Bottom fishing – Myth and Reality

In last couple of weeks, there has been too much talk from “experts” appearing on TV channels or print media or net about investing at bottom of the markets or whether bottom is formed or how far is that level and so on. In equity investing, Bottom fishing refers to buying the cheapest stocks in valuation terms at lowest levels. Let us look at some of the common myths in this regard followed by my views on each one of them. I am sure you are coming across lots of these advices and grand mythical statements now a days.

Myth # 1 – Investors can start buying at current levels and add on dips.

Views: This is such a cliché statement for whatever it means. We analyse it here in slightly more detail, as to what our beloved “expert” is saying.

-          If this is addressed to an investor who is new to equities, do you really think a novice will muster courage to step into such volatile equity markets. God forbid, if Johnie steps in and Sensex tanks 1000 points next day and there goes his stock, will Johnie be able to get sleep? Contrast it with bank FDs where Johnie is getting 10% assured return. So, this piece of advice makes no sense to our Johnie.

-          If this is addressed to an existing equity investor, Johnie is already invested and licking his wounds because his portfolio is in red by x%. In all probability, he might not be holding large cash balance to invest further. Even if Johnie is holding some cash, there is a second thought in his mind whether to put this as well in markets or deploy in safer options. This piece of advice makes no sense to this existing investor either.

-          If this is addressed to an experienced investor who can analyse stocks indepth, is this advice necessary? Either way, such an investor will assess the situation and decide the best course suiting the personal investment style.

Myth # 2 – We have strong support at 4,540.

Views: Again this and its like are some of the most rubbish statements one can come across in a bear market. When there is a concentrated bout of selling or basket selling by a large institution or FII there is no respite. Who cares for this mumbo jumbo levels of 4,540 or 4,440 or any other number given by some analyst. In some of the previous bear markets, I recall by the time analysts were giving a support level, it was getting broken such was the ferocity of the fall.

Myth # 3 – You cannot time the bottom.

Views: If our expert is referring to bottom level of Nifty or Sensex while making this statement, it should not unduly concern a discerning stock-picker investor. Please undertsand that different investors are interested in buying different stocks and all stocks do not bottom out at the same time in terms of price. To cite an example, if one is interested in a popular stock like HUL, it is making lifetime high when Nifty is at 2-year low.

Myth # 4 – Downside is limited to not more than 5%. There will be a V or U shaped recovery.

Views: Whether some astrologer or Santa Claus has given all these prophecies. And how can you decide the precise alphabet of recovery when range of growth in economy varies by the week, fiscal deficit is out of hand, more subsidy driven social programmes are on drafting table, currency fundamentals are out of place, Eurozone topshots themselves are not sure of resolution of debt crisis.

Myth # 5 – This time it’s different (This is not 2008).

Views: In markets, ticker is all. Buy-hold-sell decisions have to be made around that. So how can one market fall be more calibrated or more disciplined compared to another fall. But human being is such a rationalizing creature that any event or action can be justified with some reason when none is actually applicable in view of macro uncertainty factors I mentioned in Myth # 4.  

To conclude, don’t be misled by the noise around. Nobody knows how long this correction will continue price-wise or time-wise. Specific stock selection is what matters. As usual, keep grabbing the good opportunities provided you have the staying power and patience. It is times like these that separate the men from boys.

All the best!

Virtual Stock Portfolio – Investor Link

Over the last 6 months, we have discussed quite a few stock ideas. It would be an interesting idea to introduce a virtual portfolio of Rs 1 million consisting of say 10 stocks with equal weight. I might have vested interest in some of these stocks and with other stocks, it would serve as a tracking list. Besides the learning value, it will give a sense how Mr Market is viewing the stocks and their returns. This is not intended to be an investment advice for anyone and all the usual disclaimer clauses apply.

Another advantage of creating a virtual portfolio is that it can be done after market hours at the closing prices of today. We take closing prices of today, December 01, 2011. We have 10 picks each with an allocation of Rs 1 lakh to make up the Rs 1 million portfolio.

Each of the 10 stocks will have a starting weightage of 10% in the virtual portfolio.

Typical time horizon for this portfolio is 2 years, and risk profile is moderate.

Objective is to generate stable returns as an investor, and will not be chasing momentum by taking undue risks.  On return expectation, it’s fine so long as it can beat the bank FD return and/or outperform the main index (Nifty 50 at 4,937 and Sensex at 16,483 as at close on 01-12-2011).

Ok, so let’s get going…

Our opening list is this.

S.No	Scrip	CMP 01-12-11 (Rs)	Market Cap (Rs crore)	Quantity (No.)	Invest. Amt (Rs lakh)	EPS FY-11 Rs	P/E ttm
1	Bajaj Electricals	181.00	1,799.09	550	1.00	14.66	13.42
2	Balmer Lawrie Co	537.65	872.45	185	0.99	74.35	6.52
3	Corporation Bank	352.00	5,223.15	287	1.01	81.44	3.53
4	Hawkins Cooker	1,500.15	793.25	67	1.00	60.07	17.21
5	Hinduja Globa Sol	321.10	668.94	310	1.00	52.09	6.25
6	IL&FS Inv Mngrs	26.75	547.49	3,740	1.00	3.32	7.96
7	JB Chem Pharma	71.95	608.18	1,390	1.00	13.98	0.88
8	South Indian Bank	21.95	2,486.25	4,560	1.00	2.59	7.43
9	Tata Global Bev	88.25	5,454.28	1,130	1.00	2.92	16.58
10	VST Industries	1,115.20	1,714.21	90	1.00	61.53	14.19
	Total				10.00

All prices are closing prices on NSE as at 01-12-2011 (except Hawkins which is only on BSE). We will not be bothering ourselves with brokerage costs & STT for this hypothetical exercise. While churns are not expected to be very frequent, if there is any incidence of capital gains incurred, we will provide for that in return computation. Dividends will be accounted unless they are small to be rounded off.

Shall we do a small intro of each of the stocks, hmm.. it will become a very long post. Anyway, most of the stocks in this Virtual Portfolio have been discussed on this blog. Few others like Balmer Lawrie, Hawkins, JB Chemicals, Tata Global Beverages and VST Industries are fairly well known & established names in their respective areas. We have covered market cap varying from Rs 500 crore to Rs 5,000 crore in this portfolio. We have diverse sectors in this virtual portfolio covering the following :

(1)  Electrical appliances & projects

(2)  Packaging & Logistics

(3)  PSU Banks

(4)  Private Banks

(5)  Domestic appliances

(6)  IT (BPO space)

(7)  Financial Services (PE space)

(8)  Pharmaceuticals

(9)  Beverages (Tea)

(10)FMCG (Cigarettes)

We’ll be re-visiting how this set of stocks is performing, can’t assure any frequency though, and will shuffle the stocks as and when required. After all, you can take all such liberty with a hypothetical portfolio.

.

Checklist for a Falling Market

Equity markets have fallen rather sharply over the last 6 weeks or so. When 4,800 on Nifty was breached on previous occasions, market “experts” were saying we’re near the bottom but this time they’re not saying so which gives an impression that price bottom may not be too far. But nobody knows. Either way, yours truly has always professed stock-specific approach which keeps you more focused in a bear market.

What’s that you should do in a falling market?

1. Do your home-work and keep ready your Buy-list of stocks with total quantity that you’d like to accumulate depending on your portfolio composition alongwith staggered price points. We are presuming that one’s already in 30-50% cash to capitalize on the fall or may be fresh position coming in.
2. In the Buy-list, avoid any highly leveraged companies or those with management/governance issues and where more than 40% of promoters’ holding is pledged.
3. Next is make a note of the price points at which you’d be willing to buy each of those stocks in small lots of say 20%, 25%, 25% and 30% of the target quantity in a falling market. To give an example, suppose you want to accumulate 100 shares of RIL and price points begin with 20 no.s at Rs 780 going to 25 at Rs 740, 25 at Rs 705 and 30 at Rs 670. If it goes below 670 you don’t do anything. If it rebounds from 700 you hold only 70 and live for another day. There may be some change in your pricing depending on actual situation at that time, cash flow etc but a broad plan has to be ready upfront as to what you want to do to your portfolio both on buy and sell side. Example of RIL was just an illustration, I have no interest in the stock.
4. Investors should be able to distinguish between a stock falling due to weakness in broader market and a stock falling due to fundamental damage. Out of the two, it’s only the former that should be bought into provided the stock was in your Buy-list in the first place.
5. Be flexible to identify good opportunities. Having a starting list does not prevent you from being open. Very often, price falls make some stocks more attractive than they originally were. What happens is that a vertical fall is generally irrational and new opportunities are unraveled very fast in the slide. Having said that, basic conviction in the stock should be there and no short-cuts in the diligence process.
6. Watch out for people advocating seemingly good stories and often enhancing them to suit their own biases while ignoring the hard facts.
7. Even after the fall is over (first gets over in index and large cap stocks), the small caps languish at beaten down levels for some more time making easy picking, but please remember #4.
8. Staying power is a must. One should be prepared for a flat to bearish phase of 12-18 months, if not longer. Oct-2008 to Mar-2009 was a very short fall time-wise and it can certainly get longer than that, and much will depend on actual signs of reversal in interest rate cycle.
9. Make sure the cash deployed does not come in the way of any personal/family goals coming up in next 2 years.

Big money can be made in falling markets amidst despondency and pessimistic news flow, and that’s one of the reasons that equity investing is so tricky.

Happy hunting!

Bajaj Electricals Ltd – An update

We discussed the stock of Bajaj Electricals Ltd (BjEL) in April 2011 here.

CMP is Rs 194 and the stock price has corrected by about 28% since April 2011.

Coming to its Q2-FY2012 results, revenue at Rs 700.80 crore increased by 19% on the back of a strong growth in lighting and consumer durables which grew by 25% and 21% respectively. E&P growth was lower at 10%.

Earnings increased slower at 7% as interest costs jumped up significantly.

Let us evaluate the key risks to our investment case:

1. Large number of unorganized and small players operating in the electrical appliances business.
2. Increasing competition from branded players including some new entrants will squeeze operating margins of BjEL.
3. Excessive dependence on certain vendors for key supplies or production.
4. Performance of E&P segment is a concern, and this could lock higher working capital debt resulting in more interest outgo.

Now we look at some of the mitigants and comforts:

1. Lighting division has some pricing power despite competition.
2. Morphy Richards brand products in the premium segment are growing well ahead of the industry average.
3. BjEL has taken steps to stop bleeding in the E&P division and cut down the number of projects handled to around 50 to improve project execution.
4. Commodity prices have softened which will benefit BjEL margins.
5. Consumer durable division will maintain its momentum given the market positioning of BjEL products.

We expect BjEL to close fiscal FY12E with topline of about Rs 3,000 crore and EPS of Rs 14. In less than 6 months from now, markets would start discounting FY13 estimates. At about 9-10 times FY13E earnings, EV/EBIDTA of 6, MCap/Sales of 0.6, ROE of 25% and decent Free Cash Flow expected in FY2013, BjEL looks quite attractively placed.