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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