Don't Fall For False Security Of 'Defensive' Stocks

In times of uncertainty, and in preparation for market declines,Wall Street’s advice to investors is always the same. The market cannot be timed, and cash does not pay enough interest to even keep up with inflation. So investors need to remain fully invested and continue to buy stocks, but can protect themselves by shifting to ‘defensive’ stocks and sectors.

No matter what happens to the economy people will still have to eat, drink, and take their medicines. So food, beverage, and drug companies will continue to do well in an economic or market downturn, and the stocks of utilities and other solid companies that pay high dividends will also do well since the dividends will help offset a decline in the stock prices.

Although consumers will still have to eat, drink, and take their medicines, investors will not have to continue to value the earnings of those companies as highly as they did in a rising market. Stocks that sell at 20 times earnings in the excitement of a rising market may only sell for 12 times earnings by the time a correction has made investors more fearful. So even though a company’s earnings continue to rise, its stock will still be dragged down by the falling market.

The same holds true for the high dividend payers. They also do not escape the problem of investors not being willing to value their earnings as highly as they did in a rising market.

In fact, since defensive stocks and sectors are touted so heavily by Wall Street near market tops, driving their prices to more over-valued levels than other stocks, their subsequent declines often exceed the decline of the rest of the market.

It doesn’t take much research to check it out, but unfortunately most investors aren’t inclined to bother. However, that is my job, and here are the facts.

Utilities are traditionally among the highest dividend paying stocks, yet the DJ Utilities Average plunged 60% in the 2000-2002 bear market, considerably more than the 50% decline of the S&P 500. And it plunged 48% in the 2007-2009 bear market, not much different than the 50% decline of the S&P 500.

In lesser corrections the degree of safety promised for high dividend paying stocks has been equally disappointing for those who accepted the theory. In the summer correction of 2010 the S&P 500 declined 15%. The DJ Utilities Average declined 13%. So far in the current correction, the S&P 500 is down 7.8%. But the DJ Utilities Average is down 11.6%.  A similar relationship exists between the SPY and XLU ETFs.

Likewise, the ten highest dividend-paying solid companies in the 30-stock Dow are down an average of 18.9% in the current correction, compared to the S&P 500 being down 7.8%.  Look at the DVY ETF and how it has now held up well during the past month.

High-dividend payers have an added incentive for selling in the current correction since one of the risks of the ‘fiscal cliff’ is that taxes on dividends might jump significantly. And that’s true. But those same ten stocks plunged an average of 65.3% in the 2000-2002 bear market, and an average of 55.4% in the 2007-2009 bear, much worse than the Dow and S&P 500.

Meanwhile, we’re seeing the same historical pattern for the ‘still gotta eat, drink, and take their meds’ stocks.

So far in the current pullback, while the S&P 500 is down 7.8%, the still gotta eat and drink category is holding up fairly well, although Coca Cola (KO) is down 10.2% and PepsiCo (PEP) is down 7.3%.

In the ‘still gotta take their meds’ category, while the S&P 500 is down 7.8%, most major drug-makers are down more. Abbott Laboratories (ABT) is down 12.4%, Bristol Myers (BMY) is down 14.8%, Eli Lilly (LLY) is down 14.6%, and Merck (MRK) is down 10.7%.

You can blame it on concerns about drug company profits under Obamacare. But just as the high-dividend paying stocks plunged right along with the rest of the market in the 2000-2002 and 2007-2009 bear markets, so too did the drug-makers. Abbott Labs, Bristol Myers, Eli Lilly, and Merck, plunged an average of 54.5% in the 2000-2002 bear market, and an average of 49.1% in the 2007-2009 bear.

Several conclusions could be drawn from that history. The first is that there seems to be nothing to gain by repositioning into the so-called defensive stocks or sectors. In fact, by doing so one may come out the other side even more damaged than by holding onto current holdings.

Taking profits and moving to cash when risk is high would be a much better strategy, even though the cash would earn nothing, since one keeps the previous profits and can re-enter when the correction ends, rather than having huge losses and needing the next bull market just to get back to even. If the expected correction doesn’t materialize, the cost is only some lost opportunity for more gains, not the actual painful losses incurred by remaining fully invested and moving into so-called defensive stocks.

Another approach, which I prefer, is that the best defense is often a good offense. For instance, an ‘inverse’ etf or mutual fund designed to move opposite to the S&P 500, like the Rydex Inverse S&P 500 fund (RYURX), or the ProShares Short S&P 500 ETF (SH) will gain roughly 20% if the S&P declines 20%, more in larger corrections.

Regardless of what decision is made, let’s be street smart and realize that so-called ‘defensive stocks’ usually are not close to being so.

Sy Harding is president of Asset Management Research Corp.

http://www.forbes.com/sites/greatspeculations/2012/11/20/dont-fall-for-false-security-of-defensive-stocks/?partner=yahootix

Equity Investments - Analyzing a Company - Types of Stock

1. Growth Company and Growth StockA growth company is a company that consistently grows by investing in projects that will generate growth. A growth stock, however, is a stock that earns a higher rate of return over stocks with a similar risk profile.
   
   Feasibly, a company could be a growth company, but its stock could be a value stock if it is trading below its peers of similar risk.

2. Defensive Company and Defensive StockA defensive company is a company whose earnings are relatively unaffected in a business cycle downturn. A defensive company is typically reflective of products that we "need" versus "want". A food company, such as Kellogg, is considered a defensive company. A defensive stock, however, will hold its value relatively well in a business cycle downturn.

3. Cyclical Company and Cyclical StockA cyclical company is a company whose earnings are affected relative to a business cycle. A cyclical company is typically reflects products we "want". A retail store, such as The Gap, is considered a cyclical company. A cyclical stock, however, will move with the market in relation to the business cycle.

4. Speculative Company and Speculative Stock.A speculative company is a company that invests in a business with an uncertain outcome. An oil exploration company is an example of a speculative company. A speculative stock, however, is a stock that has potential for a large return, as well as the potential for considerable losses. An example of speculative stocks can be found in the tech bubble, where investors put money into speculative stocks, but the investor could have been hurt financially or made large gains depending on the stock the investor invested in.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/analyzing-companies-stock-types.asp#ixzz1yf8SKSRC

How to decide what shares to buy?

How to decide what to buy?

When it comes to deciding what shares to buy, the most important thing to consider is your investment goals, in particular, the performance goals you set for the share investments portion of your portfolio.

For example, you might be aiming to achieve an average after-tax dividend yield of 4% p.a. and capital growth of 8% p.a. over the next 10 years.  In that case, you could buy some shares that provide reliable, tax-effective dividends and the expectation of solid year-on-year growth.

Alongside long term investing, there are share trading opportunities that offer the chance to grow your investment capital more quickly.  Active or daily trading carries with it certain risks that need to be considered carefully.  With this in mind, looking at the range of categories that shares fall into can be a useful place to start.

(Long term investors aim to capture an upward trend in market value.  Short term investors try to capture value from the volatility in the share market.)

Income shares - Pay larger dividends, compared to other types of shares, that can be used to generate income without selling the shares, but the share price generally does not rise very quickly.

Blue chip shares - Issued by companies with long histories of growth and stability.  Blue chip shares usually pay regular dividends and generally maintain a fairly steady price trend.

Growth shares -  Issued by entrepreneurial companies experiencing a faster rate of growth than their general industries.  These shares normally pay little or no dividends because the company needs most or all of its earnings to finance expansion.

Cyclical shares -  Issued by companies that are affected by general economic trends.  The share prices tend to fall during periods of economic recession and rise during economic booms.  For example, mining, heavy machinery, and home building companies.

Defensive shares -  The opposite of cyclical shares.  Companies producing staples such as food, beverages, pharmaceuticals and insurance issue defensive shares.  They typically maintain their value during economic downturns.


http://www.asx.com.au/courses/shares/course_01/index.html?shares_course_01

How to weather the market storm or market volatility

How to weather the storm

Martin Roth

October 26, 2011

Explore your options ... experts suggest an open-minded approach to investment may be the safest course of action. Photo: Michele Mossop

A desire to lessen risk in uncertain times can adversely affect an investor's capacity to earn solid returns.

When equity markets become volatile, fearful investors often turn to defensive sectors such as consumer staples including supermarkets, food producers and healthcare, expecting these to hold up well in any economic downturn.

Other investors lean towards shares in companies providing high-dividend yields, believing a solid dividend signals a financially strong corporation.

In the recent highly uncertain investing environment, such strategies continue to have many advocates.

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But some experts warn that investors, in their desire to minimise risk, might in fact end up sacrificing attractive returns.

DEFENSIVES

The chief executive officer of the market data firm Lincoln Indicators, Elio D'Amato, argues that the market has been sold off so heavily that investors risk missing some strong performance if they stick to defensive stocks.

''Many stocks are cheap right now,'' he says. ''This is a great time to be getting excited about the market.

''I know a lot of people want to go to defensives because they are worried about all the volatility. But the current market offers an amazing opportunity for investors who do, I suppose, have to be of stronger stomach. It gives them the chance to pick up stocks that have fallen sharply for no other reason than sympathy with the problems in Europe.''

D'Amato warns more generally against defensive stocks, citing the example of bionic ear pioneer Cochlear, which in September had its shares plunge 20 per cent in a day on news of a product recall.

''Cochlear is a great business,'' he says. ''One would argue that it is a defensive stock. It has a market-leading product that is global. Yet just one problem occurs and the share price gets battered.''

He also urges caution on buying stocks simply because they offer high-dividend yields. ''A lot of people have incorrectly associated high dividends with company safety,'' he says.

''But we saw during the Global Financial Crisis, with the property trusts and the like, that irrational asset values caused significant strain and pressure, and some of those companies just stopped paying dividends altogether.''

The chief market analyst at City Index, Peter Esho, advises investors in the current market environment to adopt a three-pronged strategy.

DIVERSIFY

''Your portfolio should be diversified,'' he says. ''You do not want all your eggs in one basket.

''And there will be big question marks over economic growth for the next five years. We expect to be in a low-growth environment. So you do not want to be buying stocks with high price-earnings multiples, as these have been priced for high growth. In fact, you want to be in businesses that have had their growth prospects discounted by the market - very heavily discounted.''

Third, he advises investors to incorporate some type of insurance mechanism in their portfolios as protection against sharp market falls.

For more sophisticated investors this could even extend to buying derivatives, such as options. For others it means maintaining a strong cash position.

He also cautions against buying stocks simply because they are in traditional defensive sectors.

''A business might be very defensive, like Woolworths,'' he says. ''But it might trade on a price that assumes growth. We find it hard to justify paying a price-earnings multiple of 15 for a company like Woolworths that expects just 4 per cent profit growth next year.''

The head of research at Fat Prophets, Colin Whitehead, says: ''We view the market as pretty historically under-valued.'' In his opinion, defensive stocks do not offer the same capacity to rebound when the market returns to a more reasonable valuation.

However, he expects markets to remain volatile for quite some time and believes that investors will probably need to be ''more nimble'' than they have been in the past. He says: ''Certainly the investors who generate the best returns over the next two years are probably going to be more active, as opposed to the traditional buy-and-hold approach.''

But the senior equities analyst at Morningstar Australasia, James Cooper, continues to believe traditional dividend investing is still a viable strategy.

DEBT-FUELLED GROWTH

''We have had 20 years of debt-fuelled growth,'' Cooper says. ''Now there is all this deleveraging going on and that is going to depress growth for a number of years. People buying growth stocks might be unpleasantly surprised.

''So once the penny begins to drop, investors might start gravitating towards stocks where there is a fairly solid dividend yield that allows them to keep pace with inflation.''

He adds: ''There has been this myth that investing is about capital gain. But at the end of the day it should really be about the return that the company can generate in terms of dividends.

''We are starting to see a return to this more pure form of investing.''

Among individual stocks, D'Amato recommends billing systems provider Hansen Technologies and Tasmanian financial products business MyState, both of which offer attractive dividends and growth prospects.

Esho likes Qantas Airways, which he believes has been heavily oversold and which, he says, is now worth considerably more than its mid-October market capitalisation of $3.5 billion.

He also recommends office real estate investment trusts such as Commonwealth Property Office Fund and Dexus Property Group, which offer good dividends and are trading at a discount to their valuations.

Read more: http://www.smh.com.au/money/investing/how-to-weather-the-storm-20111025-1mgrv.html#ixzz1bmNKqzas

Stock bargains: 5 tips to protect against falling knives

Written by Reuters
Saturday, 10 September 2011 21:45


For bargain-hunters, identifying stocks in this struggling market might seem like an easy layup. Some prominent companies are languishing in the 99-cent bin, trading at seemingly laughable price-earnings ratios.

Consider Hewlett-Packard, on offer for a current P/E of 5.7. Then there’s BP at 5.9, Capital One at 5.8, Gannett (GCI) at 4.95 and Hartford Financial at five.

In normal times, it would be a no-brainer to load up your shopping cart. But these are hardly normal times, and there can be very good reasons why companies might be trading at such low valuations. As any Bear Stearns or AIG shareholder can tell you, it’s a tricky proposition to – as the investing saying goes – “catch a falling knife”.

That’s what has investors like Michael Gleason paralyzed. Gleason, an American TV producer who lives in London, would like to put more money to work – but the panicked gyrations of the markets don’t give him any confidence. “I’ve gone on hold lately, because volatility has gotten a bit worrying,” says Gleason, 57. “Maybe it’s better to stay out then to get out.”

And there’s the dilemma of every deep-value investor: How to decide when to take that risk, and make potentially the best pick of your investing lifetime instead of the worst. Sometimes it’s a very fine line. Could embattled Societe Generale bounce back smartly, for instance, or could it go down in flames like Lehman Brothers?

“Three years ago investors started catching falling knives, and got badly bloodied,” recalls Hank Smith, chief investment officer of equities at Radnor, Pennsylvania-based Haverford Investments, which has $6.5 billion under management. “Even though they were doing all the things they were supposed to be doing, like buying on dips. But there are a few ways to avoid the falling knife, both on a macro and a stock-by-stock basis.”

The trick is to separate those stocks that are merely beaten up, from those that may be down for the count. A few key criteria to keep in mind:

Look for yield support
NEW YORK: A stock will be less likely to crash and burn if it has some appeal to dividend-hungry investors. That’s why Jim Barrow, who manages Vanguard funds like Windsor II and Selected Value, has snapped up names like AT&T, Johnson & Johnson, and Texas utility CenterPoint Energy. “If you have a strong company with a five or six percent yield, how much lower can it really go?” asks Barrow. “That’s one of the key things we look at.”

Stay away from Europe for now
Real gamblers might be attracted to the rock-bottom valuations of European firms, but it’s just too much of a risk, says Barrow. With the prospect of sovereign defaults cropping up from multiple locations like Greece, Portugal and Ireland, we haven’t witnessed the Eurozone endgame yet. In the meantime, there’s no sense putting yourself in harm’s way. “I wouldn’t go out on a limb,” says Barrow. “We still don’t know how low Europe can go.”

Steer clear of banks
Financials may have made some strides in cleaning up their balance sheets since the meltdown of 2008. But they’re not there yet, says Smith. Many are still loaded down with assets that are difficult to value and trade, which could lead to the same mark-to-market problems with banks and insurance companies we saw before. That means cautious investors should give them a pass.

Opt for growth
A tech giant like a Hewlett-Packard might seem like a steal, lurching near its 52-week lows. But as it looks to shed many of its business lines, and focus on the software-and-services niche that still only generates a small slice of its revenue, Hank Smith is glad he sold his firm’s position months ago. Instead, look for companies with encouraging growth strategies, along with healthy cash flow, exposure to emerging economies, and low levels of debt.

Defense wins championships
If it’s downside risk you’re most worried about, then simply stick to traditional defensive sectors like utilities, telecom, consumer staples and pharmaceuticals. Stocks like Diageo or Philip Morris, which Barrow owns, aren’t going anywhere anytime soon. “Demand for those things doesn’t change,” he says. “Even if things get real bad.”

Chris Taylor is an award-winning freelance writer in New York City. A former senior writer with SmartMoney, the Wall Street Journal's personal-finance magazine, he has been published in the Financial Times, Bloomberg BusinessWeek, CNBC.com, Fortune, Money, and more. He has won journalism awards from the National Press Club, the Deadline Club, and the National Association of Real Estate Editors. The opinions expressed are his own.

Buy ‘defensive’ Bursa stocks: UOB Kay Hian

Investors should buy “defensive” stocks with high dividend yields such as Malaysia’s DiGi.Com Bhd and PLUS Expressways Bhd to ride out the Middle East turmoil, according to UOB Kay Hian Holdings Ltd.

Commodity and energy-linked sectors such as palm oil and oil and gas companies are also “obvious beneficiaries” of higher crude oil prices while potential losers are AirAsia Bhd and Tenaga Nasional Bhd, Vincent Khoo, an analyst at UOB Kay Hian, wrote in a report today. - Bloomberg

Read more: Buy ‘defensive’ Bursa stocks: UOB Kay Hian http://www.btimes.com.my/Current_News/BTIMES/articles/20110224113405/Article/index_html#ixzz1ErqmYIbR

Stocks that won't fall in market meltdown. Do such stocks exist?

Stocks that won't fall in market meltdown
24 May 2010, 0218 hrs
IST,Ramkrishna Kashelkar,ET Bureau

After the skeletons popped out of the closets of the world’s largest economy in 2008, it's the time for the weak members of Europe to put their soft belly on display. The fiscal problems that surfaced in some of the Euro zone countries as much capable of disrupting the global economy as the US's financial system fiasco in 2008.

As the international economist Nouriel Roubini puts it, first came rescue of private firms, and now comes the rescue of the rescuers - ie, the governments. Rumours abound that problems are much worse than what meets the eye.

There is no doubt that what investors have seen in the US sub-prime mortgage crisis makes them more susceptible to such rumours. And as a result the volatility continues. At a time when the markets are gloomy and the media is abuzz with talks on things like fiscal crises, double-dip recession, overheating, debt burdens et al one just can’t be overcautious.

Retail investors, in particular, are cursed to fail in such markets. 

• Firstly they are always late to react - be it a rally or a fall. 
• And secondly, the doubts ‘what if I sell out today and markets rebound tomorrow?’ or vice-versa never leave them at peace. 

It, therefore, pays to build a portfolio that has inherent shock absorbers.

However, if you haven’t installed these shock absorbers already, it is not too late to act. But the end to the current volatility is nowhere in sight and investors can rightly be scared of making fresh investments. Wouldn’t it, therefore, be just wonderful, if we had a handful of companies that won’t buckle, if the markets were to fall further, but will bounce back, if the stability were to return? Do such stocks exist?

Yes, they do. In fact, ET Intelligence Group has unearthed a few such investment ideas, which fit the bill - they are available at attractive valuations and hold the potential to reward investors once the market sentiment turns positive. And the list contains companies from various industries apart from just FMCG and Pharmaceuticals - the traditional friends in the times of volatility.

We have mainly five types of companies here.

• Firstly there are large brand driven FMCG businesses with large cash generating capacities. 
• Then we have companies commanding almost monopolistic leadership in their respective industries. 
• There are companies that have recently completed major capex and are going to reap its benefits in FY11.
• A couple of companies that have seen their business models evolve into becoming more robust also figure in the list. 
• At the end, we have chosen two companies that have taken a disproportionately bigger hit in the weak market and are now available at attractive valuation compared to their peers.

Brand driven businesses

FMCG and pharma industries have always been well regarded as recession-busters. So much so that in market rallies, when these sectors start picking pace, market observers start predicting a correction. Most of these stocks are slow gainers, but they hold the capacity to make a new all-time high in every bull-run. One main problem, however, is that owing to their market credibility and a long-history of superior performance, they don’t come in cheap.

Despite rising food inflation pressuring the profit margins of the company, Nestle India remains one of the priciest FMCG company on the Dalal Street with a price-to-earning (P/E) multiple of 42. Its market leadership in the niche product category of ready-to-eat food and dairy product has enabled its revenues and profits to grow at a strong pace. Despite the stretched valuations, it remains a classic defensive stock.

The diversified nature of ITC makes its business model de-risked. A stronger growth in its non-cigarette businesses is reducing its dependence on tobacco business for forging its future growth. Valued at little over six times its annual revenues and a (P/E) ratio of 26, the scrip appears reasonably valued with limited downside risk. Its ability to raise dividends year-after-year adds to its attractiveness.

Similarly, Dabur India’s non-cyclical product-mix in consumer care, healthcare, food and retail with strong brand recall and international presence makes it an attractive consumer business. The company has outperformed its peers in the past several quarters justifying its premium valuations at P/E of 32.

GSK Consumer Healthcare (GSKCH) is a market leader in niche category of malt based health drinks with a portfolio of OTC drugs. Although its margins were affected by rising food prices, it has successfully kept competition at bay. Despite trading at high valuations, this company has limited downside risk given its niche product category and non-cyclical nature of its business.

GlaxoSmithKline Pharma is the third largest player in the domestic pharma market. Its established international lineage, consistent growth, market leadership in many therapeutic areas and strong brand equity work in its favour. The company is aggressively increasing its presence in various therapeutic areas and expanding its field force. Its stock is trading at a P/E of 33. While these are relatively high valuations, the company is a promising long-term buy - offering limited down side.

Monopolistic Business Model

The country’s largest paints company, Asian Paints, has enjoyed almost a monopolistic leadership in the decorative paints segment. The company has greatly benefited from increasing consumer spending in the domestic market over the past few years. While the domestic market is the key driver for the company’s growth, Asian Paints has been consolidating its portfolio in the international market.

The company has divested its four loss making units in the South Asian region in order to mitigate the erosion of profitability in its international operations. Unless there is a significant drop in the consumer demand, the company’s business has limited downside risk. Trading at a consolidated P/E of 27, the company offers a good defensive bet to the long-term investors.

Another company, which is assured of its revenues by nature of its monopolistic business, is Gail - India’s largest transporter of natural gas. In the years to come, a vast majority of gas consumers will continue to depend on Gail’s pipeline for a seamless supply of natural gas, which will be a preferred fuel for the coming generations.

Gail has long been a cash-rich company, with very low debt. It will be spending nearly Rs 50,000 crore in the next four years to lay new pipeline and expand its polymer capacity. Defying the overall weakness in the market, Gail’s shares have gained 5.6% last week despite Sensex losing over 3.2%.

Crisil enjoys a similarly dominating position in a highly-competitive industry. Its business of providing rating, research and advisory services is far more insulated than other businesses in financial services domain. Firstly, this is not a fund-based business like lending. Since the asset base is low, return on capital employed is much higher. Secondly, even in a case of stock market downturn, the demand remains for research and advisory services making it a sustainable business model.

Crisil has always been a zero-debt company with strong dividend paying record. Its current price-to-earning multiple (P/E) of 28 is lower compared to what it commanded in 2005, 2006 and 2007. This shows that the stock has scope to move up further from here.

Container Corporation of India (Concor) is almost an indispensable company when it comes to transporting goods across the country by rail. Concor has always enjoyed a dominant position in the domestic container rail freight segment. The company is debt-free and cash-rich, which has enabled it to fund its expansion plans of the past few years entirely from internal accruals. A detailed write-up on page 2 gives a better perspective on the company.

The country’s largest auto component maker Bosch enjoys a similar position in its industry. Its product range is such that every vehicle on the road carry some of the Bosch component right from fuel injection systems to spark plugs to wipers to batteries. Besides, the company is also a market leader non-automotive segments such as hand tools, compact packaging equipment and automotive audio systems. Its continues to introduce latest products in the market thanks to its German parent, Robert Bosch

Its German parent, Robert Bosch is the largest auto component maker and an technology leader. The company is debt-free and has a history of strong operating cash with ever rising dividend payments. Not surprisingly, at the height of the market meltdown in 2008, Bosch market capitalisation exceeded most of its customers except Maruti Suzuki and Hero Honda. At its current market price, the stock is trading at just 21 times its trailing 12-months earnings and is a good buy.

Completed Capex

In the second category of companies that have completed major capex plans, we have companies like Petronet LNG. Petronet doubled its LNG capacity in the second half of last year with the additional 2.5 MTPA LNG supply starting in January. Its March 2010 quarterly numbers failed to show its benefits as RIL’s cheaper gas flooded the markets.

Completion of Gail’s pipelines in the North India will allow it to increase sales volumes as more customers get connected to the gas pipeline grid. Considering the company’s secured income source by way of regassification charges and its expanded capacities, a P/E of 15 appears attractive.

The pharma major Cipla may not have done well on the bourses in the past few years, but it has been busy building up capacities. In the past three years up to FY09, the company spent nearly Rs 1,700 crore on building its fixed assets. It is preparing to launch its robust product line in overseas markets including asthma inhalers. The company’s current valuations do not fully reflect these upsides.

JSW Energy is another such example, where the market has failed to reward capacity addition due to the weak sentiments. The company had a very impressive growth in the fourth quarter of FY10, with sales and profit going up almost three times over last year, aided by commissioning of 600 MW of generation capacity.

The company will be nearly doubling its total generation capacity in FY11, based on the current status of its various projects, which will give a significant boost to its financials. The stock currently trades at a P/E of 22 times, which provides huge upside potential.

The buoyancy in real estate industry is set to do good for Mahindra Lifespaces, which currently has almost 8 million square feet of properties at various stages of launch or under construction. The company predominantly operates in the mid and high-end residential segment in Mumbai, Pune, Nashik, NCR, Chennai and Nagpur. It recently launched its mass housing project in Gurgaon.

It currently has two SEZ’s in Chennai and Jaipur, both of which are seeing a strong traction in the recent past. The company is debt light, which is the main differentiating factor between other players. On an annualised EPS of Rs 23.2, it is trading at a price to earnings multiple of 18, that appears reasonable considering the growth prospects.

Delhi-based Anant Raj Industries continues to monetise assets where it is able to get lucrative prices. In December 2009 quarter, it sold its commercial property of 0.11 million sq ft at Rs 6,500 per sq ft. Net revenue booked during the quarter was Rs 6 crore from this project. The company has been increasing its rental income on a quarter-on-quarter basis, as it booked rental Rs 13.6 crore in December 2009 as against Rs 11.3 crore in the previous quarter. In another mall, the company has been continuously leasing space.

Going ahead, it will be launching two residential projects at premium locations, an IT Park, and also rentals will start coming from its malls. The stock is currently trading at 16 times its trailing 12 months earnings, leaving enough scope to gain in the coming months.

Changing business model:

A focused management can gradually change the business model of a company to bring in better efficiencies or integration that can take it to its inflexion point -a point beyond which the growth will speed up. The first departmental store retailer Shoppers Stop and textile major Alok Industries appear to have reached such inflexion points.

Shoppers Stop has evolved its business model over a period of last decade that will enable it now to scale up faster in the coming years. It has been derisking its merchandise model with a higher share of consignment as against the bought-out share, while its cost-cutting exercise has started paying off as visible in better margins in the two quarters.

Most of its subsidiaries have already turned profitable with a turnaround in the home solutions and international airport retail venture expected in near future. Its footfalls to sales conversion ratio came down in the March 2010 quarter, but a significant increase in average transaction size and average sales price have kept the like-to-like store growth up.

Going ahead, the company has aggressive growth plans to open 8 stores in FY11, and another 10-12 stores in the next financial year. This will cumulatively add about 1 million sq ft to the existing 20.4 million sq ft of space. These factors enable the company to justify its P/E above 27 and P/BV above 4.7, which are unlikely to weaken in market turmoil.

Alok Industries has emerged as a vertically integrated textile company with five core business divisions viz. cotton spinning, polyester yarn, garments, apparel fabric and home textiles. Its subsidiary, Alok Retail operates its branded stores ‘H&A’ having 216 stores across the country. It plans to expand to 450 shops by 2011.

Over the past 4-5 years, the company has invested heavily to create large production capacities. These capacities plus its integrated business model put it in a unique position to control the raw material costs while producing high-value-added products.

This has enabled it to expand its operating profits at a CAGR of 38% in the past five years, against a 22% growth in the topline. Galloping interest costs has so far eroded its profits, but its plans to monetise its real estate assets in near future can address the problem squarely. Considering the huge entry, the company has erected against its integrated business model, the downside appears limited at a P/E multiple of 6x.

Changed valuations

Going out of market’s favour can bring down the valuations significantly. However, if the business model is robust, it doesn’t take long to win back the favour. Pursuing the tariff wars and stringent regulatory recommendations, the telecom industry has been facing a lot of heat and has fallen out of market’s favour.

A steeper fall compared to its peers has made the valuations of Reliance Communications highly attractive, where a further weakness appears unlikely.

RCom lost over 50% since last October as a sharp drop in telecom fares lowered its profitability. The future, however, appears bright.

The company has domestic and global assets in the form of telecom infrastructure in India and under-sea fibre optic network overseas. Its telecom towers are fast gaining tenancy from other operators, which is likely to support its revenue in future. It’s 3G licences win in 13 circles including Mumbai and Delhi gives a better balance between the initial capex fees and revenue prospects. Given its low valuations and asset base, the stock looks attractive at the current levels.

The cement industry also has been worrying over the price realisations and the dampened demand in the upcoming monsoon season could keep it unattractive for a while. However, there is no reason a company like JK Lakshmi Cement should trade at half its book value and a P/E of 3.3x. The company is focusing on northern markets where demand is strong and provides the necessary growth momentum over the medium term. Its cement capacity will grow to 5.3 million tonne from current 4.7 MT during FY11.

One of the key assumptions that have gone in preparing this list is that the current debt crisis in the Europe can be contained and tackled reasonably within the next few weeks. No stock market investments will remain safe if the crisis blows out of proportions into what we saw in 2008.

(With inputs from Amrit Mathur, Ashish Agrawal, Karan Sehgal, Kiran Somvanshi, Ranjit Shinde and Supriya Verma)

http://economictimes.indiatimes.com/articleshow/5966128.cms

Stock Market Classification of Equity Shares

Stock market classification of Equity Shares

Blue chip shares: Shares of large, well-established, and financially strong companies with an impressive record of earnings and dividends.

Growth shares: Shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability.

Income shares: Shares of companies that have fairly stable operations, relatively limited growth opportunities, and high dividend payout ratios.

Cyclical shares: Shares of companies that have a pronounced cyclicality in their operations.

Defensive shares: Shares of companies that are relatively unaffected by the ups and downs in general business conditions.

Speculative shares: Shares that tend to fluctute wdely because there is a lot of speculative trading in them.

Note that the above classification is only indicative. It should not be regarded as rigid and straightjacketed. Often you can't pigeonhole a share exclusively in a single category. In fact, many shares may fall into two (or even more) categories.