Finance-Information

Can stock investing be so simple ?????

2009-11-06T22:18:00.012+05:30

Was browsing various articles here: http://www.moneycontrol.com/mc10/the10list/the10list.php

Obviously, the thing which stuck my eye is, list of "fastest growing companies in last 10 years"

Here are some interesting observations:

1. Up to no. 9, minimum gain in sale is 50000%.

2. Almost all of them are having sales less than Rs. 5 Cr

Just as thought, how about investing same amount in companies which are having sales less than Rs. 5 Cr and keep them for 10 years and sell when PE ratio of index is greater than 20 after 10 years.

Now, say there are 100 companies which are having positive cash flow and positive book value and having sales less than Rs. 5 Cr. If we hit even one (which is having very high probability, considering what is shown in this article and what I have heard/read of past performance), then most likely it will be minimum 100 bagger (considering mainly an equity dilution), this will provide me all my capital back if I have invested in 100 such companies, and my profit will be remaining value of 99 companies (I will like to bat more here in the sense more than one companies getting say 1000 baggers or so, but let's be conservative to understand point here).

As shown above, even one hit will give all my capital back and rest of them will be inflation adjusted profits. I tend to think that it will be huge profit and it's actually a no brainer.

Problems with this theory:

1. Don't know exact no. of companies which are having positive cash flow and positive book value and having sales less than Rs. 5 Cr. If they are say 1000, then obviously we need to rethink here … This actually is biggest risk for this theory. (It will be really great if someone suggests website which can facilitate this kind of number crunching?)

2. If we do not have even a single bull market in 10 years, then obviously this kind of portfolio will probably have highest losses.

3. Just to stretch the same point here, I simply cannot believe that, making money through investing can be so easy. Why?? If I take somewhat optimistic case, say we have 200 companies fitting in this criteria, and we invest Rs. 1000 in each of them (total Rs. 2 lac). Now, after 10 years, there will be at least 5 companies which will be 100 baggers (total Rs. 5 lac). Even if we forget about 1000 baggers and value left of all other companies, we are still making decent profit which is matching say PPF. This I think is conservative estimate.

Please share your thoughts here. I really want to hear some negative aspects here.

I still need to find more data and check validity of this theory.

Nice reading:

Marc Faber with investment wisdom on his website. Check here: http://www.gloomboomdoom.com/public/pSTD.cfm?pageSPS_ID=4000

Past articles:

Ø Cash Rich Companies in India

Ø Things to check before buying stock

Ø Warren Buffet's advice for 2009

Ø How to perform stock research using fundamental analysis

Note: I am looking for ideas on what topic to write. Please share if you have something interesting.

Disclaimer: These are all personal opinions. Please perform your due research before making any investment decision.

Cash Rich Companies in India

2009-09-25T08:08:00.003+05:30

This article is based on: http://www.moneycontrol.com/news/business/datawatch-50-cash-rich-companies-_416593.html

Following is table, I have added last column. I think, if company has 35% cash according to net-worth it commands, that company definitely deserves more research:

XLS can be availed from here.

Things to check before buying stock

2009-05-23T02:35:00.005+05:30

I thought about having one article which gives information on things which are not related to fundamentals of stock but still can have relatively huge impact on stock price.

You can use this article as check-list kind of thing after you have done your research and identified stocks in which you are going to invest, or to perform further short-list for your liking stocks.

One way to research stock is provided in article: How to perform stock research using fundamental analysis. For this post, I am repeating relevant information from this article.

This is like never ending post and I will keep updating whenever I find anything new to add on.

Readers are most welcome to share their thoughts in comment section and add things which I have missed here.

Here are some bullet points:

Are you with mass or against mass? (i.e. are you doing the same thing what other people are doing or opposite) Whatever it is, what’s the reason for it and do you have conviction to stick to it?
Shareholding pattern is fairly important thing to look at. Mainly three things: promoter, institutions (DII and FII) and retail holdings. Broadly speaking, it’s good to have high promoter holdings and if retails holdings are high then stock will not perform well. Also, there are many instances when FII holding is high; stocks are more volatile in nature (or have high Beta); this statement is not always true.
Are MFs dumping stock? If yes then why?
Is it amongst last stocks on any benchmark (like NSE, BSE 200) in terms of market cap? i.e. say according to market cap if this stock is somewhere at no. 195 in BSE-200 list, then you are taking significant risk for buying this company. If this stock gets out of index then there will be significant selling by index funds.
Order book and Earning Estimates.
Industry outlook and Peer competition.
Is it hard to create business model or hard for new players to enter? If anyone can come in and implement similar things easily then that’s not worth investing in.
Secured loans and unsecured loans in balance sheet. If unsecured loans are high, then be extra careful as it will require to pay more interest (and other question comes as, is the company desperate for funds?)
Be cautious when you see high "other income" in profit/loss statement.
Technical analysis: Is it technically correct level to invest? (Personally, I check only market conditions and don't do technical analysis.)
Quality of Management: I don’t know how we can find this out (except looking at some parameters like ROE, ROCE, ROA etc. and Goggling name of directors). I would request readers to share their thoughts here. Currently, I have time consuming ways to check this and even then they are not reliable.
Anything bad in management record?

Warren Buffet's advice for 2009

2009-02-17T07:29:00.001+05:30

We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organizations and nations. Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health. They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older. This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

* Hard work: All hard work bring a profit, but mere talk leads only to poverty.

* Laziness: A sleeping lobster is carried away by the water current.

* Earnings: Never depend on a single source of income. [At least make your Investments get you second earning]

* Spending: If you buy things you don't need, you'll soon sell things you need.

* Savings: Don't save what is left after spending; Spend what is left after saving.

* Borrowings: The borrower becomes the lender's slave.

* Accounting: It's no use carrying an umbrella, if your shoes are leaking.

* Auditing: Beware of little expenses; A small leak can sink a large ship.

* Risk-taking: Never test the depth of the river with both feet. [ Have an alternate plan ready ]

* Investment: Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life.

How to perform stock research using fundamental analysis

2008-10-28T12:07:00.007+05:30

Performing stock research is tedious task but you will be surprised to see how quickly you can do once you do it for 2-3 times.

In this article, I will try to provide various parameters mainly related to fundamental analysis (which I believe is backbone of investing) to perform stock research. I have specifically kept in mind that this should be easy to calculate stuff from balance sheets and profit/loss statements, as main target audience for this article is retail investor. And, I will be focused on company research only, not on industry outlook.

This is relatively big article, so if you don’t have time now then bookmark it or print it and read it out later.

Why do I recommend performing through analysis before investing:

Relatively less stress, when things are not going right in market. As, you know reasons behind your investment decision.
In case of any failure, one can at least know what went wrong and take priceless learnings from it.
I am firm believer that if you need to put 10 minutes to earn Rs. 100 then investing Rs. 100 deserves at least 1 minute (10%) of your time.
Great wealth can be achieved by only un-earned income and investing is probably the most easiest way to generate un-earned income.

What is Fundamental Analysis?

The main goal of fundamental analysis is to find out intrinsic value of stock, means primary assumption for fundamental analysis is that the price on the stock market does not reflect the ‘true’ value of stock (share). In a nutshell, focus of fundamental analysis is to determine true value of stock by focusing on various factor’s like growth, company’s actual business, company’s financial strength and its future prospects.

How to perform fundamental analysis?

I will like to break fundamental analysis mainly in three parts:

Financial stability ratios
Performance indicators
Valuation parameters

Broadly speaking, fundamental analysis should be performed at least for past 3 years (more you go, better it is).

In addition to this analysis, there are some other things to look at, which I have mentioned at the end of this article (in conclusion section).

1. Financial stability ratios:

These ratios are useful to check inherent financial strength of company and it’s cashflow patterns.

a) Debt-Equity ratio:

Debt-Equity ratio = Total Liabilities / Total Share Capital

This ratio provides leverage situation of company in the sense that it compares company’s total liabilities to total shareholder equity.

Broadly speaking, it should not be much higher (should not be greater than 2 or 3, there are exceptions like financing stocks)

b) Interest Coverage ratio:

Interest coverage ratio = Earnings before interest and Tax (EBIT) / Interest

This ratio indicates how easily can company pay interest on its outstanding debts. Warning signs are triggered when this ratio become less than 2.

c) Current ratio:

Current ratio = Current Assets / Current Liabilities

This ratio indicates company’s liquidity condition, in terms of paying of short-term liabilities from its short-term assets.

Warning signs are triggered when this ratio becomes less than 1 and be cautious if this ratio is less than 1.5

2. Performance indicators:

These ratios are useful to check performance of the company.

a) Operating Margin:

Operating Margin = EBDIT / Net Sales * 100

EBDIT indicates Earnings Before Depreciation, Interest and Taxes. This ratio indicates net profitability of the operation of the business.

b) Gross Margin:

Gross Margin = EBDT / Net Sales * 100

EBDT indicates Earnings Before Depreciation and Taxes. This ratio indicates Gross profitability of company (margin after paying interest).

c) Net Margin:

Net Margin = Net Profit / Net Sales * 100

Net Profit is derived after depreciation and payment of interest and taxes. Higher the margin better it is.

d) Return on Assets (ROA):

ROA = Net Profit / Total Assets * 100

This ratio indicates how profitable the company is relative to its assets and ability of management in generating profits from assets.

e) Return on Equity (ROE):

ROE = (Net Profit – Preferred Dividend) / Total Share Capital * 100

This is perhaps Warren Buffet’s favorite parameter. This ratio provides percentage return on shareholder’s equity.

f) Return on Capital Employed (ROCE):

ROCE = Net Profit / (Total Debt + Total Share Capital) * 100

This ratio indicates how profitable the company is relative to total capital employed and ability of management in generating profit out of it.

g) Sales Growth:

Sales Growth = (This Year’s Sales / Last Year’s Sales – 1) * 100

As name indicates, this ratio Net Sales (revenues, top-line) growth. Above formula will provide YoY (Year on Year) sales growth, similar way we can find Half yearly sales growth and QoQ (Quarter on Quarter) sales growth.

h) EBIT Growth:

EBIT Growth = (This Year’s EBIT / Last Year’s EBIT – 1) * 100

This ratio provides growth percentage in EBIT (Earnings Before Interest and Taxes) term.

i) PAT Growth:

PAT Growth = (This Year’s PAT / Last Year’s PAT – 1) * 100

PAT indicated Profit After Tax (Net Profit).

j) EPS Growth:

EPS Growth = (This Year’s EPS / Last Year’s EPS – 1) * 100

EPS indicates Earnings Per Share.

k) BV Growth:

BV Growth = (This Year’s BV / Last Year’s BV – 1) * 100

BV indicates Book Value.

3. Valuation Parameters:

First of all, valuation ratios are related to CMP (Current Market Price). So, they are quite volatile in general. As someone rightly said profits are made when you buy and not when you sell, so in that regard valuations are key.

But in general, valuations have significance after particular stock is passed through criterias of above two sections. (sometimes its easiest to ignore any scripts just on the basis of valuations like, 100 PE stock with only around 15-20% growth)

a) PE:

PE = CMP / EPS

PE – Price to Earnings, perhaps the most looked parameter. In general, stocks with higher forecast earnings growth will have higher PE and those expected with lower earnings growth will have lower PE.

b) P/B:

P/B = CMP / BV

P/B – Price to Book, very important ratio for value investors (historically, these group of investors have made most money out of stock market).

c) Dividend Yield:

Dividend Yield = Dividend per share / CMP

This indicates dividend return in percentage terms of total investments.

d) PEG:

PEG = PE / Earnings Growth

PEG – PE to Growth, Peter Lynch’s parameter. This ratio provides relative values of PE and growth projections.

e) PES:

PES = PE / Sales Growth

PES – PE to Sales Growth. My own finding, as I believe that to increase earnings in long term, sales have to improve (only profit improvement may not work in all cases)

In conclusion:

There are mainly three aspects of fundamental analysis: financial stability ratios, performance indicators and valuation parameters.

Some Miscellaneous Notes:

Quality of management. As a retail investor, it’s difficult to judge quality of management. I generally tend to look at ROCE, ROA and MF holdings. I request readers to let me know through comment/emails, if there are any other better ways.
Order Book. I haven’t mentioned regarding order book in this article. Again, I request readers to let me know through comment/emails, if there are any better ways.
Earning estimates. I tend to look at ICICI Direct for that. This point is specific to Indian equities.
As stated above, I haven’t talked about industry outlook and broadly speaking, stock prices are hugely dependent on industry performance.
Peer competition (competition between companies in same sector) is not considered here.
Take a look at share capital, and if that is increasing then be extra careful, as ROE will be affected by increased share capital.
Shareholding pattern is fairly important thing to look at. Mainly three things: promoter, institutions (DII and FII) and retail holdings. Broadly speaking, it’s good to have high promoter holdings and if retails holdings are high then stock will not perform well.
Secured loans and unsecured loans in balance sheet. If unsecured loans are high, then be extra careful as it will require to pay more interest (and other question comes as, is the company desperate for funds?)
I tend to look at whether MFs are dumping that stock and if yes, then why?
Be cautious when you see high "other income" in profit/loss statement.
Many of above mentioned ratio can be found directly calculated at India Infoline. This point is specific to Indian Equities.
After seeing October-2008 carnage in emerging markets, I will like to add one more parameter and that is FII holdings in stock.
Some cautious words: Don’t always believe what you see in balance sheets and profit/loss statements. Check this article to know more. But frankly speaking, as a retail investor, we do not have any further meaningful information. I like to here comments on this point as well.

Disclaimer: Use your own judgement before making decisions. I am not responsible for any of your decisions based on this article.

Learning about RBI monetary policy - easy and funny way

2008-10-25T12:12:00.003+05:30

I came across great pdf on "RBI Monetary Policy".

It explains three main tasks of RBI (Reserve Bank of India): Controlling Inflation, Encouraging Growth and Financial Stability. And, it does in wonderfully simple way.

Download this pdf from here.

Some of the biggest bubbles and crashes

2008-10-24T23:13:00.004+05:30

Today, 24 Oct 2008, is one of the worst days, if not the worst, in global financial markets.
Everything looks gloomy and now the question is when everything will be back to normal.

Is there any clue we can get from history or learn anything from it?

I cam across really nice article on some of the biggest bubbles as well as crashes in last 3-4 centuries. Check this link for more details on the same.

Courtesy: www.investopedia.com