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Monday, December 2, 2013

Are you Investing by Listening to TV Analysts?

There are many analysts whom you see oftenly coming up on screens with their stock picks and P. N. Vijay is one of them.

P. N. Vijay was confident about his pick when he announced Zylog Systems as his multibagger stock pick on 10th February 2012. “This is a stock that Obama will like“, he said with pride in his voice. “Its a bit different from all other I. T. companies like Infosys and TCS“, he said. “It has an excellent billing rate of $58 per hour“, he added.

P. N. Vijay was also impressed by Zylog’s performance in FY 2011-12 and he expected it to close the year with an EPS of about Rs. 100. “Zylog will get re-rated and has a price target of Rs. 1100 (Rs. 550 after the stock split) in 12 months“, P. N. Vijay said.

On that date, 10th February 2012, Zylog was quoting Rs. 245 (adjusted for split). After hitting a series of lower circuit breakers, Zylog is trading at Rs. 14 today with a whopping loss of 94.3% from the price of recommendation!

Interestingly, after P. N. Vijay’s stock recommendation, the stock soared to a high of Rs. 328 on 2nd May 2012 and went on to touch Rs. 340 on 9th July 2012 in the wake of the stock split announcement but later it started hitting lower circults and stock price came down to Rs. 120 on 2nd Nov'12.

Also interestingly, P. N. Vijay disclosed that he was Zylog’s “financial adviser“. Did P. N. Vijay have no inkling at all that something was not right with Zylog or its promoters?

Was this a classic “Pump & Dump” story?

The problem appears to be that the promoter company, Sthithi Insurance Services Pvt Ltd, has pledged 54.41% of the shares held by it (22% of the total promoter holding). Disaster struck all of a sudden on 18th October when Karvy Financial Services suddenly dumped 3.73 lakh shares at the price of Rs. 226 per share. Apparently, Karvy had made a margin call which had not been honoured by the promoter. That heavy selling triggered off the lower circuit filter. After that, every single day was met by heavy selling, either by Karvy or by the other lenders of the pledged shares, including JM Financial.

Nervous investors, scared out of their wits, also tried to bail out, worsening the situation. Though Sripriya Srikanth, of the promoter group, valiantly bought 1,78,200 shares, it was of no avail in stemming the steep slide that the stock suffered.

Sudarshan Venkatraman, Zylog’s Chairman & CEO, issued a statement last year that attributed the stock price fall to “panic” created by speculators. “Promoters and large institutions have increased their share holding over the past two weeks, coinciding with the fall in the share price.” He said there was no adverse impact on the company’s business.

Sudarshan Venkatraman’s statement is not convincing at all having regard to the ground realities of heavy selling by Karvy & J. M. Financial.

Sudarshan Venkatraman preferred not to say why the promoters had borrowed so heavily by pledging the shares of Zylog. The borrowed funds have not been used for Zylog. So, what were they used for? Also what is the promoters current position? Do they have the funds to arrange for funding the margin requirements.

Investors who are tempted to dip their toes into Zylog must remember that the total shares sold during last year by Karvy, J. M. Financial and other lenders was only a fraction of the total shares pledged by the promoters. This year more no. of the pledged shares entered the market and the carnage took the share price to Rs. 14.

One of the important factor to look at is the % of pledged share by Promoters. This can make stock a risky bet if lenders decide to offload the shares like what Karvy and JM Financial did in case of Zylog Systems.  

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Posted by Saral Gyan at 6:00:00 AM
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Wednesday, November 20, 2013

Strong Fundamentals are Key to Multibagger Returns

Looking for a long-term winner — a multibagger? It is simple! Buy shares of a company with strong fundamentals and consistently high financial performance.

To evaluate a company’s efficiency and the quality of its management, the two key financial ratios to be keenly observed are return on net worth (RoNW) and return on capital employed (RoCE). Besides, price-to-earnings ratio could be used to determine the market price of a company’s stock and to compare it with peers’ in the same sector. Price to book value measures the value of shareholder's ownership in the company. 

While earnings yield — the quotient of earnings per share divided by the share price — needs to be seen to compare directly against the returns offered by alternative investments such as interest on a bond or savings account, debt-to-equity ratio could measure a company’s financial leverage. A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This could result in volatile earnings because of additional interest expenses. 

TTK Prestige, a leader in the Indian kitchenware market, tops the list of multibaggers, with compound annual returns of 71 per cent in 10 years. In other words, Rs 1,450 invested in 2003 was valued at Rs 2.94 lakh on March 31, 2013. The company has benefited from market growth, driven by rising consumer spend, evolving lifestyle preferences and broad demographic trends. 

TTK’s product range and distribution have complemented the strong brand, helping it clock a revenue CAGR of 24 per cent in 10 years. The profit has grown at an even higher CAGR of 66 per cent, backed by its premium products and a debt-free status, from a debt-to-equity ratio of two in 2004. The efficiency and the quality of its management measured from consistently high RoNW and RoCE helped it become the most valuable company in the past decade. 

Titan Industries, the second in the league has made its investors 89 times richer, with its profit growing at 47 per cent CAGR. However, the top-class performance in the decade may cool a little in the coming years, as demand is expected to slow down, given the tough environment. Among other most valuable companies of the decade are Motherson Sumi (ranked third), followed by Coromandel International, Godrej Consumer, GMDC, SKF India, IndusInd Bank, Bajaj Finance and HDFC Bank.

While constant good financial performance by some companies has fetched handsome returns for their shareholders, some weak performers have underperformed the market, despite quality management and lower debt-to-equity ratio. For example, Hindustan Unilever has given below-par seven per cent annualised returns in 10 years, due to poor single-digit sales and profit CAGRs. Slowdown in growth has also hurt the market performance of some pharmaceutical firms like Dr Reddy’s Labs, Novartis and Ranbaxy.

Stock market investment runs in sector-specific cycles. According to reports of Morgan Stanley India, the stocks in a particular sector get bigger and give better returns as that sector gets popular. For example, between 2002 and 2007, realty, metals and capital goods companies topped the gainers’ list. The demand for housing and strong investment in capital goods and infrastructure projects saw Unitech, JSW Steel, Pantaloon Retail, Sesa Goa, Alstom T&D, Jubilant Life, Crompton Greaves, Siemens and Thermax emerge as top companies on the multibagger list.

Business Standard Research Bureau has analysed these trends through a study of top 200 stocks by market capitalisation with trading history of more than 10 years. There are 158 stocks that have outperformed the benchmark index with 10-year CAGR of more than 17.4 per cent each. Of these, as many as 99 stocks have been multibaggers — giving their stakeholders gains of over 10 times on investment made 10 years earlier, or annual average returns between 26.6 and 71 per cent. Of these, 59 have been long-term winners — the companies that have given very good high returns in 10 years as well as during the economic slowdown seen in last two years.

Among these 59 stocks, 10 have been consistent performers, that is, 20 per cent CAGR in sales and profit over the past decade as well as in last two consecutive years. These companies have recorded very high financial ratios, both RoNW and RoCE, and given strong earnings yield — significantly higher than the other prevailing investment avenues.

The consistent performers are from the sectors like auto ancillaries, banks, consumer durables, pharmaceuticals, housing finance, fertilisers, FMCG and mining. The dropdown list of 59 companies, too, has similar sectoral compositions, with additions from automobiles and capital goods.

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Posted by Saral Gyan at 8:00:00 AM
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Tuesday, November 19, 2013

Simple & Effective Strategy For Buying Winning Stocks

If we stick to basic rules of investing and put our money in fundamentally strong small and mid cap stocks, we will have multibaggers in our portfolio. We have a long list of super-duper multibaggers like Jubilant Foodworks, Page Industries, Amara Raja Batteries, Natco Pharma, De Nora, Cera Sanitaryware and Mayur Uniquoter.
It is obvious that this consistent success is not the result of chance or good luck. Instead, there is a carefully thought out strategy behind it. Below are some of the strategies which an investor needs to always follow for buying winning stocks.
1. First identify the sectors doing well and then the best stocks in it:
There are two well-known strategies for buying stocks – the “top down” approach, in which you focus on the Industry / Sector (e.g. consumer non-discretionary), and the “bottom up” approach, in which you focus on individual stocks (e.g. Page Industries).
We follow a unique method that is a combination of both methods. We buy only the best stocks in the best performing sectors. Applying this method in past, we have avoided investing funds in dud sectors like realty and infra even though individual stocks looked very promising.
2. Buy stocks only if the requirements in the check-list are met:
We follows a rigorous process of checks and balances before we trust a stock offers right investment opportunity. These are:
(a) Know the management and its credentials / pedigree;
(b) Understand the business model and growth prospects of the company;
(c) The company must have positive cash flows;
(d) The debt must be Nil or negligible;
(e) The company must have pricing power and not be vulnerable to excessive competition.
3. Focus on information & not on hype:
In times of boom and bust investors tend to carried away by the noise around them. We advice investors to be rigidly focused on tangible information in the form of financial statements. “Never get carried away by the cacophony and hype on Dalal Street”. Its always wise that investors should “identify the nuts and bolts that drive the growth and profitability of the company”.
4. Recognize your mistakes and cut your losses:
This is very important, most investors suffer from “loss aversion” and like to be in denial that they have made a mistake. If they want to raise money, they will sub-consciously sell the stocks where they have a profit but not those where they have a loss.
Considering our own experience where we made mistake by recommending investments in stocks like Firstobject Technologies and National Plastic. Once we knew that we had committed a blunder, we dispassionately ask our members to cut their losses before they could do further damage to their portfolio.
We are sure that by following our “old-fashioned” style of picking stocks after doing thorough research should help all of us to grow our money and become better investors.

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Posted by Saral Gyan at 11:30:00 PM
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Tuesday, October 22, 2013

Can Sensex Achieve Target of 1,00,000 by 2020?

Sensex Target of 1,00,000 by 2020

In view of the fact that the BSE Sensex has yielded an internal rate of return (IRR) of 17.25 percent since its inception in 1979, the chances of it hitting the 1,00,000 level over this decade is quite possible. Below are some facts and figures which justify such possibility and give some insight on long term Sensex targets.

1. Over a period of the past 30 years i.e. 1979-2009, BSE Sensex has yielded in IRR of 17.25 percent per annum. If history can form any basis for the future and if the historic average IRR of 17.25 percent per annum has to be maintained, the Sensex will reach whopping high levels of 1,00,000 or more by 2020.

2. If we look at the commencement of bull phase of the indian capital markets i.e. from 2003 onwards, the BSE Sensex has yielded an IRR of 26.21 percent per annum. If such an IRR of 26.21 percent has to be maintained, the sensex has to reach a level of 2,23,000 by 2020.

3. If we look at sensex targets by 2050 i.e. after 4 decades from now with an IRR assumption of 17.25 percent per annum, we will see sensex at 1,17,50,000 (1 Crore seventeen lakh fifty thousand)

4. If we have a bull phase for 4 decades, an IRR assumption of 26.21 percent per annum, sensex shall be at 24,05,77,897 (24 Crores plus)

We do not have any idea what is there in store for indian markets in this decade or century. If anybody gets a feeling that the indicative sensex levels discussed here is hypothetical and out of reach, we won't complain because the indicative levels surely are sounding exaggerated. This is done assuming that all the 30 sensex companies are going to contribute to it in line with their respective weightage.

However, it leaves us wondering if equities can't even yield 17.25 percent per annum IRR during this decade because that is the period which is widely accepted to be the "decade of India".

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Posted by Saral Gyan at 10:30:00 PM
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Monday, October 14, 2013

Smart Investors Always Focus on Fundamentals

Fear or greed may move the market over the short term, but sooner or later economic fundamentals take control.

Stock market bubbles happen when greed (or at least the excitement of money to be made) pushes prices to unrealistic heights.

Conversely, bear markets, when there is more pressure on the sell side than the buy side, happen when investors become disillusioned with over-priced equities.

Bull and bear markets tend to raise or lower all stocks, but often hit some sectors harder. Not surprisingly, the stock sectors that take the biggest hits are often those previously floating on the bubble.

We all have experienced last bubble which was lead by Realty Stocks. Stocks like Unitech, DLF, HDIL which were the darling of many Investors in last bull run are making new lows today. These stocks have massively eroded the capital of investors since 2008.

HDIL - A mumbai based realty company, was trading at 4 digit price in Jan 2008, made all time high of Rs. 1114 on 10th Jan 2008, couple of months after listing in stock exchanges, today trades at price of Rs. 43. Investors who bought this stock on that day have lost almost 96% of their capital as on date, Rs. 1 lakh invested in HDIL in Jan 2008 is less than Rs. 4,000 today. Investors during that period was fascinated to invest in these companies.  Every thing was rosy in terms of realty stocks, huge land bank, mega township projects, expansion in tier 1, tier 2 cities etc. No body wants to think and analyse the changed scenario as of today.  

It is easy to assume that markets are either driven solely by fear or greed. While that may be the case when markets are expanding or contracting, it doesn’t explain how the markets behave in between raging bulls and roaring bears.

Stock Fundamentals Rule

During these times, fundamentals rule rational investing - there will always be those who impulsively jump into and out of the market.

It is easy to overlook the fundamentals, both economic and market related, in the heat of a soaring or crashing market, but you do so at your own peril if you are a long-term investor.

Just as in the dot.com boom, companies still need to earn a profit and pay their bills to prosper. There is no excuse for dismissing these fundamental truths.

Point to Ponder

No matter what the market is doing, companies that have a sustainable business model, strong cash flow and little debt are going to come out of any boom or bust in good shape.

Investment Truths

It is worth repeating these investment truths:

• The economy is not the stock market
• Stock prices may or may not represent a company’s true value
• Good companies are long-term good investments

A stock’s price is only important in establishing when is a good time to buy or sell.

Long-term investors have time on their side - time to let aberrations in the market work themselves out. Take advantage of time and let good companies show their true value. Don't be in a hurry to make lot of money from stock market.

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Posted by Saral Gyan at 12:00:00 PM
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