What to Do in a Down (Bear) Market?

What to Do in a Down (Bear) Market?https://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-bear-market.html

Here is a summary of the provided post and a critical discussion on what to do in a bear market.

The post outlines three primary courses of action for investors during a declining (bear) market.

Key Points:

• Core Premise: Intelligent investors know how to act in both bull and bear markets.

• Suggested Strategies:

  1. Sell Immediately: The first option is to sell holdings quickly to minimize potential further losses.

  2. Take No Action: The second option is to do nothing and wait for the market to recover on its own.

  3. Buy More: The third option is to purchase more shares at lower prices, effectively "buying the dip."

• Important Caveat: The post advises that investors should only choose the third option (buying more) if the stock's decline is not due to a fundamental, company-specific problem.

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This post on navigating a bear market provides a basic starting point but, like the previous one on bull markets, requires significant expansion and critical analysis to be truly useful.

Expansion and Critical Discussion

The original post correctly identifies the emotional and financial stress of a bear market and presents three broad reactions. However, it oversimplifies the situation and, in one case, offers advice that could be detrimental.

1. On the Proposed Strategies:

• "Sell immediately in order to minimize your losses."

  • Expansion: This is known as capitulation or panic-selling. The logic is to preserve remaining capital before prices fall further.

  • Critical Discussion: This is often the most dangerous and counter-productive strategy for the average long-term investor. Selling after a decline turns a "paper loss" into a realized loss, locking in the decline and eliminating any chance of recovery. The greatest risk is mistaking a normal market cycle for a permanent failure. Historically, markets have always recovered from bear markets, and those who sold at the bottom missed the subsequent rebound. This strategy should not be a default option but a last resort for a specific, dire reason (e.g., the investor needs the cash immediately or the company is facing bankruptcy).

• "Let the market work its way through the problem with no action from your side."

  • Expansion: This is the "Buy and Hold" strategy applied to a downturn. It requires emotional fortitude to ride out the volatility, trusting in the long-term trend of the market.

  • Critical Discussion: This is a fundamentally sound strategy for well-diversified, long-term investors. However, it is psychologically challenging. The criticism is that it can be a passive excuse for inaction when a more active and beneficial strategy exists. Simply holding on while your portfolio drops 30-40% tests the resolve of even seasoned investors.

• "Benefit from the stock decline and add some more to your portfolio."

  • Expansion: This is the principle of "Buying the Dip" or Dollar-Cost Averaging (DCA). By investing at lower prices, you reduce your average share cost. The post's caveat about ensuring there's nothing fundamentally wrong with the company is crucial.

  • Critical Discussion: This is the most powerful strategy for wealth-building during a bear market, but it requires capital and courage. The post's caveat is correct but needs expansion. You must differentiate between:

    • Cyclical Downturn: A solid company's stock is down because the entire market or its sector is down (e.g., a recession). This is a potential buying opportunity.

    • Structural/Company-Specific Downturn: The company has a broken business model, crippling debt, or faces existential threats (e.g., new technology makes its product obsolete). This is a value trap, and buying more is throwing good money after bad.

2. Critical Analysis of the Core Argument and Omissions:

The post frames the bear market as a problem to be reacted to, but it misses the proactive mindset required for successful investing.

• What's Missing from the Discussion:

  1. The Importance of a Plan and Asset Allocation: An intelligent investor doesn't decide what to do during the panic. They have a plan before it happens. This includes having an appropriate asset allocation (mix of stocks and bonds). In a bear market, bonds typically hold their value better, providing stability and dry powder to rebalance.

  2. Rebalancing: This is a critical, disciplined strategy omitted from the post. If your target allocation is 60% stocks and 40% bonds, a bear market might shift it to 50%/50%. To rebalance, you would sell some of your bonds (which have held their value) and use the proceeds to buy more stocks at their new, lower prices. This forces you to "buy low and sell high" systematically and without emotion.

  3. Quality Over Everything: A bear market reveals the true quality of companies. It's a time to conduct deep fundamental analysis. Is the company's balance sheet strong? Does it have a durable competitive advantage? Is it generating cash flow? Focusing on quality is more important than ever.

  4. Tax-Loss Harvesting: A sophisticated strategy not mentioned is selling a security at a loss to realize that loss for tax purposes, then immediately buying a similar (but not identical) security to maintain market exposure. This turns a market negative into a tax positive.

  5. The Danger of "Catching a Falling Knife": The post doesn't warn that trying to "buy the dip" too early can be painful. Markets can fall much further and for longer than expected. A better approach than trying to time the bottom is dollar-cost averaging—investing fixed amounts at regular intervals to smooth out your purchase price.

Summary

The original post provides a basic, three-option framework for a bear market: sell (minimize losses), hold (do nothing), or buy (average down). It correctly identifies buying more as a potential opportunity, with the important caveat to ensure the company itself is not fundamentally broken.

However, the post has significant limitations:

• It presents selling immediately as a valid, neutral option without sufficiently highlighting its extreme risks for long-term investors.

• It promotes a reactive stance rather than a proactive strategy based on a pre-defined plan and asset allocation.

• It omits crucial concepts like portfolio rebalancing, tax-loss harvesting, and the disciplined use of dollar-cost averaging.

• It fails to emphasize that a bear market, while painful, is a normal part of the market cycle and a potential opportunity for long-term investors to acquire quality assets at a discount.

In conclusion, while the post identifies the basic choices, a more intelligent approach involves having a plan that includes a suitable asset allocation, the discipline to rebalance, and the courage to view a bear market not just as a threat to be endured, but as a sale on quality assets for those who are prepared. The goal is not to time the market, but to use time in the market to your advantage.

What to Do in a Up (Bull) Market?

 

What to Do in a Up (Bull) Market?

https://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-up-bull-market.html

Here is a summary, followed by a critical discussion of the above post:

The post outlines a cautious approach for investors during a bull market, framing the rising prices as a potential risk that requires action to "counteract the potentially negative effects."

Key Points:

• Core Dilemma: While a bull market increases stock prices and provides profit opportunities, it is always followed by a correction that can rapidly erase gains.

• Suggested Strategies:

  1. Sell a portion of shares with the plan to buy back after the price falls.

  2. Do nothing and let the market correct itself.

  3. Sell entirely to realize profits.

• Recommended Strategy: The post specifically advocates for selling a portion of stocks at high bull-market prices. After the inevitable correction occurs, the investor should use the proceeds to buy back more shares at a lower price.

• Claimed Benefits: This approach is said to help avoid losses, increase the total number of shares owned, and reduce the average cost per share.

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A critical discussion of the above post.

This post touches on core investment principles but also contains some common misconceptions. Let's expand, critically discuss, and then summarize the original post.

Expansion and Critical Discussion

The original post correctly identifies the opportunity and the central dilemma of a bull market: how to realize gains without missing out on further potential upside. The proposed strategies, however, need deeper context and a critical eye.

1. On the Proposed Strategies:

• "Sell a part of the shares to repurchase later at a lower price."

  • Expansion: This is known as "Taking Profits" or "Rebalancing." It's a disciplined way to lock in gains. The advanced version mentioned later—using the proceeds to buy more after a correction—is a form of "Buy Low, Sell High" in action.

  • Critical Discussion: The major flaw here is timing risk. A "bull market" is not a single peak; it's a sustained upward trend with many peaks and valleys. What if you sell 20% of your shares, but the market continues to rally for another two years? You have now missed out on significant gains on that portion of your capital. This strategy can lead to opportunity cost and is essentially a form of market timing, which is notoriously difficult even for professionals.

• "Leave the market work its way through with no action."

  • Expansion: This is the classic "Buy and Hold" strategy. The underlying philosophy is that over the long term, quality assets tend to appreciate, and trying to time the market is a fool's errand. For investors with a long-time horizon (10+ years), this is often the most successful and least stressful approach.

  • Critical Discussion: The criticism is psychological and financial. Watching a 40% gain evaporate to a 10% gain in a sharp correction can be devastating and may cause an investor to panic-sell at the bottom. For those nearing retirement, failing to take some profits in a sustained bull market can be a catastrophic error, as they may not have the time to recover from the subsequent bear market.

• "Take advantage of the high prices and sell the stocks for a profit."

  • Expansion: This implies a full exit, which is different from selling a portion. This is a valid strategy if you believe the asset is severely overvalued or your investment thesis has changed.

  • Critical Discussion: The same timing risk applies, but even more severely. A full exit means you are 100% in cash. If the bull run continues, you are completely on the sidelines. Furthermore, selling triggers capital gains taxes, which can significantly eat into your returns, especially on short-term holdings.

2. Critical Analysis of the Core Argument:

The post frames a bull market as a problem to be "counteracted." This is a defensive, almost fearful, perspective. While prudence is key, a bull market is primarily an opportunity for wealth creation.

• The "Average Cost" Fallacy: The post claims that buying back after a correction will "reduce your average cost per share." This is misleading.

  • Example: You buy 10 shares at $10 each. The stock rises to $20, and you sell 5 shares. You now have 5 shares and $100 cash. The stock then crashes to $5. You use the $100 to buy 20 more shares. You now hold 25 shares with a total investment of $100 (for the first 10) = $100. Your new average cost is $200 / 25 shares = $8 per share. Yes, your cost basis is lower, but you achieved this by realizing a gain and deploying more capital at a lower price. The benefit came from the successful trade, not just the mathematical averaging.

• What's Missing from the Discussion:

  1. The Role of Valuation: The best action in a bull market depends on valuation. Is the market (or your stock) fairly valued, overvalued, or still reasonably priced? Selling a broad-market index fund in a bull market that is not in a bubble has historically been a poor long-term decision.

  2. Asset Allocation and Rebalancing: The most professional strategy is to have a target asset allocation (e.g., 60% stocks, 40% bonds). In a strong bull market, your stock portion might grow to 70% of your portfolio. To counteract risk, you would rebalance by selling some stocks (taking profits) and buying bonds to return to your 60/40 split. This is a disciplined, non-emotional way to "counteract" the risk.

  3. Dollar-Cost Averaging (DCA) Out: Instead of selling a lump sum, an investor could initiate a plan to systematically sell a small percentage of their holdings each month. This mitigates the risk of selling everything at a single point.

  4. The Power of Quality: In a bull market, "the tide lifts all boats," but when it recedes, you see who was swimming naked. Focusing on high-quality companies with strong balance sheets and durable competitive advantages is the best defense against a sharp correction.

Summary

The original post provides a basic, cautious introduction to navigating a bull market. It correctly highlights the risk of a subsequent correction and suggests plausible actions like taking partial profits. Its core strategy of selling high to buy back lower is a classic profit-taking maneuver.

However, the post has significant limitations:

• It presents a defensive view of a bull market, framing it mainly as a threat rather than an opportunity.

• It heavily implies a market-timing approach, which is high-risk and often leads to missed gains (opportunity cost).

• Its explanation of "reducing average cost" is an oversimplification that ignores the mechanics of realized gains and additional capital deployment.

• It omits crucial concepts like long-term buy-and-hold strategies, portfolio rebalancing, valuation analysis, and the importance of investing in quality assets.

In conclusion, while the post's heart is in the right place—advising caution—a more robust approach to a bull market involves a disciplined strategy based on personal goals, risk tolerance, and time horizon, rather than a reactive fear of an inevitable correction. The most intelligent investors don't just know what to do in a bull or bear market; they have a plan that works through all market cycles.

Strategy during crisis investment: Revisiting the recent 2008 bear market

FRIDAY, FEBRUARY 26, 2010

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

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Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”

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Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.

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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

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Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 


http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html  

http://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

What to Do in a Down (Bear) Market?

The stock market often falls under the conditions of the so called bull and bear markets.  Intelligent investors are well familiar with the conditions of both and know exactly what to do. 

Under a down market you have several options.

- One of them is to sell immediately in order to minimize your losses.

- Another option is to let the market work its way through the problem with no action from your side.

- A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.


Final Piece of Advice

Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.

Pick the right stock at right time for returns

16 OCT, 2010, 03.54PM IST,

KAVITA SRIRAM,ET BUREAU 

Investment tips: Pick the right stock at right time for returns

Picking the right stock at the right time, and booking profits, is a challenge for many small investors. With hardly any time for research and a desire to reap quick profits, many investors often rely on friends and expert advice. The risks are considerable even if you chase a rising stock, without comprehending the driving forces.   How do you differentiate an overheated stock from one that has truly appreciated in its intrinsic value? 


Identifying an under-valued stock 


An under-valued stock is a great investment pick as it has high intrinsic value. Currently under-valued , it has immense potential to rise higher and make the investor richer. 


A low price-to-earnings (P/E) ratio can be an indicator of an under-valued stock. The P/E is calculated by dividing the share price by the company's earnings per share (EPS). EPS is calculated by dividing a company's net revenues by the outstanding shares. A higher P/E ratio means that investors are paying more for each unit of net income. So, the stock is more expensive and risky compared to one with a lower P/E ratio. 


Trading volume is an indicator 


Trading volumes can help pick stocks quoted at prices below their true value. In case the trading volume for a stock is low, it can be inferred that it has not caught the attention of many investors. It has a long way to ascend before it touches its true value. A higher trading volume indicates the market is already aware and interested in the stock and hence it is priced close to its true value. 


Debt-to-equity ratio 


A company with high debt-to-equity ratio can indicate forthcoming financial hardships. If the ratio is greater than one, it indicates that assets are mainly financed with debt. If the ratio is less than one, it is a scenario where equity provides majority of the financing. Watch out for stocks that have low debt-to-equity ratio. 


Some other pointers 


Historical data of stocks that have performed consistently and yielded good returns are reliable. A higher profit margin indicates a more profitable company that has better control over its costs compared to its contenders in the same sector. 


Weeding out over-heated stocks 


Avoiding over-priced stocks that could plunge anytime is as critical as picking the right stocks. Buying over-heated stocks and losing money in a bubble burst is not an uncommon phenomenon in the markets. Stocks that have moved up the ladder very quickly are potentially risky. The sudden spurt could be based on a rumour or event not backed by strong fundamentals. 


Good market conditions or bull runs do not last forever. Investors, who believe that good times are here to stay often burn their fingers. On a similar note, an over-valued stock has little scope or space for upward movement and could lose its momentum anytime. 


A little bit of research and analysis will help investors make prudent investment choices even in bear market conditions.

http://economictimes.indiatimes.com/features/financial-times/Investment-tips-Pick-the-right-stock-at-right-time-for-returns/articleshow/6759442.cms

Making money in a downturn

By Allison Tait, ninemsn Money
February, 2009

By now we’re all aware that the financial world has gone pear-shaped. Words such as recession, unemployment, and credit crunch being thrown about with monotonous regularity. It seems that money news these days is all bad.

But what if it’s not? What if it’s actually possible to profit from the world’s economic woes? A fairytale? Perhaps. But with a little nous (and a bit of luck) it could be that the global financial crisis could deliver you a happy ending.

First up, however, the disclaimer. Most of the people who do well in unsteady financial times know what they’re doing. “There’s no substitute for doing the hard work and research,” says Matthew Walker of Sydney’s WLM Financial Services. “You don’t get anything for free. Share trading, for instance, is not as easy as it looks – you can fudge a bit in good times because everything’s going up anyway, but it’s much more difficult to get it right when things aren’t so good.”

To market, to market

When all news of the Dow Jones is about its downward motion, and some of Australia’s staunchest shares have taken a dive (Westfield anyone?) it’s hard to see where the money is. US shares guru Warren Buffet is all about buying smart and buying low – he’s also about looking forward to falling share prices because it simply means you can buy more of a good thing. The trick is to pick the good thing.

“The price of a share is not where the bargain is,” says Walker. After all, you can pick up shares at any time worth 6 or 7 cents each. What you need to look at is how expensive a share is relative to its performance criteria. Walker explains: “You need to look at the Price-Earnings Multiple (or Ratio) – the higher that is, the more expensive a share is deemed to be because it takes longer to earn back its purchase price.”

O-kay. The P/E Ratio is defined as the valuation ratio of a company’s current share price compared to its per share earnings. It’s calculated by dividing the share’s market value by its earnings. So if a company is currently trading at $40 a share and earnings over the past 12 months were $2 a share, then the P/E Ratio for the stock would be 20. If you’re looking at a company, you can compare its P/E Ratio to other companies in the same industry to help you work out how much of a ‘bargain’ it is.

But it’s not the only indicator.

“Today, you have to look at how robust the company’s balance sheet is – debt levels, quality of management, do they have cash flow, sales of product (what’s the market doing),” says Walker. “Consumer discretionary stocks, for instance, are being hit today because nobody’s buying anything, but the big picture is that long term they’ll pick up again.”

Other areas he suggests might be worth a look are Gold (buy shares in companies that mine gold if you don’t want to stock up on the yellow stuff itself) and bond funds – particularly if you think interest rates will fall further. “If you really want to be competitive and you don’t have the time or resources or depth of understanding to do it yourself, go through a managed fund,” he recommends.

Bricks and mortar

Of course, when the sharemarket is uncertain, investors look for other areas for their money. While real estate hasn’t exactly been what you’d call booming of late, John McGrath, CEO of McGrath Estate Agents, is enthusiastic about buying now.

“I think the next 6-9 months are a great time to buy,” he says. “Prices in most parts of Australia are 10-20 per cent down on their peak, interest rates are down – and likely to fall another 1.5-2 per cent, the First Home Buyers grant has gone up, and rents have gone up considerably – we’ll probably see more growth, not as strong but still there this year.”

When he puts it like that, why wouldn’t you? “Astute investors buy when there’s some level of fear around,” says McGrath. “They take the opportunity to act when others aren’t. We’ve been in a down cycle for 18 months to 2 years, and they usually last around three years. So it’s perfect.”

Which is not to say you can buy just anything. McGrath has the following tips:

* “Focus on capital growth more than rental return. Rental yield is important in that it helps you to buy the asset, but the real money in property is made when you can pick at area that outpaces the market in terms of capital growth.”
* “Houses generally outperform units in terms of capital growth. So if you can afford to buy a house with a garden you’re likely to get a better return.”
* “Older style apartments or apartments that are not brand new often have better capital growth than brand new. There’s often a premium attached to buying new, in much the same way as a brand new car loses value the minute you leave the showroom.”
* “Location, location, location. Where you buy is more important than anything else. Buy a prime location and it will always be a prime location. You can improve a property down the track, but never the location.”
* “With the internet, there is no excuse not to research areas and values in those areas. Treat it like a second job. If you get your buying decision right, you’ll make more from your investment than your fulltime job.”
* Don’t buy outside an area with which you’re familiar – if I’m in Sydney I wouldn’t be buying in Brisbane, for example. Stick to an area you can research and know well

A big question of when

One thing that both McGrath and Walker reiterate is this: don’t try to pick the bottom of the market. Sitting around when things are bad and waiting for them to get worse is not the way to find a bargain.

“Don’t try,” says McGrath. “The bottom of the market will be somewhere between last September and this September. I’m not convinced we haven’t seen it already. But the bottom is something you only see in hindsight. I’ve been in the market 25 years and you can never pick the top and you can never pick the bottom.”

Matthew Walker adds: “I like the quote by Jane Bryan Quinn: ‘The market timer’s Hall of Fame is an empty room’.”


http://money.ninemsn.com.au/article.aspx?id=736768

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

Take a long shot in such choppy markets. Investors tend to forget that equities deliver only in the long term

Take a long shot in such choppy markets
24 May 2010, 0501 hrs
IST,Nikhil Walavalkar & Prashant Mahesh,ET Bureau

Increased volatility in markets has made life difficult for equity investors in India. The risk that some European governments may default has thrown a scare into equity markets globally. Though domestic economic fundamentals are sound, flight of some foreign funds has eroded value of companies on Indian exchanges.

A look at indices’ movement shows that S&P CNX Nifty has lost 5.43% since January 2010 whereas Nifty Mid-cap 50 index lost 2.21%. But this is rather deceptive. If one looks at the fall from the highest point, the indices (the Nifty level of 5374) in the current calendar year, the Nifty lost 7.94% in 30 sessions and Nifty Mid-cap lost 7.32% in 14 sessions, as on May 20, 2010. This has confused retail investors. Now, the million-dollar question that haunts all of them is — “What should I do with my equity investments?”

QUICK ACTIONS

Though often repeated, investors tend to forget that equities deliver only in the long term. So, if you are there with your short-term resources for some quick buck, just follow the classical advice and get out of equities. This applies to even the best of the conviction ideas you have. “Though there is some global uncertainty, there is no crisis. The current correction is a good buying opportunity, as markets have corrected 10-15%, and we are positive on mid-cap stocks as valuations there are at a discount to large caps,” says K Ramanathan, chief investment officer, ING Mutual Fund.

Leverage can be disastrous when equities obey the laws of gravity. In volatile times, futures, too, may emerge as the weapons of mass destruction, as envisaged by legendary investor Warren Buffett. Given the circumstances, it’s better to cut down naked derivative exposures and avoid taking any positions using borrowed money.

If you are not sure of the equity markets’ future in the near term, change all your lump-sum investments in mutual funds and other vehicles into systematic investment plans (SIP) to ensure that you don’t commit the mistake of trying to time the market. If you need some time to think before you act, you can consider buying insurance by way of purchasing index ‘put’ options. Of course, there is a cost attached to it.

THINK BEFORE YOU JUMP

Equity investing is an art as well as science. Especially in cases, where you decide it on your own, it becomes a tight-rope walk. “One should stick to strong conviction ideas with strong fundamentals. Fundamentally, strong companies are last to fall and first to bounce back when the environment changes,” asserts Vinod Ohri, president-equity, Gupta Equities. It makes sense to revisit the portfolio with a single question in mind — If I am given money, will I buy the share I am holding now? If the answer to this question comes positive, your investment deserves a place in your portfolio. If you are not sure if you will buy it at the current price, probably, it’s the time to bid adieu to that stock.

“Retail investors need to at least check business performance of companies in which they have invested, by going to the exchange website,” says Sunil Shah, director-equities, Indsec Securities & Finance. This is even more important in case of small-, and mid-cap companies, where there is no or limited research coverage. “As a broad rule, one can decide to stay with mid-cap stocks, enjoying single-digit price earning multiples and book profits, where the mid-cap stocks quote at price multiple of more than 20,” adds Mr Shah.

If you are not sure as to how the global crisis will unfold, you can choose to convert some of your equities into short-term fixed income instruments to earn decent ‘return on capital’ without compromising on ‘return of capital’.

Strategies

As of now, the domestic economy is in shape. Some experts prefer to restrict their equity exposure to ideas that revolve around domestic themes such as consumption and infrastructure. One can cut his exposure on export-oriented companies.

There is another advice to stick to companies with least leverage. This may come handy if the credit crisis spread beyond European countries. Look at only those companies with no or nominal debt on books. To play safe, one can avoid companies that are still in the capital expenditure mode and are expected to guzzle a good amount of cash.

Looking for price supports is a very much a normal act of savvy equity investors. Some call it special situations-investing. Investing in fundamentally strong companies where due to open offer or some other corporate action there exists a safety net is a good bet in weak markets. Delisting offers also can be considered here.

Ultra-conservative investors looking at equity can resort to a capital protection strategy. If you have, say Rs 5 lakh, to invest with a three-year time-frame, invest Rs 4 lakh in fixed deposits, earning an 8% return and invest the rest in diversified equity funds with a good track record using systematic investment plans. Here, your investments in fixed deposits will ensure that you get Rs 5 lakh back at the end of three years. At the same time, your equity investments will earn superior returns for you.

Ultimately, investors will be better off sticking to their asset allocation. Of course, one can take tactical calls of moving from one type of equities (such as mid-caps) to another type (large-cap). One should never forget that all bear markets start with correction. Greed leads to investors throwing good money after bad ideas. It is time to have some conviction in the Indian growth story and buy quality businesses at attractive prices slowly and steadily.

http://economictimes.indiatimes.com/articleshow/5966749.cms

Buffett's Value Investing Style

Warren Buffett is the world famous stock market guru. Recently, he bought stakes of General Electric Co (GE) and Goldman Sachs Group. General Electric Co (GE) is a technology and services giant company which is listed in Dow Jones board; whereas, Goldman Sachs Group (GS) is a financial heavyweight company, which is listed in New York Security Exchange (NYSE). Through his famous investment company; Bershire Hathaway, Buffett invested US$8bil in these two companies. His action startled many people in stock market. When everybody was taking their money out from the Wall Street, he invested such a huge amount of money. There is no surprise actually because he at one time said that the best time to enter the market was when everybody was not interested in stocks. He also stated that it was difficult to buy a popular stocks and made profit from it. Besides, he also said that when everybody was in fear was the best time to enter the market but not when everybody was greedy. According to financial specialists, Buffett investment is a long term investment.

Currently, stock prices are considered as irrational due to the heavy sell down. So, now it is the best time to invest. When investing in a company, we should invest to the company management and market strategy. In this type of investment, good stocks should be held as long as possible by the investors.

When investing in stock market, Warren Buffett is very careful. He sets very strict requirements to select stocks. So, stocks that fulfill his requirements are seldom being found.

• Earnings versus growth, 
• high return on equity, 
• minimal debts, 
• strength of management and 
• simple business model 

are five main criteria, which are used by Buffett to select stocks to invest.

He usually concentrates in a few solid stocks, which able to give high return of investment. These few stocks usually are in the industries that he understands the most. He is also very careful to the local bourse, which is an emerging market that could be very volatile. Besides, he is also watchful to the market sentiment, which could be easily affected by many other external factors.

Good stocks are worth to hold for as long as possible. This is because good stocks such as blue chip stocks are able to ride through bad times and recover over time. Buffett is the most successful and trusted investors. His investments in GE and Goldman Sachs will restore the confidence of some of the investor on the Wall Street. When Buffett invests in stocks, underlying fundamentals of a company are the must will be investigated by him rather than market sentiment. Because of his astute investment skill, he is dubbed as “The Oracle of Omaha”. Intrinsic value of a business is always will be determined by him and he is willing to pay a good price for it as long as the business has the intrinsic value. Buffett is very prudent and holds a principle that if he can not understand the operation of the business; he will not invest in it. That’s why, he escaped the dotcom market crash. He will check the fundamentals of the companies that he intends to invest by analyzing the companies’ annual reports. This is his simple investment principle.

He is the chairman of Berkshire Hathaway and this company’s stock is the most expensive on Wall Street. In a letter last year to his shareholders, he stated that Bershire was looking to invest to the companies, which had competitive advantage in a stable industry for long-term prospects. His philosophy is that the stock price will increase as long as the business does well. Investment in PetroChina, which is an oil and gas firm in China, was one of his most successful investments. He bought the stake for this company for an initial sum of US$500 mil and then sold it for US$3.5 bil. Investments in companies such as Coca-Cola, American Express and Gillette are also among his successful investments.

http://fourstarinvestor.com/buffetts-value-investing-style/336/