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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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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Stock Analysis Online by Kumaran Seenivasan is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 India License.
Based on a work at www.stockanalysisonline.com.

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