquidity crisis. So, they started dumping the Indian stocks and converted all the currency in to US Dollar which created so much demand in a quick time which in turn increased the value of dollar.

3. International currency traders and speculators wanted to take advantage of the rising value and they started buying more and more US Dollar.


Market Forces Vs Central Bank

While most of the countries let the market forces (Demand and Supply) to determine the currency value, some countries like China had fixed currency value for a long time before easing control over it though with a limited scope. Main reason for that was to have a stable balance of payment. Even RBI can regulate the exchange rate to an extent by adjusting the foreign exchange reserves.

Impact of Exchange Rates:

Exchange rates impact in many ways starting from reduced sales for companies to more buying power for individuals. I will explain this with couple of examples.

Exports and Imports get affected

Strong dollar reduces the export value of US Companies and likewise strong rupee reduces the export value of Indian companies. This is what happened in 2007 – 2008 with Indian companies particularly in IT and Textile sector. Example: Tirupur is the Textile Capital of India and let’s take a company called ABC Textiles which makes inners. Assume ABC had agreed to supply 10 inners to Macy’s in US @ $100 per piece in 2004 when the Rupee value against the dollar was 46. ABC would have earned Rs.46000 in 2004 by supplying 10 inners. But suddenly the Rupee value increased and in 2007 Rupee value was 40 against a US Dollar (You are able to buy 1 dollar by giving Rs.40 instead of Rs.46). ABC would now earn just Rs.40000 for supplying the same 10 inners and it gets affected by reduced revenues.

Strong currency makes the imports cheaper. Take another example where KS Oils imports 10 litre’s of oil from US Company US Oils @ $10 per litre in 2004 when the exchange rate was Rs. 46 Vs US Dollar, which means KS Oils imported 10 litre’s of oil by paying Rs.4600 (100 * 46). In 2007 rupee value has increased and the same 10 litre of oil now costs KS Oils only Rs.4000. So, exchange rates have its effect on imports and exports.

Buying Power

Assume a traveler from India visited US in 2004 with Rs. 46000. He could have bought goods worth $1000 in 2004. But assume the same traveler visited US again in 2007 with the same Rs.46000. In 2007 he could have bought goods worth $1150. Of course there could have been either increase or decrease in prices of individual items based on inflation or deflation. But the essence is, exchange rates affect buying power as well.

I have also uploaded a presentation on rupee appreciation and it would be useful if you want to know more. Readers can access the file at the following link to have additional understanding.

http://issuu.com/kumaran1978/docs/rupee_appreciation

Impact of Exchange Rate on Stocks

As I said above strong currency will reduce the sales and it will have an impact on company earnings particularly when company operates across many geographics. Example: When rupee value appreciated in 2007 - 2008, all the Indian IT, Pharma and Textile exporters faced huge foreign exchange loses and it reduced the earnings and thus the share price. Now, the rupee value against dollar has decreased and all these companies enjoy more earnings due to better foreign exchange rate. Hope I provided a detailed account of exchange rate determination and its impact and look forward to your comments.


Kumaran Seenivasan
www.stockanalysisonline.com

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Friday, June 19, 2009

Beating the Market – Opinion

Stock Market is a ground where players play all kind of “speculative” games to win, though they do not necessarily know who they are fighting with. Most of the retail investors try to get ahead comparing themselves with other investors and mutual fund managers who in turn compete with “Mr. Market” to enhance their reputation and performance. But they fail to understand that the fund managers and key investors have far more information, time and money to beat the market and even then vast majority of them fail to do it consistently.

Legendary investors like Buffet and Lynch did it in the past and are still doing it. But people like them are very few and the unique style they follow has not been mastered by anyone else. It’s true that they are giving tips like “Buy Low, Sell High”, “Long Term Investment”, and “Balance Sheet Analysis” etc…But what exact analysis they do before selecting a particular stock is unknown and even Buffet has admitted his failure in couple of dealings last year. So, beating the market is an arduous task and personally I would not waste my energy to match the market and few other people who are less than 0.001% of investor population.


All I would be interested in doing is to analyze the key parameters and business potential of various companies as good as I can and buy stocks that would not make me cry down the road. Of course I will be happy if my portfolio beats the market and I will take it, day or night. But taking undue risk, spending too much time brooding over how my neighbor could make more money than me or trying to become a millionaire in 2 years by investing in the so called “multi-baggers” will all be efforts in vain more often than not.

Strategy to Keep Yourself Happy

Satisfaction is an individual thing and for many people, no matter, how much return they get, still they will be found wanting. It’s natural of human beings to behave in such a manner but we have to learn quickly enough to understand that there is a cost involved in putting undue pressure on ourselves, which we do not count. Making money, getting good returns and beating the market are all desirable things but we should not lose our peace in doing that.

How many people did not curse themselves that they did not invest when the SENSEX was around 8000? If I conduct a poll (I am sure one is on the way), I am sure there will be only one answer. So, the main thing for us is to find the “Satisfaction Point” in terms of investment returns and here is my “Satisfaction Point”.


My Satisfaction Point


I get satisfied when I do the following no matter how much return I get. But believe me; I am close enough to most of the fund managers and even the market. I do not spend lot of time in searching stocks and thinking about it and I follow fairly simple approach.

I invest only when stock markets decline significantly and other people start selling.


I buy stocks that show continuously growing “Quarter to Quarter” earnings with less than the market PE.


If markets go down continuously, then I continue to average till I exhaust 60 % of my intended investment.


If the market plummets like the one we saw in March 09, then I buy for at least 30% of my intended investment.


My intended investment amount in fact rises when the stock markets reach unbelievable lows.


I look for companies that do not show any prospects for failure and businesses that can be sustained over a period of time.


I look for companies that do not have many straight competitors.


Finally I just keep watching my returns when the stock markets go up. My overall portfolio has given the return of about 30% (Started investing when the SENSEX was around 17000 last year) and I do think that’s not bad. But my new portfolio which I started investing when the SENSEX were around 8000 - 10000, has given me 60 % return which is not bad either and I am not far away from the market performance. Markets have gained 45% from 10000 levels and 80% from 8000 levels. If we calculate exactly with my investment period, market return would be somewhere around 60% to 65 % and I am quite close to it. I have not lost a night’s sleep for all this and still could come close to it by doing what I said above. Though my return is in lakhs and not in crores, I definitely think that it can be achieved with the same approach, but with increased risk taking ability and guts. If you can do it with lakhs, I do not see any reason why you can’t do it with crores.

Some people can argue that if I have invested in selective stocks I could have earned in multiples which I agree. Even I bought “YES BANK” for Rs.42 and now it is traded for Rs.133 with an increase of 216 %. But my portfolio contains other stocks too which did not appreciate as much as stocks like Yes Bank. For example, I bought Asian Paints for Rs. 750 and now it is Rs. 1100, an increase of only 46%. Of course there are so many ifs and buts that could have made a difference. If I had bought HDIL when it was Rs. 62, I could have made 500 % return, but I did not want to invest heavily in the real estate sector. Likewise, there are so many examples. Aban Offshore was available for Rs. 220 and it went up to Rs.1100, an increase of 500%. But you can’t rely on just one stock if you are a serious investor and that’s the reason my portfolio return is 60 % which is in line with the market performance. That’s a good enough return for me for the time I spent and I can definitely say that’s my satisfaction point.

Conclusion: Make sure you do all the right and simple things in making a buy decision and continue with your defined approach. Do not get worried about the portfolio performance by comparing yourself with other investors or fund managers. If you buy when others are selling and remain cautious when the market bounces back, then you have a fair chance of getting a market return if not beating it. Even if your portfolio gives 40% overall return and it is 15 % lesser than market return, there is no need to lose your sleep over it as your portfolio still returned decent profit which is higher than what you could have earned in other form of investments. So, the point I am making is, whatever return we get after making a decent effort should satisfy us and I refer it as the “satisfaction point”.

Kumaran Seenivasan

http://www.stockanalysisonline.com/

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Sunday, June 7, 2009

Buy and Hold Approach - My Personal Experience

The Title "Buy and Hold" has been the buzz word in most of the stock market books, articles and related speeches. I am sure many people have reservations about it and I would like to share my personal experience regarding this. Does this approach make sense? Does it really give decent returns?. My answer to the above two questions is a resounding Yes. Like most of the retail investors, I have read many books and articles and each one contained approaches starting from technicals and trading to speculation and fundamentals. But the legends who have made billions always advise investors to buy good stocks and hold for a long term.


We all know that SENSEX reached 21000 in Jan 2008. But all of a sudden, the market euphoria started to recede and markets reversed the trend. In the current phase, I started investing when the SENSEX came down to 17000 thinking that the markets would not go down below 15000 or 16000. This time it was different and we have witnessed one of the worst recessions in history. Many companies which were once considered to be invincible’s have ceased to exist. People panicked and economic activity came to a halt. SENSEX started reaching new lows every day.

Since, I have invested some money when the SENSEX was at 17000, I had no other option but to average the stocks I had by buying continuously as stock prices reached new lows. But what I made sure was to buy the stocks that I believed would perform well over a long term.

Readers might ask why the hell I did not sell all those at that time and buy when the SENSEX came down to 10000 levels repeatedly. Of course I would have done that, had I got the Wisdom of Solomon. Unfortunately I did not and in fact never wanted to predict the impossible. Because, if there are 10 individuals involved in the market, then it is not that difficult to sense the mood of the people and act accordingly. But the stock market is a place where millions of individuals buy and sell and I do not think anyone can predict what would or what would not happen. So, I continued to buy stocks and backed my stock selection as well as the "Buy and Hold" approach.

So, I invested in good companies and waited for appreciation. I sticked with my portfolio of stocks and continued to accumulate but I stopped investing at 13000 as I feared that markets would go down further. It in fact came down to 8000 levels couple of times. During the downtrend, some of my stocks declined even 75 % but I believed that it would eventually go up and at least reach my cost value. I started buying some stocks again at 9000 levels but that’s a separate portfolio. I always wanted to check the performance of my old portfolio. In short I started buying at 17000 and continued to average till 13000. My portfolio was down almost 50 % when the SENSEX was around 8000. Still I believed in full recovery.

Finally the time came. Recession started slowing or at least people believed that way. Bad economic news stopped coming and markets made a rebound. Indian general Elections gave the verdict that markets and investors were looking for. People started buying in heaps and Foreign Institutional Investors pumped in as if there is no tomorrow. All the stocks in my old portfolio started moving up. It has now given a 20% return which means, the portfolio has registered 120% growth from 8000 levels. So, the verdict is "Buy and Hold" approach definitely works and it will give me good returns in next 5 years.

Alternative Approach

There are still people out there to question my wisdom. Of course I too know that I could have stopped buying at 16000 and invested all my money when the SENSEX was 8000 or I could have sold all my stocks at 13000 to limit my losses and ploughed back that money at 8000 levels. There are so many ifs and buts. But according to me, if you are not sure then just hold all your stocks. Never sell stocks for a loss if you believe in those stocks. If you think you have made a mistake in stock selection, then it makes sense to sell it and buy other good stocks. Otherwise it is always good to keep rather than register a loss.

There might be a select few who could have sold at 16000 levels and invested again at 8000 levels and by now they could have made millions. But the percentage of people who does that will not even reach 0.0001 %. So, why bother about them. Just believe in your stock selection and continue to accumulate irrespective of market movements. Hold it till you get the decent returns and sell it as soon as it reaches your expected returns. If not at least we should have the ability to sense the downtrend and sell it before that.

Conclusion

There are many approaches one can take but the approach which is safe with the potential of good return is "Buy and Hold". To do that we need to do couple of things. One is to make sure that we select stocks that are essential to the economy and livelihood with strong market presence and another is not to buy at peak valuation. If we do that, then most often than not, one can reap decent returns if not the best.

Kumaran Seenivasan

www.stockanalysisonline.com

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Saturday, May 30, 2009

Best Indian Stocks – Defensive Investors

Last week, I posted a list of stocks for the investors who tend to follow Aggressive approach and have also mentioned about other risk profiles. In this article, I will list some of the good stocks for Defensive Investors.

Who are Defensive Investors?

Conventional definition defines defensive investor as the one who does not take undue risk to make money. But in stock market, no one is spared of risk and defensive investment therefore does not mean not taking risk at all. It just means taking affordable risks by following a conservative approach in stock selection to derive optimal returns. In many cases, defensive investors match the returns of aggressive investors and they do not lag behind significantly. They also invest in some growth stocks but their primary investment strategy revolves around “Conservative” stocks.


Branding stocks as growth stocks or conservative stocks heavily depends on perception. In fact some stocks might have given more than average returns but still would be branded as a defensive bet just because investors perceive it that way. Hence, considering all this I have come up with a list of stocks that can be considered by investors who follow conservative approach.

Banking / Finance

HDFC
State Bank of India
Bank of Baroda
Bank of India
Punjab National Bank
Federal Bank

Pharmaceuticals

Sun Pharmaceuticals
IPCA Labs
Dr Reddys Laboratories
Pfizer
Cipla
Cadila Healthcare
JB Chemicals and Pharmaceuticals / Piramal Healthcare

Software / Services

Tata Consultancy Services
Infosys Technologies
Educomp Solutions

Shipping / Offshore

Great Eastern Shipping
Shipping Corporation of India Limited
Great Offshore


FMCG

ITC Limited
Hindustan Unilever Limited
United Spirits
Asian Paints
Marico Limited
Colgate Palmolive
Britannia Industries Limited / Nestle India
Titan Industries

Power

NTPC
PTC
Power Grid Corporation
Tata Power Company
CESC Limited
Rural Electrification Corporation
Neyveli Lignite Corporation


Agriculture / Fertilizer / Chemicals

Monsanto India Limited
Bayer Crop science Limited
BASF India Limited
Gujarat State Fertilizer Corporation
Coromandal Fertilizers
Tata Chemicals

Diversified / Cement

Grasim Industries
Kesoram Industries Limited
Nava Bharath Ventures
Ambuja Cements
ACC Limited


Engineering / Electronics / Telecom

BHEL
ABB Limited
BEML
Bharath Electronics
Bharath Forge
Hawkins Cookers Limited
Blue Star
Crompton Greaves
Century Textiles and Industries
Siemens

Bharti Airtel

Tata Communications

Oil / Gas / Steel

Reliance Industries Limited
ONGC
Indian Oil Corporation
HPCL
BPCL
GAIL

Tata Steel
Indian Hume Pipe Company

Others

Dredging Corporation
Container Corporation
Bilcare
Blue Dart
Bannari Amman Sugars
Shree Renuka Sugars
MRF
Mahindra & Mahindra
Asian Hotels
Power Finance Corporation

I request the readers to share their list of stocks in the comments section.

Kumaran Seenivasan

www.stockanalysisonline.com

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Disclaimer

This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
any decisions that you make based on the information provided here.
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