OFF SEASON SALE: TIME FOR BARGAIN HUNTING

The Great Indian Stock Market Sale is on, do you have the funds and the guts to take a plunge?

The past week's roller coaster ride of the markets saw the sensex swing over 3700 points. From 19000 level it touched a low of 15332 and then bounced back to close at 18362. The volatility in midcap and smallcap indices was much higher. Traders have had a fair share of their misery, at the same time long term investors are also in a dilemma. What lies ahead?

There are similarities and diisimilarities between the off season sale in other bazaars and the stock markets. Just like the annual clearance sale on the bazaars stock markets also react to give a chance to investors to book profits and re-enter at lower levels. But the timing of stock market sale is uncertain. Like the market dips occured at different time periods during the past years, in 2006 it was in the month of June, in 2007 it came in the month of August, and this year it has come in the month of January itself. In other bazaars the discount is announced on the MRP so the consumer knows how much money he is saving. But the peculiar feature about the stock market sale is that in the absence of MRP it is very difficult to judge whether the stock is trading at a premium or at a discount. However, Fundamental Analysis helps us to understand the 'Intrinsic Value' of the individual stocks. Since the market sentiment is based on the movement of popular indeces, it is worthwhile to understand the 'Intrinsic Value' of the index also.

The volatility in coming weeks is going to be high because of the following reasons:
1. Fear about slowdown of US economy, however, its impact on India will be marginal
2. Monthly settlement of forward trades/ rollovers due on 31.01.08 - Margin calls may lead to greater volatility.
3. Policy announcements such as RBI credit policy on 29.01.08 and the FED meet later in the month to review the
US policy.

The week ahead will give the investors opportunity to book profits at higher levels and also to buy quality stocks at lower levels.

For long term investors let us analyse the 'Intrinsic Value' of the sensex over a 12 month period. There is a reasonable consensus amongst analysta that tha EPS or sensex stocks is likely to be between Rs.850-870 for FY08. If thw economy continues to grow at 9% which is being forecast, the EPS of sensex stocks can be reasonably assumed to grow at 15% pa for the next 2 years. Thus, the projected EPS of the sensex stocks is Rs.1000 for FY09 and 1150 for FY10. The sensex normally discounts one year forward earnings, so one year from now it would be discounting EPS for FY10. Now coming to thw Price Earning Multiple (PE). The one year forward PE of the sensex has tended to oscillate between 14-22. For a growth economy like India the discounting factor should not be less than 15 and it can go upto 20, when the liquidity position is good. It will not be prudent to project a discount factor of over 20 due to the global factors. If we normalise it further, the sensex PE at the end of 2008 should be between 16-19 of the EPS for FY10. On this basis we can project a sensex band of 18400-21850 at the end of 2008.

Strategy for the week starting 28.01.08: Make your purchases/ sales on the above assumptions. Take advantage of the volatilty in the markets and buy your bluechip stocks at around the sensex levels of 17000, and book profits in momentum stocks (which have gone up in the absence of fundamentals) around the 19000 levels. This switch strategy will help you strengthen your long term portfolio. Avoid leveraging, ie. buying stocks with borrowed funds, because making money may not be easy in 2008, and it will further reduce your 'Margin of Safety'. You can add the stocks mentioned earlier on this Blog, as many of them are available at a steep discount to their intrinsic worth. Act fast, because the Off season sale is for a limited period only. The markets are likely to stabilise in 2-3 weeks once the liquidity postion becomes normal.

Investors taken for a ride by shameless brokers

The Indian stock market is in the hands of speculators and manipulators, and the market watch dog SEBI is sleeping. How can one explain the wild swings of 2000 points in a single day on BSE. And when the long term investor wants to enter the markets at attractive lower levels he is denied access by the unscuplous brokers because of their inability to pay up margins to the exchanges.

When the markets were tanking on 21st and 22nd January 2008, many brokers' terminals were closed. I could not trade through my online account with a reputed broker for most part of these 2 days, because of margin problems created by the broker and the speculators ruling the markets. This is despite the fact that I had sufficient cash with me and the broker had a lien on my bank account. There are also cases of delay in crediting the shares purchased by the investors to their respective accounts, even after you have paid for them. I have received such complaints from several investors across the country. If you have faced any such problem please post your comment to this message.

This is a sorry state of affairs:

• Why should a genuine investor suffer due the defaults made by another section of players ie. 'the speculators'?
• Why should brokers be allowed to play with the money of their clients?
• Why should brokers be allowed to run online trading activity if their sites cannot handle the traffic?

Market watchdog SEBI has to address these issues. Some suggestions to SEBI could be:

1. Instruct brokers to seggregate Margin Trading and Delivery based trading. Delivery based investors should be given priority over margin traders.

2. Brokers disallowing trading to genuine investors should be penalised heavily, but not at the cost of investors.

3. All online trading systems of individual brokers should be monitored by an independent agency. Brokers should not be permitted to add accounts in excess of their ability to handle the traffic.

Please respond to this call and send in your suggestions, so that the matter can be suitably taken up with SEBI in due course.

How to face Market Crashes?

Indian stock markets are at the crossroads, after the steep decline of the past two days. But long term investors, who have invested in blue chip stocks have no cause for worry. Indian stock markets have a tendency to do things in a hurry. We were in a hurry to top the 21000 mark on the sensex, and now within a span of 6 trading days we have touched 15000 on the sensex intraday. Day traders or speculators have a cause for worry, but long term investors can use this opportunity to add their favourite stocks to their portfolio. If you are a long term investor, you need to be brave and start buying actively, despite doomsayers predicting lower levels for the markets. Here are some of the reasons for the markets to recover from these levels:

• Fundamentally, the sensex now trades at the 12-month trailing PE ratio of 20.7, and FY09 PE multiple of 16-17, which is quite attractive.
• The medium term downside technical levels have been tested today, and a bounce back is inevitable.
• US Federal reserve has induced a 75 basis points rate cut, which will ease liqudity in the system. The last time when Fed announced a rate cut markets rallied from around 15700 sensex levels, this time they are likely to reverse their downtrend.
• Growth prospects of 9% GDP growth of Indian Economy are intact.

It is to be noted that the fall has been maximum in the so called speculative/ momentum stocks like RNRL, RPL, and many stocks from the Power and Realty sector. Avoid these stocks for investment, because the market will move on fundamentals for the next few sessions.

We should look for a positive turn in the markets from Wednesday 23rd January 2008. But investors should not look for a runaway rise to 20000 sensex levels and beyond.

STOCK ACCUMULATION THROGH SIP

SIP or Systematic Investment Plan is a term used in context of investments in Mutual Funds. Most MFs allow investment through the SIP route, which enables the novice investor to even out his investments over a period of time, by investing in the mutual fund in small chunks at regular intervals. For example, if you want to invest Rs.12000 in a mutual fund scheme you can invest it in 12 monthly instalments of Rs. 1000 each.

SIP can be used effectively to buy your favourite stocks also. It helps the investor to overcome the emotions of greed and fear. Most investors cannot tolerate a loss in their portfolio, and once your favourite stock falls below your purchase price you generally get disturbed. In rising markets we tend to make purchases at higher prices, because we do not want to be left out of acquring our favourite stock. It is impossible to predict either the top or the bottom of the market for a particular stock. SIP can help you overcome this dillema. How to make SIP work?

STEP 1: Identify your favourite stock. Do a thorough EIC analysis: analysis about economic scenario, industry analysis and growth prospects of that sector, company's past performance and future growth projections. Identify the intrinsic price of the company, which gives you adequate 'margin of safety'.
STEP 2: Wait for this price target to be acheived.
STEP3: Start buying your favourite stock in small lots. Add more if the price dips, this will reduce your average price and will help in increasing your 'margin of safety'.

EXAMPLE: Let us assume that you have identified TATA STEEL as your favourite stock, and you analysed Rs. 800 as its intrinsic worth. The stock has closed at Rs. 782. You can start accumulating the stock. If you want to buy 100 shares of this company spread this buying into 4 lots of 25 shares each. Your average price of acquisition will be reduced in a falling market and you will have no regrets of buying at a high price. If the price of the stock rebounds and starts rising but is still below your intrinsic price of Rs. 800, you will still have adequate margin of safety. However, temporary swings in the market should be taken in a stride, provided you have selected the right stock.

Stock Market is not a 'Casino' - Invest wisely

The unwarranted euphoria in the markets sometimes makes gullible investors think that they can become rich overnite. It takes only one bad session for the markets to take these investors back to 'Ground Reality'. To make things worse, our media plays the villians role to perfection. Electronic media is very often guilty of 'Playing to the gallery', that is serving the interests of the day traders or speculators only. Friday, the 18th January 2008 was one such day in the history of Indian Stock Market. News headlines like "Steepest weekly loss for the sensex", "Investors lose wealth by a whopping Rs.5,00,000 crore", are more than enough to spoil your party. Many investors start to sell their blue chips in such a scenario. Dear investors please do not play the stock market like a casino.

I had time and again cautioned on this blog, about the weakness in the markets and the impending fall. There were enough reasons to beleive that above 21,000 sensex levels were not sustainable currently:

• The US slowdown and the Sub Prime crises.
• Fall in IIP (Index for Industrial Production) numbers for Nov 2007.
• Competitiveness of Indian exports, and the woes dues to the rising Rupee.
• Liquidty outflow due to the Mega issues, specially Reliance Power.
• Negative FII inflows in January 2008.

All these factors have contributed to the sudden dip in the markets. I had noted earlier, markets to fall atleast to the level of BSE sensex 19000-19200, and the BSE sensex has closed at 19013 on 18th January 2008. Now, is this the time to buy? Ironically the same analysts who were so upbeat on the markets till yesterday have turned into "Doomsayers" overnight.

Let me assure you, dear investors, there is no need to panic. Rather this is an opportunity to buy good stocks for long term. The market may yet fall further by around 5%, but it will bounce back sooner than later, because the economy is growing reasonably well, and the valuations of most stocks are now at reasonable levels. It is advisable to buy your favourite stocks in small lots, rather than putting all your money in one go.

As promised, here are a few good sectors/ stocks for the future:

India's infrastructure growth story is intact, rather than focussing on unreasonably priced power, infrastucture, real estate stocks you may focus on the sectors that power the infrastructure growth, like Cement and Metals;

Cement: Demand and supply gap is not likely to be bridged in the next 2-3 quarters, the profitability of cement companies will continue to grow exponentially. Preferred stocks; ACC (Rs.865), India Cement (Rs.252).

Metals: Prices of ferrous metals are likely to be stable in the long run, large players sre on the lookout for buying/ strategically allying with iron ore suppliers. Investment is advisable in these blue chips for decent gains in the long run: TATA STEEL (Rs.782), SAIL (Rs.234). Among non ferrous metals these stocks look attractive: Hindalco (Rs.185), Sterlite (Rs.880).

Contrarian Buys: Selective investment for long run may be considered in IT Majors and Pharma Sectors, because the downside from here is very limited in these sectors. A bounce back can occur anytime before budget. Investment can be considered in INFOSYS (Rs.1464), TCS (Rs.904).

"Happy Investing".

Sanity Returns to the Markets: Back to Fundamentals

Indian bourses are finally seen returning to the fundamentals after the the madness of the past few weeks. The writing on the wall was clear, as I had been writing on this blog. Finally, law of gravity has caught up with the blue eyed boy of the markets: RIL, after the announcement of its Q3 results. The sensex climb beyond 21,000 was led by only a few stocks led by RIL which zoomed from 2700 to 3250 in the last 3 weeks. The stock may be headed back to 2700-2800 levels for now. Those of you who had been sitting on cash can utilise the current decline in the markets to buy your favourite stocks which you had missed out earlier.

But, remember, and I repeat, it's not going to be easy for anyone to make easy money on the markets in 2008. Here are a few sectors/ scrips, which have been battered in the recent decline, but hold a great promise for the future:

AUTO/ AUTO anciliaries: Auto sector has showcased its future plans in the recently concluded Auto Expo at Delhi.
Tata motors may have stolen the thunder by the launch of "NANO", but there are other players which hold a lot of promise. India is seen as an emerging destination for world's small car manufacturing. Commercial vehicle sector is set to launch several new models to cater to the world markets. Buying can be considered in these scrips for decent gains: MARUTI-SUZUKI (Rs.867), M&M (Rs.752), ASHOK LEYLAND (Rs.48), APPOLO TYRES (Rs.56), BHARAT FORGE (Rs.367), CLUTCH AUTO (Rs.109).

MEDIA/ ENTERTAINMENT industry: The ad. revenue for print as well as electronic media is expected to grow at CAGR of 25% and more in the coming years. This augers well for the existing established players, whose profitability is likely to record handsome gains. Buying may be considered in the following scrips:
Electronic Media: ZEE ENTERTAINMENT (Rs.301), TV-18 of CNBC fame (Rs.451),
Print Media: HT MEDIA (Rs.236), DECCAN CHRONICLE (Rs.220),
DTH Services: DISH TV (Rs.87),
Film Exhibition: PVR (Rs.302), PYRAMID SYMIRA THEATRE-PSTL (Rs.451).

Some more sectors will be discussed tomorrow.

How expensive are Indian Markets

How Indian Markets compare with global markets? This will enable us to understand whether we are expensive as compared to our peers.
PE MULTIPLES OF SELECT MARKETS AS ON 31.10.2007:
DOW JONES 16.6
DAX 14.2
FTSE 13.8
SHANGHAI 55.2
NIKKEI 32.9
HANG SANG 20.9
KOSPI 16.6
STI 14.2
SET 20.9
BSE SENSEX 26.9
But the Markets generally discount one year future earnings. So going by one year forward PEs, according to an article published in Mint on 14.1.2008, India has the 3rd highest valuation of 25.62 followed by China at 4th position with a PE valuation of 23.46. The top two positions are held by Slovenia(31.79) and Morocco(30.11). Analysts are of the view that these PEs are justifiable on the basis of high growth potential for both India and China.
Based on this analysis any dip in the Indian Markets signals a buying opportunity. Going by the analysts' views the correction that has started will not be more than 5-10%.

Making sense of the sensex

Most investors track the movement of the 'sensex' or the 'nifty' only. This can be utterly misleading at times. The sensex had closed the last week (4.01.2008) at 20686, and it has closed today (10.1.2008) at 20582, after touching a high of 21200 intraday. This represents a fall of 0.5% only. But the broader market represented by other indeces like bse midcap and bse small cap has fallen by over 10% during the past 4 days. The sentiment of the market can be judged by other indicators more appropriately.

1. sensex and the nifty have different methods of allocating weights to the stocks comprising the index. nifty allocates weights to the stocks based on their market capitalisation, whereas the sensex weights are calculated on the basis of floating stock of the index stocks. On the basis of current prices top 5 scrips on the sensex have a combined weightage of 45%, with reliance contributing 15.6% and icici bank contributing 10.4%. The operators can paint a rosy picture for the sensex by romping up these few stocks. Similarly on the nifty top 5 scrips have a combined weightage of over 36%, with reliance contributing 12.3% and ongc 7.7%. Infact this has been the story of sensex and nifty rise during the recent highs, whreas the broader market was giving opposite signals.

2. advance-decline ratios are an indicator of the overall health of the markets. analysis of the markets for the past 4 days indicated a very negative signal from the advance decline ratio, like in todays markets this ratio was terribly negative 1:9, that means 9 out of ten stocks were in the declining mode.

3. volumes or turnover also helps us in understanding the future signals for the market. if the broader markets are declining with high turnover, it does not auger well for the markets.

The writing on the wall is clear. Although the sensex and nifty are still not showing any signs of a major decline, the damage is deeper at the broader level. there is still some downside left before the market stabilises. It is, however, a good time to hunt for your favourite midcaps that have taken a beating in excess of 10-15% over the past 4-5 days.
Some sectors to look for bargain hunting are:
Banking (specially PSU banks), Auto anciliaries (India is poised to become an export hub for automobiles), Entertainment (Print media, TV media, DTH services and Film exhibition businesses), and Hotels and Hospitality sector.

Market Musings: Stock Tip of the Day?

When markets are in an uptrend, we have no dearth of 'TIPS TO BUY'. Even people who have little knowledge of the markets, maybe the roadside paanwala or the neighbourhood rikshawwala, will also dish out a tip or two.
It happenned during Harshad Mehta's time, it is happenning again, 'cats and dogs' stocks hitting the upper circuits on a regular basis without supporting fundamentals.

I am reminded of an anecdote relating to Harshad Mehta:
In those days Harshad Mehta had the 'midas touch', anything he was associated with started to climb in the markets. People used to track Harshad Mehta's moves like mad. One day a liftman incharge of operating the lift at BSE had Harshad Mehta on the lift, and he was talking to an official of Karnataka Govt. about investment plans in the state. The lift man heard the Karnataka official tell Harshad Mehta that if you invest in Karnataka your investment is likely to double in a short period. The lift man immediately got hold of his freind selling new issue forms outside BSE to find out if there was any listed share by the name of Karnataka. Soon he found out that there was a company by the name of 'Karnataka Ball Bearings', which was a sick company and the share was quoting at around RS.4 per share. The lift man who had some funds with him ordered for buying 2000 shares of the company, and recommended the share to his freinds telling them that Harshad Mehta is investing heavily in this company.
The rumour spread like wildfire as 'The Tip of the day' and there was a mad scramble for shares of this company. The share started hitting the upper circuit regularly and jumped to over RS.10 soon. One day a friend of Harshad Mehta enquired from him about his investment in the company and its future prospects. Harshad himself was surprised that how this stock had appreciated so much, just because people were buying it as a Harshad Mehta stock. At that juncture Harshad himself bought over 1,00,000 shares of the company. As soon as the news was out there was a volume jump in the counter and the stock touched a three figure mark within days. At this juncture Harshad sold his shares in the market, but the common investors like the liftman hung on to their investment, in the greed of making more money. Soon the stock trend reversed and it started hitting lower circuits consecutively and the stock came back to Rs. 4 again.

The moral of the story is: 'Beware of hot tips and the Tipsters'. Do your own research and analysis before investing.

Indian Stock Market in 2008 - Investor's dilemma

The markets have started the new year with a bang! The question uppermost in everyone's mind is: Is this the right time to invest? Investors have reaped bumper gains in the range of 40-50% during the past two years, so the expectations are very high. Will the market be able to repeat the phenomenal returns this year too?
ANALYSIS:
The market generally discounts one year forward earnings. The expected EPS (Earnings per share) of sensex stocks for FY09 is around 1000, so if we discount this by a PE (Price to Earnings multiple) of 20, the sensex is valued at 20000, a level which has already been achieved. A discounting higher than 20 is frought with risk, because history has evidenced that whenever the discounting factor has gone beyond these levels, markets have tended to correct themselves. Temporarily higher levels may be sustainable due excess liquidity, but in the longer run the fundamental valuations hold good.
Going by this fundamental, the expected EPS of sensex stocks for FY10 is likely to be between 1100-1150, which the sensex will start discounting in 2nd half of FY09. So the sensex can reach a level of 22000 at the lower band and 23000 at the higher band by the end of 2008.
The sensex is at 20700 on 4th january 2008. So if you invest at these levels, the likely gains can be between 7% and 11% for the year 2008. Is it worth taking the risk for this kind of a ruturn?, whreas you can earn a near risk free return of 8% by investing in PPF/NSC/Govt. securities.
So, dear investors it is a time to think! Invest wisely. Anybody investing in stock markets must look for a ruturn in excess of 15%. Assuming that the sensex reaches the level of 22000 by the end of 2008, to earn a 15% return you should be looking to invest at the sensex level of 19000-19200. Watch out for these levels on the sensex, you will definitely get better opportunities to enter. Don't make a hasty decision, which you may repent later.
Having said this, there are still a few good opportunities available in the market. Scan the market for low PE stocks with high growth potential, which may still provide you with extraordinary returns. Invest if you have to in these low PE growth stocks to the extent of 25%, and keep ready cash to the extent of 75% to take advantage of the market dips.

Stock Ideas:Time for portfolio churning

Book profit in Power/Power equipment stocks, as they look overvalued at current prices :
Book your profits in NTPC, BHEL, Reliance Energy, Kalpataru Power.
Buying can be considered at lower levels in Auto/ Auto anciliary stocks, as they can give decent returns in 2008:
Selectively buy Maruti, M&M, Bharat Forge, Clutch Auto.

Market valuations: Ideas for 2008

Investors in India had excellent returns of 40-50% over the past two years, but it is going to be very tough to make money in 2008. Valuations of many sectors are looking overstreched.
It is advisable to avoid fresh investments in Power (Most of the stocks are valued at their earnings multiples based on their anticipated performance in 2011 or 2012), Telecom (The spectrum crises may lead to higher costs for telecom operators, whreas the ARPU's are not increasing). Real Estate (highly oversteched valuations, unstainable in the long run. Perhaps a bubble waiting to burst!)
However selective investment may be considered in Banking (Public sector banks are still quoting at reasonable PE multiples), and Autos (the downcycle seems to be ending, and once the interest rates fall, they can give reasonable returns)
Midcaps: Many of them are being manipulated because of low floating stock, small investors need to be extra cautious while investing in midcaps.
Only excess liquidity is guiding the destiny of our markets, it is anybody's guess how long this scenario will last.