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.