Highly Qualified Stock Analysts are hired to provide free research work, not it surprises you? Why is it so?

Most of us have a brokerage account. Most of us also receive free research reports from our brokers.

Of late though, the quantum of free research from brokerages seems to be on the uptick. Most brokerage houses employ a research team that is dedicated to coming out with stock picks and publishing research reports on the same. A lot of money is spent on setting up these research teams. People, databases, office premises are just a few areas where expenses are made.

So we ask ourselves, when the brokerages spend so much in setting up these teams, then why do they dish out the reports free of cost? Do they get anything in return? Or are they putting up reports to just educate and help their investors?

The truth is far from this.

By generating this momentum, the brokerages earn their brokerage fee.

So the next time you receive a free research report, ask yourself. Are you being given an advice on a stock based on its fundamentals and valuations Or are you just helping the brokerage house in earning more income for itself?

Considering a "Buy" call given by a brokerage firm, retail investors get into the stock at a higher price. 

We suggest all our readers to do ensure that free research reports should not be expensive for your investments.

Note: Saral Gyan equity analysts team will release "Hidden Gem - January 2011" on 16th Jan 2011.

This month Hidden Gem has recently made its 52 week high and is now available at cheap evaluations due to recent market correction. At current market price its looking highly undervalued and has the potential to deliver 10 times returns in next 3 years based on domestic demand driven consumption in India.  

Natco Pharma is a leader in the Oncology segment and is ranked No.1 amongst Indian companies in the Oncology segment in terms of revenues from the domestic market.

Natco Pharma - a Discovery led pharma company with strong R&D capabilities, with potential for significant increase in revenues on account of the company's entry into retail pharma space in US and its tie-up with Mylan Inc. Company also has a land bank.

Natco Pharma was promoted by Mr V.C. Nannapaneni in the year 1981 as a Private Limited Company to be in the business of Research, Developing, Manufacturing and Marketing of Pharmaceutical Substances and Finished Dosage forms for Indian and International markets. Natco Pharma began operations in 1984 in Andhra Pradesh, India. The company which began operations with one manufacturing plant and 20 employees today has four manufacturing facilities and 1500 employees. Natco also has the credit of being one of the largest contract manufacturers in India. Some of the well-known companies like Ranbaxy, Dr. Reddy's Laboratories, John Wyeth etc. get their products manufactured by Natco. The company's bulk drug and Intermediate facility at Mekaguda, in Andhra Pradesh is certified for its environmental management systems (ISO-14001) and is US-FDA approved plant.

The company has a strong research base and has developed various Oncology and non-Oncology drugs. As a recognition of its strong research capabilities, the company has conferred the National Award 2008 by Technology Development Board, Government of India, Ministry of Science and Technology for indigenous technology developed by the company in life saving anti-cancer drugs.

The company has developed a new molecule NRC 19 for treatment of Chronic Myelogenous Leukemia (CML) which is cancer of the blood in which too many granulocytes, a type of white blood cell, are produced in the marrow. The company has is going through clinical trials. Successful clinical trials and commercialization of the Drug will lead to substantial benefits for the company.

The company has been increasing its presence in Pharma Retail in US through the inorganic route. The company has over the past year and a half acquired three Pharma Retail chains in the US Savemart Drugs, Nicks Drugs and Newark Drugs. These stores are capable of adding Rs.150 crores towards Sales Revenues for the company in a year. The company is scouting for more acquisitions in this space in the US.

The company also entered into a Tie-Up with the Pittsburgh based Mylan Inc., for worldwide marketing and distribution of Glatiramer Acetate. The drug is sold as Copaxone R - a registered trade mark owned by Teva Pharmaceutical, Israel. Natco has signed a license and supply agreement today with Mylan for its (NATCO's) Glatiramer Acetate pre-filled syringes, a generic version of Teva's Copaxone R, which is used to treat multiple sclerosis. The agreement grants Mylan exclusive distribution rights in the United States and all major markets in Europe, Australia, New Zealand, Japan and Canada, and includes an option to expand into additional territories. Teva's market cap and profitability is a function of Copaxone, which, with brand sales of nearly $2 billion officially, returns a profitability of 50%-70%.

The company has substantial land bank near the Hyderabad Airport (close to 300 Acres). As per a few press reports of Dec 2007-Jan 2008, the land is valued at around Rs.350 crores. Factoring a possible decline that might have taken place in land values in view of the recent real estate slowdown, the land may be valued at around Rs.300 crores on a conservative estimates.

Commercial Launch of BENDIT

NATCO Pharma also announced the commercial launch of its brand - BENDIT - Bendamustine - a novel agent in the treatment of Chronic Lymphocytic Leukemia (CLL), mostly seen in the elderly people.

Bendamustine is a unique hybrid cytotoxic, which is mechanistically distinct from the existing options. Response rates to Bendamustine are reported to be high and durable, and the therapy is seen as a superior and tolerable first line option in the treatment of CLL.

Bendit is the generic version of Treanda, the innovator brand, which is priced at around Rs.86,000 per vial of 100mg. Bendit is aggressively priced at Rs.6,950 per vial of 100mg., in accordance with Natco's policy of making available quality medicare at an affordable price. Natco is exploring the possibility of introducing this product in international markets as well.

Natco Pharma to partner US co to mkt generic Revlimid

 

Natco has filed abbreviated new drug application (ANDA) for Revlimid drug in 5-10-15 mg and 25 mg strengths and company's ANDA has been accepted. Natco has got the first-to-file status for the 25mg strength. It is likely that Natco get the FTF status for the other strengths as well, though it is not yet confirmed. Revlimid is a total USD 2.3 billion drug out of which US sales alone are about USD 1.5 billion growing at about 44% compared to last year.

 

Currently Natco stock price is 269 and stock is trading at a PE multiple 15 compared to PE of 25 of peer group. One can invest in Natco at a price of 250, keeping a long term view for returns of 20% to 30% over a period of 12 to 18 month.

 

Note: The stocks discussed in Saral Gyan through posts are not a part of "Hidden Gems" & "Value Picks" issues which we recommend to our paid subscribers only. These are just stock specific views by Saral Gyan Team; one must do the due diligence before doing any investment based on our recommendation.

As an investor in stocks, what do analysts mean when they say 'stocks are cheap or expensive'? You often hear this in connection with a story on whether it is a good or bad time to buy or sell.

Often, they are referring to the PE (price earnings ratio) of stocks. This metric tells you how much investors are willing to pay for the earnings a company produces. In general, the higher the PE, the more 'expensive' a stock.

A stock's PE is computed by taking the current price per share and dividing it by the earnings per share (EPS).

For example, a company with Rs. 5 EPS and a current share price of Rs. 50 would have a PE of 10. This tells you that investors are willing to pay 10 times the EPS for the stock.

As you can see, if earnings remain constant, but the price per share continues to rise the PE will be higher. At some point, the stock will be deemed 'expensive,' which often precedes a recommendation to sell. Conversely, as the PE falls, the stock will become 'cheap' and may be a buy candidate.

Of course, PE is just one tool in evaluating stocks, below are some more.

1. Projected Earning Growth – PEG

However, none of these tells you at what PE is the stock cheap or expensive. For individual stocks, you need to look at industry peers to compare their PEs. If companies in the stock's sector are showing higher PEs, then your candidate may indeed be cheap. Likewise, if the sector has lower PEs, the stock may be expensive.

The Dividend Payout Ratio (DPR) is one of those numbers. It almost seems like a measurement invented because it looked like it was important, but nobody can really agree on why.

The DPR (it usually doesn’t even warrant a capitalized abbreviation) measures what a company’s pays out to investors in the form of dividends.

You calculate the DPR by dividing the annual dividends per share by the Earnings Per Share.

For example, if a company paid out Rs.1 per share in annual dividends and had Rs. 3 in EPS, the DPR would be 33%. (Rs.1 / Rs.3 = 33%)

The real question is whether 33% is good or bad and that is subject to interpretation. Growing companies will typically retain more profits to fund growth and pay lower or no dividends.

Companies that pay higher dividends may be in mature industries where there is little room for growth and paying higher dividends is the best use of profits (utilities used to fall into this group, although in recent years many of them have been diversifying).

Either way, you must view the whole DPR issue in the context of the company and its industry. By itself, it tells you very little.

The P/E is the most popular way to compare the relative value of stocks based on earnings because you calculate it by taking the current price of the stock and divide it by the Earnings Per Share (EPS). This tells you whether a stock’s price is high or low relative to its earnings.

Some investors may consider a company with a high P/E overpriced and they may be correct. A high P/E may be a signal that traders have pushed a stock’s price beyond the point where any reasonable near term growth is probable.

However, a high P/E may also be a strong vote of confidence that the company still has strong growth prospects in the future, which should mean an even higher stock price.

Because the market is usually more concerned about the future than the present, it is always looking for some way to project out. Another ratio you can use will help you look at future earnings growth is called the PEG ratio. The PEG factors in projected earnings growth rates to the P/E for another number to remember.

You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.

For example, a stock with a P/E of 30 and projected earning growth next year of 15% would have a PEG of 2 (30 / 15 = 2).

What does the “2” mean? Like all ratios, it simply shows you a relationship. In this case, the lower the number the less you pay for each unit of future earnings growth. So even a stock with a high P/E, but high projected earning growth may be a good value.

Looking at the opposite situation; a low P/E stock with low or no projected earnings growth, you see that what looks like a value may not work out that way. For example, a stock with a P/E of 8 and flat earnings growth equals a PEG of 8. This could prove to be an expensive investment.

• It relies on projections, which may not always be accurate

 

A candlestick chart is a style of bar-chart used primarily to describe price movements of an equity over time.

It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.

Candlestick charts are said to have been developed in the 18th century by a legendary Japanese rice trader. The charts gave the traders an overview of open, high, low, and close market prices over a certain period.

This style of charting is very popular due to the level of ease in reading and understanding the graphs. Since the 17th century, there has been a lot of effort to relate chart patterns to the likely future behavior of a market.

This method of charting prices proved to be particularly interesting, due to the ability to display five data points instead of one.

The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand. The method was picked up by Charles Dow around 1900 and remains in common use by today's traders of financial instruments.

Candlesticks are usually composed of the body (black or white), an upper and a lower shadow (wick). The wick illustrates the highest and lowest traded prices of a stock during the time interval represented and the body illustrates the opening and closing trades.

If the stock closed higher than it opened, the body is white, with the opening price at the bottom of the body and the closing price at the top.

If the stock closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom.

Stock research analysts study publicly traded companies and make buy and sell recommendations on the securities of those companies. In this way they can exert considerable influence in today's stock marketplaces.

Stock analyst's recommendations and reports can influence the price of a company's stock - especially when the recommendations are widely disseminated through public appearances.

The mere mention of a company by a "popular stock analyst" can temporarily cause its stock to rise or fall - even when nothing about the company"s prospects or fundamentals recently has changed.

While analysts provide an important source of information in today's markets, investors should try to understand the potential conflicts of interest analysts might face.

For example, some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover.

The fact that a stock analyst - or the analyst's firm - may own stocks they analyze does not mean that their recommendations are flawed or unwise. But it's a fact you should know and consider in assessing whether the recommendation is wise for you.

We strongly suggest that a little more digging on your part, beyond what brokerage companies are recommending, will always be to your benefit. It's up to you to educate yourself to make sure that any investments you choose match your goals and tolerance for risk.

Above all, always remember that even the soundest recommendation from the most trust-worthy analyst may not be a good choice for you.

The ease with which buyers and sellers can be brought together and can agree on a price is called liquidity.

An important consideration in assessing risk is how liquid various financial assets are. Therefore, assets that are less liquid tend to have a wider spread between the "bid" (the price offered by a would-be buyer) and the "ask" (the seller's asking price).

Cash Is King: You need cash and liquidity for freedom and security. The cash in reserve provides money for not only emergencies but opportunities as well.

A cash reserve provides the foundation for your entire financial position. You should get your cash reserve in order before taking on any risky investments with money you can not afford to lose.

Boring but Prudent: Five to six months "salary or seven to eight months" expenses are guidelines generally considered reasonable for emergency reserve funds.

This type of liquidity is best measured with volume. Higher the average daily volume is, higher the liquidity is. High liquidity ensures that at the moment when we want to buy or sell shares, there will be enough sellers/buyers on the other side of the fence.

Before investing in any stock, one major element that you have to look at is the company's daily volume. The daily volume of a company (liquidity) is the amount of shares that are traded on any day.

Most of the stocks that have minimal volume, 15,000 shares per day or less, have a problem, and there are numerous reasons you should try to avoid such low volume stocks.

One reason is that stocks with low volume often have very large price swings.

These fluctuations are due to the laws of supply and demand. If there is only a few available sellers of the stock you want to buy, you are forced to pay what they want for the stock.

On the other hand, when you decide to sell the stock, you may be forced to keep the shares because there are no buyers of the stock, or to sell them in a really low price.

Since the low volume stock is "handled" by only a few persons, the stock is usually get hammered down harder than most stocks, and it is also more easily "treated" going up.

Stockholders of these type of companies are often very easily frustrated, and unless they are prepared to hold them for long periods, they very easily panic and sell their stock to the very first offer.

Tide Water Oil Co. (I) Ltd. is a PSU company. Tide Water Oil Co. (I) Ltd., is a part of the multi divisional Andrew Yule group that has diverse interests in Engineering, Electrical, Tea Cultivation, Power Generation, Digital Communication Systems and Lubricants.

Tide Water has been a pioneer of Automotive and Industrial lubricants in India since 1928 and has five plants at Howrah, Oragadam, Turbhe, Silvassa and Faridabad. Its repertoire of automotive products includes engine oils for trucks, tractors, commercial vehicles, passenger cars and two/three wheelers. It also produces gear oils, transmission oils, coolants and greases for automobiles. For industrial application it manufactures industrial oils, greases and speciality products like metal working fluids, quenching oils and heat transfer oils.

Tide Water has tie-ups for manufacture of genuine oils with a number of renowned OEMs in the automotive and industrial equipment segment. The company also has technical collaboration with Nippon Oil Corporation, the No.1 petroleum conglomerate in Japan. Company sells oil in automotive segment under the brand name Veedol, enjoys high brand recall. Superior quality lubricants under the brand name Eneos are also manufactured and marketed in India by Tide Water Oil Company.

Share holding of Tide Water Oil as per last quarter, Promoter holds 26.33% stake, institutions hold 14.31% stake, non promoter corporate bodies hold 40.93% stake and public hold only 18.43% (Only 160593 shares with 7269 share holders) stake in this company.

Last year quarter performance was above analyst expectations, June was outperforming quarter in which company has shown marvelous number, Net sales zoomed to Rs 197.65 crore from Rs 165.07 crore while net profit zoomed to Rs 15.78 crore from Rs 7.85 crore. Company has shown EPS of Rs 181.09 in June quarter itself. Company has paid 300% dividend to share holders for last year. Current level at per estimated EPS stock is trading at PE ratio of 10.

Looking at peer group, Castrol India is trading at a price of 625 with PE of 22 with a market cap of 7700 crore. Tide Water Oil stock is available at an attractive price of 5050 looking at medium to long term investment, market cap is only 440 crore with less public holding.

Company has equity of just 0.87 crore while company has huge reserve of around Rs 150 crore (More than 172 times of equity, it shows company is very strong bonus candidate).

We recommend Buy on Tide Water Oil with a target of 7200. Stock has strong support zone at Rs 4350, hence incase of severe market correction, Tide Water Oil may not go below 4350 levels and give an opportunity to accumulate more at lower levels. In the days to come, we also expect disinvestment story coming out in this company. Tide Water Oil can give 20 to 30 percent returns in next couple of months.

 

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Pantaloon’s 4QFY10 revenues grew 91% yoy to Rs31.8bn. The underlying samestore sales growth (SSSG) for value retailing was 11%, while the lifestyle SSSG came was 19%. EBITDA grew 15% yoy to Rs2.1bn. PBT (pre-ex) grew 36% yoy to Rs750mn due to higher other income. Tax reversal led to adjusted PAT growth of 154% to Rs927mn.

Lifestyle-retailing delivered SSS growth of 19.4% YoY on a normal base quarter. Valueretailing SSS grew 11.5% YoY – marginally slower growth than in 3QFY10, but on a much stronger base quarter. Home-retailing SSS grew 57% YoY on a very weak 4QFY09, which had seen c30% YoY decline.

PRIL added c.1.7m sq ft in FY10 on a base of 9.3m at the end of FY09. FY10 revenue/ sq ft increased c.19% yoy; lifestyle division with 14% SSSG contributing the most to the growth. Pantaloon has merged the home solutions business (HSRIL) and divested stake in non-core operations. A wholly owned subsidiary FVRL has been created for the value retail business.

Management notes that core retail debt dipped modestly from Rs32bn to Rs29.1bn. Given consolidated interest costs are Rs4.93bn (vs. Rs3.91bn for retail), we believe consolidated debt is ~Rs39-40bn. This implies consolidated debt-equity of ~1.3x, which is better than FY09 (1.5x). Core cash generation, will need to improve.

Pantaloon Retail India Ltd – EPS Expectations and Stock Target [Year Ends in June]

How much cash a company can generate is one of the more important measures of its health. Yet, you will hear more about P/E than almost any other metric on valuation, but it does not give you an accurate picture of a company’s ability to generate cash.

P/E represents the ratio of the stock’s price to its earnings per share (EPS). It is an important metric, for no other reason because so many people think it is. When a company’s P/E is very high or low, it gets top billing on the news.

Overlooked by many are the equally important, we would suggest more important metrics that examine a company’s price relative to its cash position.

The reality is that without cash, a company won’t last long. That may seem obviously simple, however there is a long list of companies that failed because cash was in too short supply.

So, how do you use cash flow ratios to see if a company is under or over-valued, which is the same purpose of P/E? Two primary measurements shed light on a company’s valuation.

The price to cash flow is determined by dividing the stock’s price by cash flow per share. The reason many prefer this measurement is the use of cash flow instead of net income (found in computing EPS).

Cash flow is a company’s net income with the depreciation and amortization charges added back in. These charges, which reduce net income, do not represent outlays of cash so they artificially reduce the company’s reported cash.

Since these expenses don’t involve actual cash, the company has more cash than the net income figure indicates.

Free cash flow is a refinement of cash flow that goes a step farther and adds one-time expenses capital expenses, dividend payments, and other non-occurring charges back to cash flow. The result is how much cash the company generated in the trailing twelve months.

You divide the current price by the free cash flow per share and the result describes the value the market places on the company’s ability to generate cash.

Like the P/E, both of these cash flow ratios suggest where the market values the company. Lower numbers relative to its industry and sector, suggests the market has undervalued the stock. Higher numbers than its industry and sector may mean the market has overvalued the stock.

Thankfully, you don’t have to do all of these calculations. Many sites on the Web include these valuation numbers for your consideration.

Like all ratios, they don’t tell the whole story. Be sure you look at other metrics to verify relative value. However, these cash flow ratios can give you significant clues to how the market values a stock.

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

ROE measures a company's profitability by comparing its net income to shareholders equity (book value). ROE is a speed limit on self-funded growth (company's profit). That is, a company cant grow earnings faster than its ROE without raising cash by borrowing or selling more shares. For instance, a 15% ROE means that the company cant grow earnings faster than 15% annually by relying only on profit to fuel growth.

Higher ROE is usually better. ROE, then, becomes a measure not only shows return of the company is generating, but also of how successfully management has been in running the corporation. Good ROE ratio depends on the company's industry. When looking for stocks, we want to find companies that show an increasing ROE over time. It's a sign to us that management is getting better and better at deciding what to do with its money. The higher the number, the better management has allocated capital.

It turns out that a company cannot grow earnings faster than its ROE without raising additional cash. That is, a firm with a 15 percent ROE cannot grow earnings faster than 15 percent annually without borrowing funds or selling more shares. So ROE is a speed limit on a firm’s growth rate. Many specify 15 percent as their minimum acceptable ROE when evaluating investment candidates.

You also must pay attention on the company's debt when calculating ROE. Recall that shareholder’s equity is assets less liabilities. High liabilities means low equity. The higher-debt firm will then show the higher return on equity. Consequently, you should take debt levels into account when comparing different firm’s return on equities.

To measure the safety of a company, we use the debt to equity ratio (D/E). 

Debt to equity ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk or Gearing. It is equal to total debt divided by shareholders' equity. The two components of debt and equity are often taken from the firm's balance sheet, but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity.

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as the result of interest expense. If a lot of debt is used to finance increased operations, the company could potentially generate more earnings. If this earnings is greater than the debt cost (interest), then the shareholders will benefit. However, if the cost of this debt outweigh the return that the company generates on the debt through investment and business activities, the company can go bankrupt.

The debt/equity ratio depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

When talking about the stock market, we often use a simple average, like any Index, to quickly understand the big picture. But the Index is not a perfect representation because it's usually made of only a limited number of large stocks.

When looking at an individual stock, we can use a similar idea, a moving average, to see the bigger picture.

Let us consider a particularly volatile stock. For example it peaked near 200 in March then bottomed under 60 in June and the most recent price is 140.

A simplistic moving average for the above stock (more precisely, the arithmetic mean) is calculated exactly as you would expect. Add all the values together (210 + 70 + 140 = 420) and divide by the number of values (3) = 140. Consider this as a moving average of a series plotted against time.

Many argue that day-to-day price fluctuations are completely random, and longer periods are required for trends to emerge. If we could smooth the price fluctuations, it might help us see the emerging trend.

However, the market sometimes offers a hint. A moving average reveals the general direction and strength of a stock's price trend over a given period.

When properly used and understood, a moving average is a very powerful tool. It's not complicated, but you should understand how a moving average is created. It will help you understand why you might choose one moving average over another.

It will also help you choose a reasonable time frame to match your investing style.