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/

8 comments:

drumartak September 13, 2009 at 2:28 PM  

Hello Kumaran
I like way u have explained and given real examples of recent past. It is an excellent post and really learnt a lesson but problem is difficult to follow. One more example is NIIT- when budget was declared this stock corrected heavily but see price now...thanx

Shabu's September 13, 2009 at 11:39 PM  

Dear Kumaran,

Wonderful again.. You are making good effort to educating the investor community with real examples. Keep it up.

Shabu

Chirag Ali,  September 15, 2009 at 11:42 PM  

Hi Kumaran

Nice Post.Very much useful to the beginners like me.Continue the great work

Thanks indeed

Chirag Ali

Venkat,  September 20, 2009 at 1:16 AM  

Too good Kumaran!!.. Great Lesson to learn from this post..Thank you for sharing such a valuable notes..

- Venkat

Anonymous,  September 23, 2009 at 3:32 PM  

I am a beginner in stock exchange. But this article have helped to reach next level of investors’ knowledge

Anonymous,  September 23, 2009 at 3:32 PM  

I am a beginner in stock exchange. But this article have helped to reach next level of investors’ knowledge

dhushyanthi rajaram September 25, 2009 at 12:29 PM  

I'm a beginner who finds your articles very useful. Can 'taking advantage of a situation' apply to Satyam as well, taking into account the GE contract etc.

Kumaran September 25, 2009 at 7:04 PM  

Dhushyanthi,

Satyam kind of cases usually referred as "Turn around story". Everything is in place for this company and Mahindra group just needs to lead well and make the clients confident about the recovery. If it becomes a real "Turn Around" story, then I see no reason why the stock can't reach Rs. 500 levels. But if they fail to do so, then it will be in the sidelines for somemore time. Again it's a risk that you need to take in the stock market.

-Kumaran.

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