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.