IndiaBazaar

• Bullish on Mangalam Timber Products
• SPIC can touch to Rs 39 on Monday
• Stoploss of Rs 100 advised in Mukand
• McLeod Russel can touch at Rs 95
• Eveready Ind has resistance at Rs 135-136

• Stock watch: HLL, SBI, BEML, Mc Dowells
• Sector watch: Brokerage, energy, cement
• Remain invested in good companies

• Do not overtrade.
• Do not trade on rumors.
• Do not trade in all stocks of one sector.
• It's better to buy the wrong stocks at the right time than to buy the right stocks at the wrong time.
• Trade with the trends rather than trying to pick tops and bottoms.

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Equities: 8 Investing Tips

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on

Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals. Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back.It is apt to note here what Warren Buffet, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff”.

Avoid trading/timing the market: This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers’ end at the end of the day. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again. In Benjamin Graham’s (pioneer of value investing and the person who influenced Warren Buffet) words, “Basically, price fluctuations have only one significant meaning for the ‘true’ investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market”.

Avoid actions based on rumours/sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investors’ portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffet, “Be fearful when others are greedy and be greedy when others are fearful”.

Avoid emotional attachment/averaging: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company’s performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffet’s words, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”.

Avoid over-leveraging: This behaviour is typical in times of a bullrun when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.

Keep Margin of Safety: In Benjamin Graham’s words, “For ordinary stocks, the margin of safety lies in an expected ‘earning power’ considerably above the interest rates on debt instruments”. However, having a stock with a high margin of safety is no guarantee that the investor would not face losses in the future. Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if a portfolio of stocks is selected with adequate margin of safety, the chances of losses over the long term are minimised. He further points out, “while losing some money is an inevitable part of investing, to be an ‘intelligent investor,’ you must take responsibility for ensuring that you never lose most or all of your money.”

Follow research: The upswing in the stock markets attracts many retail investors into investing into equities. However, picking fundamentally strong stocks is not an easy task. In fact, it is even more difficult to identify a stock in a bullish market, when much of the positives are already factored into the stock price, making them an expensive buy. It is very important to understand here that owning a stock is in effect, owning a part of the company. Hence, a detailed and thorough research of the financial and business prospects of the company is a must. Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.

Invest for the long-term: Short-term stock price movements are affected by various factors including rumours, sentiments, market perception, liquidity, etc, however, in the long-term, stock price tends to align themselves with its fundamentals. Here it must be noted what Benjamin Graham once said, “…in the short term, the market is a ‘voting’ machine (whereon countless individuals register choices that are product partly of reason and partly of emotion), however in the long-term, the market is a ‘weighing’ machine (on which the value of each issue (business) is recorded by an exact and impersonal mechanism).”Of course, it must be noted that the above list is not exhaustive and there may be many more points that an investor needs to understand and follow in order to be a successful investor. Further, the above points are not just a read but needs to be practiced on a consistent basis. While making wealth in the stock markets was never an effortless exercise, it becomes all the more difficult when stock markets/stock prices are at newer highs.

Source : ww.equitymaster.com

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All about Stock Splits

What are stock splits?
A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in NO WAY affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting.
A typical example is a 2-for-1 stock split. A company will announce that it's splitting its stock 2-for-1 in one month. One month from that date, the company's shares (having traded the day before at, say, $30) will now be trading at half the price from the previous day (so they'll open at $15). The company, which had 10 million shares outstanding, now consequently has 20 million shares outstanding. The price has been halved in order to accomodate a doubling of the share total.
The most common splits are 3-for-2, 2-for-1, 5-for-4, and 3-for-1. But they can happen any which way: 5-1, 10-for-9, etc. They can even happen in "reverse": 1-for-10, etc.

But why the heck would a company do this?
Hey, excellent question. A few reasons. First, as a stock price skyrockets, some people will be psychologically unwilling to pay that "high price" so a stock split brings the shares down to a more "attractive" level. Again, the intrinsic value has NOT changed, but the psychological effects may help the stock. Second, a stock split generally occurs in the face of new highs for the stock. Thus, it's an event dripping with positive connotations and associations. . . it's makes bulls snort and roar to suddenly have "twice as many shares" as they started with, for example. Third, and final, with lower-priced shares, a stock's LIQUIDITY (FAQ topic, see LIQUIDITY) increases, often reducing the BID/ASK SPREAD (FAQ topic, see BID/ASK SPREAD) and making it easier to trade. This is always good.

I buy 100 shares of ABC Inc. for $10 shares. Six months later the stock is at $20 and splits. Now I own 200 shares at $10 each. However, do I also halve my base purchase price to $5---or does my original, base purchase price remain $10?
Yes. Your cost basis (ignoring commissions) is now $5/share. Not to worry! Your money can't evaporate into thin air!

What happens if you buy a stock after the "record date" for the split but before the listing change?
The "record date" means virtually nothing to the stockholder. If you bought the stock before the split, your shares will split the same day everyone else's do, regardless of the record date. You won't lose on the split.

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All you want to know about P/E Ratio

The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to as the P/E ratio. Though commonly used, it is also misunderstood for various reasons. Here is an attempt to simplify this valuation metric.

How is P/E calculated?

It is calculated by dividing market price of a stock by EPS (earnings per share). EPS in turn is calculated by dividing the net profit of the company by the number of shares outstanding.

Having calculated the P/E, what does it stand for?

Lets assume a stock is trading at Rs 100 and its EPS is Rs 20. The P/E multiple is 5 (100 upon 20). Assuming that the company’s EPS is likely to be Rs 20 each year, it will take 5 years for the investor to realize Rs 100. Of course, the assumption here is that the company’s EPS is not growing at all.Now taking the example of commonly traded stocks like Infosys and Tisco. While the former trades at a P/E multiple of 25 times, the latter trades at 7 times. Why is it so? It is believed that the stock price of a company tracks its long-term earnings growth potential. In an economy, some companies (or sectors) are likely to grow at a faster (like say software or pharma) rate. So, the P/E multiple of companies from these sectors are likely to be higher and vice versa. Depending upon growth expectations, the P/E multiple could vary.There is one crucial factor here i.e. expectations. Though Infosys may be trading at 25 times earnings, if EPS is expected to grow by 25% per annum, the investor could realize the money in four years.

P/E – Is it a discount or a multiple?

There are two ways of quoting P/E valuations:
1. Tisco is currently trading at Rs 350 discounting its earnings by 5.5 times
2. Tisco is currently trading at Rs 350 at a P/E multiple of 5.5 times

Which is right? The answer to this lies in the formula for calculating P/E itself.
P/E is Market price divided by EPS. If we were to reverse the formula,
Market price = P/E multiplied by EPS. Stock prices reflect future earnings potential and not past performance. Discounting the current price with historical EPS is not a right way to analyse companies.
Take a hypothetical case. If Tisco’s EPS for the next year is expected at Rs 50 and the growth in EPS is around 15%, the market price is calculated by multiplying Rs 50 with 15 times i.e. Rs 750. When determining the stock price, one does not discount earnings but multiply earnings.

What is the ‘right’ P/E multiple for a stock?

The answer to this question is not easy. In the previous example, we have assigned a P/E multiple of 15 times because EPS is expected to grow by 15% in the immediate year. Is this the right way? Not necessarily. Here, it is important to understand industry characteristics of the company.For a commodity stock like Tisco, EPS tends to grow at a faster rate when steel prices are recovering or are at the peak and the EPS is likely to decline at a faster rate during downturns. To qualify this statement, if we look at EPS growth of Tisco from 1994 to 2004, the compounded growth in earnings is 17%. However, the CAGR growth in the last three years was 193% (the recovery phase). So, if one believes that steel demand is likely to trace long-term economic growth and that 15% growth is unsustainable, the P/E multiple should be ideally much lower than 15 times. Similarly, the long-term growth prospects for software companies could be much higher than commodities. So, the P/E multiple for software stocks could be at a premium.
Determining the P/E multiple for a stock/sector also depends on:

1. Historical performance – Why does Infosys trade at a higher P/E multiple compared to Satyam? By historical performance, we mean, focus of the management (without unrelated diversifications), ability to outperform competitors in downturn/upturns and promise vs performance. This can be gauged if one looks at the last three to five year annual reports of a company.

2. The sector characteristics – Margin profile, whether it is asset intensive and intensity of competition. Less asset intensive sectors (say, FMCG) are considered defensive and therefore, could trade a premium to the overall market.

3. And more importantly, expectations. Take the case of textile stocks. Expectations of significant growth opportunities post the 2005 quote regime phase out has resulted in upgradation of P/E multiple of the textile sector.

When is P/E not useful?

1. Economic cycles - In FY02, Tisco was trading at a P/E multiple of 20.5 times its FY02 earnings. Was it expensive? Based on FY05 expected earnings, Tisco is trading at a P/E multiple of 5 times its earnings (at Rs 250). Is it cheap? If one ignored Tisco in FY02 on the basis that it was ‘expensive’ on the P/E multiple in FY02, the opportunity loss is as much as 350%. Businesses operate in cycles. During downturn, EPS will be low but P/E will be inflated and vice versa. At the same time, during expansionary phase, corporates invest in capacities. In this case, high depreciation costs suppress earnings. P/E, in this context, may mislead investors.

2. Not actively tracked – There are number of companies in the Indian stock market that are not actively tracked by investors, analyst and institutions. For example, Infosys’ average price was Rs 2 in FY94 and the P/E multiple was 17 times. At times, P/E multiple may be lower because some sectors/stocks are not in the limelight.

3. Expectations – On the downside, some stocks may be trading at a significant premium because earnings expectations are higher. High P/E also does not mean a good stock to buy. What if the expectations are unrealistic? One needs to exercise caution to this extent.

4. Means little as a standalone number – P/E, as a standalone number, means little. Besides P/E, it is also important to look at margins, return on net worth, cash generating ability and consistency in performance over the years to assign a value to a stock.

5. Market sentiment – During bear phases or when interest in stocks is low, valuations could be depressed. Since equities are considered less attractive during these periods, valuations are likely to be below historical average or below earnings growth prospects.

When is P/E useful?

A powerful metric – Unlike metrics like discounted cash flow method and so on, P/E is relatively a simple and at the same time, a powerful metric from a retail investor perspective. Though the factors behind determining the ‘right’ P/E multiple are important, a historical perspective of a stock’s P/E could make this exercise less complex.
To conclude, valuation of stocks involves subjectivity. A person X may assign a higher P/E multiple to the stock as compared to a person Y depending on the risk profile and growth expectations. In the end, it all boils down to how the company is likely to perform.
It is not that stock market is always right when it comes to valuing a stock! As Mr. Benjamin Graham puts it “in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism”. Watch the earnings!

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Types of Trading

Day Trading, Swing Trading, Position Trading, Online Trading

There are several types of trading styles that persons seeking to profit from short term trades in the market may wish to use. Here is a brief description of the most widely used short term trading styles.

Day Trading

Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always sell all of those stocks before the close of each day. The day trader will therefore not own any positions at the close of any day, and there is overnight risk. The objective of day trading is to quickly get in and out of any particular stock for a profit anywhere from a few cents to several points per share on an intra-day basis. Day trading can be further subdivided into a number of styles, including:
Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.
Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

Swing Traders

The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days.
Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock's price.

Position Trading

Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months.

Online Trading

Online trading is not really properly described as a trading style. Rather, online trading is simply a term that refers to the medium used to enter and execute trades. Online traders, which can include long term investors, as well as day, swing and position traders, use either an Internet connection or a direct access online trading platform to access and execute trades with Web based brokers.