Irrational Minds, Irrational Markets....

Few months back, I was worried because the way in which the SENSEX was soaring up did not relate to the growth story of the emerging Indian economy or the earnings potential of the individual companies... The equation seems to have reversed now. The interesting part…My sentiment is fear in both the situations ( both @ above 21000 levels and @ below 10000 levels) though the cause of fear and the reaction to it looks totally different..

Now, the worry is, the correction seems to be much worse than what it should have actually been considering the fundamentals. The correction in the GPP growth of India because of the US sub prime and Global recession is close to 2%. But then the market has fallen down from 21000 to less than 10000 levels which looks unreasonable. A P/E of 12-15 for top notch companies in sectors such as IT and telecom definitely looks like a very low valuation considering the EPS projections of these companies.

My take on this issue:

#1, I don't agree to the argument that this fall in SENSEX is because of the liquidity crunch. Every earning Indian seems to have a secured mindset with quite a bit of reserve funds which does not get into equity markets. Confidence of Indians in commodity and realty space as an asset class looks to be really good. Probably because we feel that we understand these asset classes as an investment opportunity much better than the equity space. The current downfall is more to do with the confidence and sentiments of people. Lack of awareness brings in fear that reduces our confidence and finally becomes panic….And the current levels indicate that it is a panic struck market..

#2, Even if FIIs has to pull out the money from Indian markets, I tend to believe that we have got the capability to absorb it locally and provide support at these levels to SENSEX.

So the fundamental problem with us is that we are either overly pessimistic or overly optimistic. We seem to lack rational thinking. We seem to get carried away just with what the media says. Our awareness and understanding of the economic system looks to be superficial that lacks common sense. We as investors should try and learn how this system works before we invest our money into it.

Should we be building an economy just based on the sentiments of the people?? We need level headed media persons, economist, politicians and decision makers to reduce the impact of the sentiment factor from the economic growth though a complete decoupling may not possible.

I believe that in situations such as this the media has to act in a responsible way with a lot of awareness and courage about the issue. It's high time that they realize the fact that they make up half of our economic consciousness. Media can have a great impact on our day to day decision making process and ultimately on our economy.

"While morality is all about how this world should work, Economics is all about how it actually works". Is Morality in economics a distant dream for this human race???

Installment #7 - Do the due diligence

Hi Frenz,

I continue to write though the low response levels (or) feedback from you guys have brought down my motivation levels.

This is what I would call it as a framework for due diligence. Before you invest in a company spend a few hours collecting all this information. Here is a sample "Due diligence" that was done by me for "Infosys".

The good thing about doing this is that you get to learn a lot of macroeconomic perspectives. Also, the information that you collect about the sector could be reused for other companies in the same sector

Installment #5 - Rely on your reasoning than getting carried away with market sentiments

For all those who are still skeptical about my positive views on KPR mills (or in other words to all my friends who get carried away with the market sentiments and speculations rather than relying on our own sense of reasoning J - which is what differentiates humans from the rest of the “beings” in cosmos) and a buy strategy on KPR mills at Rs. 130

The reason why I say KPR mill is still not a bad bet at 130 levels based on my deep dive and the following findings...So, here is an analysts J pick based on the fundamentals… (still a novice who is on a fast paced learning ..)

Financials:


KPR Mill reported sales of Rs 481.62 crore and net profit of Rs 58.42 crore for FY07. The company’s operating profit stood at Rs 120.27 crore and the operating margin was 24.97%. The net profit margin stood at 12.13%. On post issue diluted equity, KPR posted an EPS of Rs 15.5 for the year.

Valuations


At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 15.50 by 17.1x and 14.5x at the lower end.

So, @ the price of 225 the P/E works out to 14.5
@ the price of 130 the P/E works out to 8.3 – So, I believe that the share is trading @ a
comparatively cheaper price.

Look @ how it compares with its peers…( KPR is almost half the size of Gokaldas exports in terms of revenues and better than Gokaldas in terms of profit margins)









Take a look at the overweight stocks in textile listed in ICICI DIRECT.. If I do a comparison of this company with other companies in the same line of business (based on the revenue and the net profit) KPR will definitely be there in the TOP 5 slot…


























My take:

Currently this stock is trading at a discounted price. All that is required is a hype in the market about this company…Patience is the name of the game as far as KPR is concerned…This stock definitely deserves more light than what it has got so far…170- 180 levels should bring in a fair P/E for this stock…

PS: take a look at the below links to understand more about the textile sector and why P/E could be an effective metric to evaluate if a stock is trading on an investment or speculative basis.

http://www.equitymaster.com/research-it/sector-info/textiles/

http://beginnersinvest.about.com/cs/valueinvesting1/a/011101a.htm

http://www.equitymaster.com/detail.asp?date=9/2/2004&story=2

Installment #4 - Numbers Don't lie

Hello knowledge workers,

I am a firm believer of this philosophy “earning comes along with (l)earning” atleast in a knowledge economy ( offcourse there are few exceptions, what say you, Kannappan :-) The coincidental connotation (not sure if it was coincidental or intentional) of these words (learning and earning) had intrigued me right from my childhood.

Nevertheless, I feel that there is a strong relationship between earning and learning in an industry such as share market. So, let’s take the first step towards earning which is learning.

Numbers don’t lie though people who give out these numbers may lieJ. In my opinion numbers (or) metrics helps us in different levels based on the need of the hour.

Level 1 – Understand an “object of study” better.
Level 2 – Evaluate if it is good or bad
Level 3 – Compare (both 1 & 2 are in its absolute sense) whereas level 3 is in a “relative sense”
Level 4 – Predict (In this level we all tend to feel as if we were astrologers).

Note: Sometimes it is very difficult to understand the thin line of difference between 2& 3. So for all practical purposes we could consider level 2& 3 to be the same.

Let’s see how these 4 levels works while we make an investment decision in share market.

Here are the stats for some of the most renowned IT companies that I had considered for my investment options.







Here is the definition for each of these metrics…

Face Value à Par value (or) stated value of the share. This is not an important metric when you want to understand the intrinsic value (and) market value of the share. However this is an important number when you want to understand how dividends are given out every year.

Current Market price: The current price at which a share is traded.

Revenue: Overall sales of the company

PAT: Profit after tax in other words net profit

Net profit Margin: Revenue/PAT say for eg., for HCL it is 1101.82/3768.62 which is 29%

EPS: Net Income/Number of outstanding shares (for the definition of outstanding shares refer to the earlier installment)

P/E ratio: Current traded price/ EPS say for eg., for HCL it is 305.55/16.6 which is 18.41.

52 week high and low à should be self explanatory

In my opinion the key numbers that are to be used while making an investment decision are EPS (the higher the better it is) and P/E (the lower the better it is). The best metric that could give us an indication regarding the intrinsic value of the share (and also to understand whether a stock is trading at a much higher price than it is ought to be) is this P/E.

Let me not spoon feed you too much… let your thoughts take wings... Look at these numbers for any stock where you want to invest money. Streamline your thinking based on the four levels explained above. Make a choice. I am sure that the chances of repenting later will be greatly reduced if we all understand the implications of these numbers (not to mention that it is our responsibility to ensure that these numbers are correct).

Even to buy a t-shirt @ 150 rs. We ask fundamental questions such as,

• Is it worth buying at this price?


• Is there any other shop where I could buy this @ a cheaper price?


• Is there any shop where I could buy it @ a discounted price (say end of season sale)

Even to buy a product that is @ a price of 100 rs. We ask ourselves all these basic questions. Seldom do we ask the same questions while investing thousands of rs. in shares which is something that I had always failed to understand. Most often that not we tend to get carried away with the typical herd mentality...So, let’s get our basics right.

Have a nice weekend and many thanks for your patient reading,
Kiru.

Installment #3 - Market Capitalization

Dear prudent Investors,

For a change this thread starts of with a note whereas most of the threads end with a note…

Note: Though this thread is a little longer, understanding the concepts explained out here should not take much time…BTW, sorry for this long thread. In future I will try and keep it short. I am in the process of learning “how to write precise and concise threads/emails”. I am doubtful if I would ever get to learn this art in my lifetime…

Sensex has crossed the 16000 mark (infact it is at around 16800 while I write this email) and here’s my 3rd installment of this series…The market has taken around 50-60 trading sessions (if my memory is correct) to reach 15000 -16000 level. My belief is that it will take less than 30 sessions to move from 16000 – 17000 level which only goes to show the kind of impact that a policy decision (now in this case it is the FED rate cut in US on Sep 19th ) can have on the INDEX

Guyz... As far as my personal disclosures are concerned, overall it’s been a profitable day for me…

1. Puravankara bought @ 400(in IPO) and sold @ 445 – Overall profit of Rs. 3600 (off course you will have to deduct the brokerage of around 300 bugs)
2. ICICI bank bought @ 850 and sold @ 995 – Overall profit Rs. 2900
3. Tata motors bought @ 673 and sold @ 755 – Overall profit of Rs. 1640

These are (2 & 3) still unrealized profits. But then today these stocks are trading in these ranges and I am hopeful that it will get sold out at these prices. Now I would want to consolidate all these money into IT stocks (Satyam, Wipro and HCL) that are on its way towards an all time low (or) 52 week low (configuring an alert in ICICI DEMAT can be quite useful here.. I have already started using this facility for timing my buy decisions when the share prices are on its 52 week low for the chosen stocks)

Now in this installment let me introduce you to a few key terminologies that I have understood and digested so far. I think I could fairly relate to these terminologies and factor in these concepts and numbers in all my judgments to buy a share @ some X price.

Market capitalization – All of us may not have heard of this terminology “Market capitalization” including me (atleast till the time i.e., last month that I read the dummies book on Stock marketsJ).

I am pretty sure every one in CC would have heard of this term Small Cap, Mid Cap, Large Cap etc., So, what does the term “Cap” mean here...?? It simply means Capitalization.

Market Capitalization =

1. Value of the company (or) Market value of outstanding shares*
2. No of outstanding shares * Market value of the share

* Outstanding shares is the number of shares held by the investors

So, say for example if the current value of infosys share is Rs. 1800 and no of outstanding shares is 1000 then the market capitalization is 1000* Rs. 1800 = Rs. 1800000

Now that we know about the funda for classifying a stock as smallcap, largecap what is the most common misconception of a naive? “Higher the stock price the larger the company”

If you have understood market capitalization concept you should be able to understand how ridiculous this understanding is. Still, till last month I had this misconception. Now I am fairly clear on this concept.

Lessson#2

Always make “Apple to Apple comparisons” why trying to judge the performance of the companies relatively. To make apple to apple comparison the minimum requirement is that the companies that we compare:

• are involved in the same line of business ( I mean the same sector)
• Then understand whether it is a Midcap, Smallcap, Largecap etc., based on Market Capitalization to ensure that they are of the same size.

A couple of months back my understanding about this concept was flawed. Believe me, understanding this simple yet effective. Understanding this concept has made me a better/ (to be professional) investor. Now when I look back at some of my choices that I have made few of them could be attributed to the sheer misunderstanding of this concept.

Let’s talk about EPS (Earnings per share) and P/E ratio in the next installment, quite an interesting concept in equities.

Thanks,
Kiru.

Installment #2

Looks like my stock picks for last week weren’t all that bad... Though my venture into IPO has turned out to be a big disappointment (or) rather learning by burning the fingers (As Edison quotes “I have not failed. I have found 10,000 ways it won’t work”), with investments in KPR mills and Purvankara…Now I am ambivalent as to “exit out” or to “wait” (a million dollar question in this industry) because I have very little faith in the fundamentals of these companies…

Learning #1: Never invest in an IPO just b’coz it is an IPO without understanding the fundamentals of the company/industry. Belief in fundamentals adds in an ounce of patience in our emotion. Otherwise we tend to panic and sell of the stock at a lower price than the offer price. Understanding the fundamentals thoroughly before we invest in an IPO makes us to wait with patience and confidence, even if the listing price is lesser than the offer price…

So, guyz (investors) out there… watch out before you invest in an IPO. I have paid my price for not heeding to the words of the experts and for getting carried away with my emotions and sentiments... would you want to be a prudent investor? The choice is yours…

Dopes with Stats:







Puravankara – offer price – Rs. 400 and current price is around Rs. 365
KPR mills – offer price – Rs. 225 and current price is around Rs. 170

The eternal quest for knowledge lies in these – Why, Where, When, What, Whom, How….

As always, Comments and Criticisms are most welcome. Will come back with more thoughts/learnings as thoughts converge (or) when time permits…J

Thanks,
Kiru.

Looks like this the golden period to invest in shares..

Hi all,

Would you be interested in investing your money in shares? Looks like this is the best time to invest in shares with a medium term (6 months – 9 months) or long term perspective (anywhere between 12 months – 36 months) if not with a short term perspective...

Most of the IT (heavy weight sector) stocks like HCL, Satyam, Infy, Wipro (heavy weight companies) are on a 52 weeks low price… I feel that the market will bounce back from this bearish trend in another 6 months timeframe. In my opinion if we invest now we should get anywhere between 15-25% returns in the next 6 months time frame…? (i.e., If I invest Rs. 1000 now I should get anywhere between 1150 -1250 in 6 months time frame)

HCL – around 289*
Infy – around 1759*
Satyam – around 410*
Wipro – around 444*

* Based on yesterday’s closing..

I had a look into the fundamentals of the above listed companies like P/E (price per earnings) and EPS (earnings per share) and the net profitability for the last three years. The fundamentals definitely look positive for all the above 4 companies...

Apart from the above IT sector stocks that I have mentioned over here, few other stocks that look appealing to me are Tata Motors (automobile), ICICI bank (Banking), SBI (Banking)

This is the time when we need to buy out stocks in small chunks. So that even if it goes down further we could average out…For eg., if I intend to make an investment of Rs. 50000 in Infy shares I invest only 10000 immediately and wait to see if the market goes down further.. If it does I invest another 10000 and so on…This is called the averaging strategy….

What do you say/think?

Disclaimer: All stock market investments are subject to market risk….. Whatever predictions that are made are with the assumption that future will continue to behave in the same way as the past…. :-)