Wednesday, February 27, 2008

3 Dumb Reasons to Sell

Read a nice little article on on three dumb reasons based on which investors sell stocks:

1. I'm selling because the price is going down
Selling Morgan Stanley (NYSE: MS) or Bear Stearns (NYSE: BSC) because you think there will be more subprime pain to come -- pain not reflected in the current price -- is perfectly sensible. These companies created a mess for themselves, and their shareholders have been feeling the pain.

But selling a stock for no other reason than that the price is declining? That's plain dumb. If you hadn't factored into your valuation Bear's subprime exposure, then sure, sell it. Fast. But if you did, and are just fidgeting at the sight of red ink, you're forgetting that you're selling part of a living, breathing business -- not trading a slip of abstract paper.

2. I'm selling because someone told me the market is going lower
If you're selling off stocks because you read in a newspaper that a recession is now inevitable, or that the subprime crisis was only going to get worse, or that a multitude of "experts" predict that a bear market is nigh, then you're overlooking the trees for the forest.

See, as a retail investor, you have no control over the direction of the economy. Get used to it and deal with it. You do have control over the companies in your portfolio. If you've bought quality companies at reasonable prices, short-term economic movements should have little effect on the long-term returns of those businesses.

3. I'm selling and buying back in when the market bottoms
In the short term, no one knows which direction the stock market is going to move, or by how much. Trying to pick the bottom of the market is an utterly futile task. In a recent article, Foolish colleague Tim Hanson cited a study that illustrates exactly how futile market-timing is:

[IESE Business School professor Javier] Estrada studied 15 major global stock markets for periods ranging from 31 to 79 years, with the full data encompassing more than 160,000 trading days. What he found is "less than 0.1% of the days considered" actually matter to long-term returns, which means that "the odds against successful market timing are staggering."

The entire article can be read here.

BEEN THERE, DONE THAT......"whats worse".......sometimes still do it (but now only in case of instance 3).

Sunday, February 24, 2008

Event study update: Pre-budget trades

The Union Budget for 2008-08 will be tabled on 29th Feb'08. This, probably, is the most awaited of all events in the Indian financial circles. Market movements are sharp in and around Budget time.

Can one trade (with the benefit of hindsight) or take a position to earn alpha returns based on this event?


The verdict:

[A month after the announcement of the Union Budget, the benchmark indices (BSE Sensex and NSE Nifty) closed below the pre-Budget levels on seven of the last ten occasions and of the total 17 instances they ended in the red 12 times]

Trading options:

- Undertake straddle trades, which means an investor buys both the at-the-money call and at-the-money put with at least two to three months left to expiration. However, the stock price must move significantly in order for the investor to make a profit, but the downside remains restricted to the amount of premium paid.

Exactly two years ago, I had done a small study on this. [Link]

Event studies: Bonus issues / Stock splits / pre-budget trades / index inclusions

Kaushik & Deepak have put a nice event study on investments in companies that have announced bonus or stock splits on their joint initiative Moneyoga. Their hypothesis :and the subsequent conclusion are as follows:

Hypothesis: Buy stocks of companies that have declared a bonus or split.

The verdict

We obtained several insights into how stocks perform before & after corporate actions such as a bonus or split. Here are the salient ones:

  • Bonus stocks
    • If you invest an equal amount in every bonus stock on the effective date of the bonus (aka Ex-Date), you would not beat the index (Nifty-50), whether you held it for one day, one week or one year.
    • If you invest an equal amount in bonus stocks - but only the large cap ones - you would be better than investing in the small cap ones; yet you would barely match the index returns in the short term; but have to take twice as much risk (drawdown) as the index.
    • This is true regardless of the historical time periods tested (bull markets, bear markets, etc.).
    • This is true even if you bought the stock as soon as the corporate action was announced - usually 3-4 weeks before the Ex-Date.
    • The best scenario is when large-cap stocks are bought as soon as the bonus is announced and are held for 9 months or longer.
  • Split stocks
    • The same conclusions as for the bonus stocks hold here as well; except that for large cap stocks, the strategy comes close to beating the index in the short term.
The full article with a nice graph depicting how the strategy works over a period of time can be accessed here.

While at event studies you might want to look at some of the event studies that I had undertaken in the past. These are:

1). How to play the markets a week prior to the Union Budget. [Link] be updated for more recent data soon !

2). Does one gain by investing in stocks to be included in the Sensex ? [Link]

Friday, February 22, 2008

Reliance Power bonus issue ratio.... update

theIPOguru has a nice article (with computations) on the Reliance Power bonus issue. According to theIPOguru's analysis, Reliance Power's Board is likely to issue bonus shares in the ratio of 2:17. I agree, 1:17 or 2:17 is a more realistic ratio given the kind of price rise seen in the past few days. I had written on this earlier [link] where I had estimated a ratio of around 3:17.

Monday, February 18, 2008

Reliance Power bonus issue ratio ??

Reliance Power, one of the most hyped IPOs of recent times, dropped significantly below its issue price of Rs.430 per share. The company in an unprecedented move has offered to issue bonus shares to all non-promoters (individuals or institutions). Given that there are more issues lined up from ADAG's stable, the group can't afford a complete loss confidence of the retail investor.

The notification is as follows:

Reliance Power Ltd on February 17, 2008 has announced that a meeting of the Board of Directors of the Company will be held on February 24, 2008.

The Reliance Power Board will, inter alia, consider a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), and / or other measures, which will result in reduction of the cost of Reliance Power Ltd, shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors. [I think shareholders who were given 17 shares during the IPO will get an additional 3-4 shares, which will result in a significant drop in their acquisition cost, to around Rs.350 per share. This compares well with the current market price of Rs.415 per share].

Reliance Power's IPO closed on January 18, 2008, receiving an overwhelming and record breaking response, with commitments of nearly Rs 7,50,000 crore (US$ 190 billion), from nearly 500 institutional investors across the globe, and 5 million retail investors. The sheer scale and unprecedented magnitude of the response clearly reflected the pricing of the IPO as being in line with prevailing valuation benchmarks and market sentiments.

However, subsequent to the closing of the IPO, the global and Indian equity markets have suffered an extra-ordinary meltdown, with all benchmark indices down 15% - 20%, and leading Indian stocks down by an even greater range of 20% - 40%.

In line with this global trend, the Reliance Power stock price has closed below the IPO price, since listing on February 11, 2008.

From the time of opening of the Reliance Power IPO on January 15, 2008, the Sensex is down 13%, while the Reliance Power stock is down 11% from the IPO price for retail investors, and 15% for other categories of investors.

The decline in the Reliance Power stock price has been compounded by:

- a vicious and orchestrated campaign of market manipulation and market abuse

- unleashed by unscrupulous rival corporate interests

- to hammer down all Reliance ADA group stocks

- in an attempt to undermine our fair name and reputation, and

- cause losses to millions of genuine investors.

Reliance Power has formally written to SEBI seeking an investigation into the same.

Equity shares, by their very nature, are risk-bearing instruments, and there is no obligation on behalf of any issuer to insure investors against possible losses.

However, in keeping with the Reliance ADA Group's fundamental and over-riding philosophy of creating value for genuine long term investors, the Board of Directors of Reliance Power will be meeting as above, to consider appropriate one-time measures which will result in reduction of the cost of Reliance Power shares below the IPO price.

This will include, inter alia, consideration of a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), thereby protecting investors even from notional short-term losses on their shareholdings.

The proposal will result in dilution of the promoter group's shareholding in Reliance Power, which they have indicated they will accept in the broader interest of protecting and enhancing value for over 4 million institutional and retail investors.

Reliance Power has the world's largest shareholder family of nearly 500 overseas and domestic institutional investors, and over 4 million retail investors.

Reliance Power has a market capitalization of Rs 87,000 crores (US$ 22 billion) - among India's 10 most valuable private sector Companies, and a net worth of nearly Rs 14,000 crore (over US$ 3.5 billion) - among the top 5 private sector Companies in India on this parameter.

Reliance Power is implementing power projects with aggregate capacity of over 28,000 MW, by far the largest development pipeline in the country.


theIPOguru has a nice article on the Reliance Power bonus issue. The article can be read here.

Sunday, February 17, 2008

Core Projects & Technologies - Interview with CMD (IT Education stocks) interviewed Mr.Mansotra, CMD, Core Projects & Technologies recently.

Q). Core projects has been growing very rapidly since last couple of years. What is your perception about the current numbers and what would be your company's short term and long term strategy in next 2 to 3 years?

Our current year's guidance for top line is at Rs. 450 crs on a consolidated basis with a bottom line of about Rs. 80 crs. Our international business will grow at about 30 percent organically. On the India front, we are expecting to make substantial inroads on projects under the Sarva Shiksha Abhiyan initiative. The collaboration with CHL, a NASA sponsored institution, is also expected to contribute a lot to the company's business profile.

Q). What growth and profitability do you expect for current and next fiscal? Which segment would contribute maximum to the revenues?

Ans. We should be doubling our revenue every year for the next three years. Education is expected to contribute about 87% revenues in FY 10. the full interview here.

I've written about this sector and the companies within [link, link]. The stock bore the brunt of the recent crash on the bourses. It has lost more than 50% of its value from the peak. Nevertheless, one can consider this stock (after proper due diligence, i.e.) as a long term call option, which if clicks can be a decent multi-bagger.

Saturday, February 16, 2008

Drivers of stock prices - p/e expansion vs eps expansion

the chart depicts indexed movement in the P/E and the EPS of NSE's Nifty is quite a useful chart to monitor...

Thursday, February 14, 2008

Indian IPO market in 2008

theIPOguru has a small review note on the Indian Primary market with recommendations on some of the stocks that listed recently. A brief summary of the same is as follows:

Future Capital Holdings Ltd: Hold
Mundra Port: Hold
Brigade Enterprises Ltd: Sell
Kolte Patil Developers Ltd: Sell
Aries Agro Ltd: Hold
Precision Pipes & Profiles Company Ltd: Sell
Burnpur Cement: Sell

Read the full article here.