Sensex Long Term Outlook

I would like to introduce to Investment School Readers, a very good technical analyst -Mrs. Lokeshwari .For those who read Hindu Business Line, this name should be very familiar. She the technical analyst and writes technical analysis columns every sunday and she is associated with Business Line for past several years. Those who are curious to know the various resistance and supports of benchmark indices can definitely spare some time and read through her sunday columns in Business Line.

In her recent column , she had given the long term outlook of Sensex and i would like to quote her technical calculations to our readers,

In our review in July, we had stated that, “The decline below 13700 brings the next long-term supports for the Sensex at 11,900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus. We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25,000 again. Caveat - decline below 9,703 would need recasting of the counts.

The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.

The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.”

In her column, she has indicated the next major support levels at 9700,8800 and ofcourse 6800. So as per technical counts , Sensex can go to 6800 given the current situations.

Note: The counts are revisited if some major changes happens in the global financial arena.

What is Fundamental Analysis?

When it comes investing in stocks, there are two schools of thoughts - Fundamental Analysis and Technical Analysis. Fundamental analysis focusses on company economic factors to make an investment decision whereas technical analysis focus on stock price movements to determine the investment. Let us get started with fundamental analysis and what are the various factors affecting fundamental analysis.

     Fundamental analysis of a stock should answer the following questions related to the stock.

1. How is the company growing in terms of revenues and earnings over the past?

2. Has the company been able to maintain healthy profit consistently over the past?

3. How good is the company placed with respect to its competitors?

4. How good is the management of the company?

5. How transparent are the company's operations and decisions?

      These are only few , more questions on the similar note needs to be answered to fulfill a fundamental analysis of the company.

Factors affecting Fundamental Analysis:

             Quantitative factors - The factors which can be measured in numeric terms like net profit growth,revenue growth, equity:debt ratio, EPS, P/E Ratio etc.

              Qualitative factors - Quality of management of the company, brand value of the company etc.

          Both these factors are equally important and should be considered in conjunction while choosing a stock. For eg, Coke has a good track record of financials and also a great brand value which also contributes to its sales. Some of Warren Buffet's(Richest person on earth) investment are shining examples of fundamental analysis. He invested in coke for a simple reason that people will not ditch coke no matter how many times they drink it, coz it has a brand value associated with it. 

          Fundamental analysis will help in identifying the "intrinsic value" of the company.  For eg a company trading at Rs 100 may have a intrinsic value of 200 rs which can be identified by fundamental analysis. In the long run stock markets will reflect the fundamentals of the company.

 

           Lets look into the factors affecting fundamental analysis in deep in the coming posts.

    

What is P/E Ratio?

"Company XYZ is available at a cheaper PE and is a good buy". You would have come across this phrase many a times in NDTV Profit or CNBC-TV18 or in the business newspapers. Most of us make an investment on recommendations from either friends/newspaper/TV channels and overlook technical parameters. Let us understand about these parameter and let me tell you it is not rocket science to learn these.

What is P/E Ratio?

P/E Ratio = Price of one share of a company/Earnings Per Share of the company.

Usually, EPS of the last four quarters is taken into consideration and the resultant P/E is called trailing P/E.If the expected EPS for the next few quarters is taken into account, we arrive at Forward P/E.

How to use P/E Ratio?

P/E Ratio can help investor take their decision to buy a stock. P/E indicates how much Rs is needed to generate a earning of Rs 1.

Eg. If P/E of company XYZ is 20, then it indicates, an investor is willing to pay Rs 20 to generate Rs 1 as earnings for the company.

P/E value varies across sectors. Banks have a lower P/E whereas the tail sector may have a higher P/E. Investors are willing to pay more for a retail company to generate earnings than they want to pay for Banks.

How to use P/E ratio along with other parameters?

As stated in one of the previous article, any technical parameter should not be considered alone to take a buy/sell decision. They should be analysed in conjunction with other parameters.

P/E ratio should be analyzed along with the growth rate of the company. If a company has a higher P/E ratio and but the future growth of the company is not very encouraging, then one should rethink on his decision to buy the stock. P/E of a company should be compared only with its peers. For eg, Infosys P/E should not be compared with SBI's P/E.

To reiterate, P/E should not be the only guiding factor to make your buy/sell decision. One should consider all factors affecting a stock's price before taking a call.

What is short covering?

In the previous article, we have seen about short selling and what are the risks involved. As promised in the last article, let us see how to mitigate the risk associated with short selling. We shall look at this with an example.

Trader Ram, borrows 50 stock of company XYZ at Rs 100 and promises to give back the stocks to the lender in a months time. Ram anticipates that the stock price of the company would go down to 80 rs and he is planning to buy back the share at 80 rs. Unfortunately , due to external and market conditions, the stock price of the company XYZ rallies to Rs 120 and there is only 3 more days for the month end and Ram has to buy back the shares and deliver it to the lender.

So Ram is in a loss of 20 rs/share and he has only 3 days to go and the market sentiment is very bullish and the stock price of company XYZ can appreciate further. Hence Ram decides to trim his loss at 20 rs/share and buys the share at 120 rs. Share market is not a place with only Ram as a short seller. There are numerous short sellers in the market and say 500 people had short sold the stock of company XYZ. All of them would be trimming their losses and all of them would be buying at higher stock price of 120 rs.

When 500 people places buy order for company XYZ at 120 rs, the company's stock price will eventually go further up and this increases the stock price of the company. This entire process is called "Short Covering". Short covering will lead to a rally in the overall market and these are called short covering rallies. When most of the traders had predicted that the market will touch lower levels, due to some global cues or other factors if the market rises, we tend to see the short covering rally.

The practises of short selling and short covering only suits traders and investors should try to stay away from risky practises.

What is short selling?

Most of us are taken back with the stock market crash of late eroding our investment value, but you would be surprised to know that you can make profits even in a crashing market. Want to know how is that possible at all? To know how to make money in a bear market, we need to understand the concept of short selling.

What is short selling?

Short selling is selling of a stock which is not owned by a seller. When a trader feels that the stock price of a particular company will fall in the near future, he indulges in short selling. Let us see how it works with a simple example.

Eg. Suppose say, trader Ram feels that stock price of company XYZ currently trading at 1000 rs will go down significantly in the near future due to market correction or any other reason. Ram borrows certain number of stocks,say 20, of company XYZ from his broker for 1000 rs/share.The commitment is that he will have to return back 20 shares to the broker on a specified date in the future say in one month's time.

After purchasing the stock at 1000 rs, Ram immediately sells the stock at 1000 rs and gets 20,000. As expected the stock price of the company XYZ falls by say 100 rs and is at 900 rs at the end of one month. So Ram buys back 20 shares of XYZ at 900/share thereby spending 18,000 and gives back the shares to the broker.

Hence Ram has gained 2,000 from short selling of company XYZ.

Risk Involved

Making money is not that easy. So once you buy the stocks assuming that it's price will go down, what if the price begins to rise due to the overall market sentiment and in these days, where the market volatility is very high the markets can go up and down in a days time and hence there is significant risk involved in short selling.

So should we not indulge in short selling at all? If involved how to trim our losses? The answer is short covering. Let us digg on that in the upcoming posts.

What is Dividend Yield?

Continuing on the series of explanation of technical parameters of stock analysis, let us now get to know about one another important ratio known as "Dividend Yield".

Dividend yield of a company indicates the annual dividend paid by the company relative to its share price.

Dividend Yield % = (Annual Dividend Per Share / Price per share)*100

If a company A pays dividen of rs 10 and its stock price is 100 rs, then dividen yield is (10/100)*100 = 10%

Dividend yield indicates how much cash flow is generated for each rupee invested in the company by the investor.Dividend yield mutual funds are category which invests in stocks which has higher dividend yields.In general FMCG stocks have a higher dividend yield.

Who can invest in dividend yield stocks?

It is suitable for investors who wanted minimum cash payouts on a regular basis from their investment.

what is return on equity?

Let us dig through yet another important technical criteria associate with a stock - Return on Equity(ROE). It is simple to calculate and helps in measuring the profitability and asset management of the company.

Return on Income = Net Income/Shareholder's equity

Net Income can be obtained from Profit and Loss statement and Shareholder's equity can be obtained from the balance sheet.

ROE indicates if a company is creating assets or eating up lot of cash in due course of doing its business.

If ROE is 15%, it means 15 rs of asset is created for every 100 rs invested in the stock.ROE also indicates if the additional cash investment made by the company is produced by the return on existing investment or out of fresh cash investment.

ROE can also be interpreted as

ROE = (one year's earnings / one year's sales) x (one year's sales / assets) x (assets / shareholder equity)

Lets see how ROE can give information on profit margin,asset management in the next articles.

Learn More : What is Earnings per share?

How to analyze company's annual report?

Many of us are proud owners of shares of bluechip companies and we receive company's annual reports every year. Most of us do not give due importance to the annual reports. Many useful information can be obtained from the annual reports and those can help you decide on your future investment in the particular company.

Let us glance through some important information that needs to be looked at a company's annual report mailed to you.

1. Look out for the current state of the company and what are the changes which have evolved in the company over the past one year.Track the progress over the past few years.

2.Get information on new acquisitions or any major developments in the company.

3. Get to know about various offerings/products from the company.Learn what is unique about them and how are they different from the competitors.

4. Know what is the company's plan for the upcoming financial year.

5. Learn more about short term and long term goals from the annual report.

6. Go through the profit and loss account statement.

7. Analyse the sales growth and earnings growth over past 3-5 years which will be given in the annual report.

8. Go through the various assets,liabilities of the company from the balance sheet of the company.

In addition to these, many other useful information can be inferred from a company's annual report.Remember , every share holder has the right to know all details about his/her own company.

So , go and get the annual reports of your companies from your dusty shelves at home and go through them and get knowledgeable about your company.

Learn More : How to invest?

What are the risks involved in stock investing?

Everyone wanted to make quick money out of stock markets and very badly wanted good stock picks that would generate triple digit returns but WAIT,

1. Are you aware of risks involved in stock market investing?
2. Have you calculated the amount of risk that you can take?
3. Are u choosing the stocks that matches your scale of risk?

One should find answers to the above questions, before placing a buy order with his/her broker.Let us go through the various risks associated with stock market investing.

Financial Risk

The investor can lose his/her money when the financials of the company in which he has invested is not performing well. If an investor invests in a company and if the company's profit keep declining yoy, then investor is holding the risk of losing her money because the company's share price will keep moving downwards.

So before choosing a company to invest, do a thorough analysis of the financials of the company.

Interest Rate Risk

Lets assume an investors goes for fixed depost at the rate of 8%. When the interest rate scenario changes, the interest rate in the market can move to say 10%, then you stand to lose the extra 2% gained in new fresh deposits.

Interest rate also affects equity investment,how? . Companies borrow funds from banks, financial institutions for capital expansion. When the lending rate increases, companies bottom line(profit) is hit and hence it affects the share price of the company.

Market Risk

The investment can be influenced by market volatitlity in the short to medium term.The markets sentiment is driven by lots of factors - like global cues,economic data etc. When the entire market is moving down, your stock will also most likely move down and affect your return on investment.

Inflation Risk

In terms of investment, one should always look for inflation adjusted return for true evaluation. If your investment fetches you 10% per annum and the inflation is 12% per annum, then you are losing your money and your investment is giving negative returns.So inflation has a bigger impact in investments.

Poitical Risk

The market mood is influenced by the political climate in the country. When a govt changes,the market will be in a jittery mood to know if the new govt will be industry friendly or not.The major economic policy of a country is framed by the ruling government and hence it has a bigger say in market and hence your investments.

Emotional Risk

Investors usually get into the trap of three emotions while investing. Greed,Fear,Love.They have a greed to make most of the money in a short period of time. They fear to enter markets when market is in a deep bear run. They keep investing in a stock though it is moving down just because they have a mad love for that stock.

In investment, emotions should not rule over intelligence.

So, take into account all these risks before investing in stock markets.

Learn More : How to select a stock?

What are the different types of stocks?

Many of us wanted to choose the right stock at the right time and make a good profitable investment,but this is easier said than done. Before picking up the right stock, you need to figure out what kind of stocks that you would like to invest.There are a wide variety of stocks.Let us go through them.

1. Growth Stocks - These are the companies whose earnings growth is much higher than the other peer companies in the stock market. The tag of "growth stocks" rotates among various sectoral stocks as time evolves and it is not a fixed one. In the last 3 years, capital goods,infrastructure,realty stocks were considered as growth stocks.

2. Income Stocks - These are stocks which have a good rate of dividend paid out to the shareholders consistently over time. Mostly these will be companies from a sector wherein after establishment of the business, there will be constant flow of income. For eg, power generation sector. While it takes more capital and time to build the power plant, but once its commissioned, there is a constant stream of revenue and hence these companies keep giving constant dividend to the share holders.

3. Value Stocks - These are stocks whose market value is much lower than the real value of the stock.These have a very low PE value and the marketmen have not yet identified the true potential of the stocks.

4. Defensive Stocks - These are stocks which are not affected by economical cycles of growth and slowdown. For eg, Pharma sector. People will not stop buying medicines if the economy is slowing down or growing fast. These companies will have moderate growth of income over a longer time of time and have stability in revenues.

5. Cyclical Stocks - These stocks are influenced by the current state of the economy. If the economy is growing , these stocks get benefited with the higher growth rate and if it slowsdown,these stocks also have the effect in them. Eg. Banking,Real Estate.

6.Momentum Stocks - These stocks are those which drive the market and influence the trend or mood of the market to a greater extent. Eg. Infosys,RIL.

So before you put your penny into stock market,figure out on which category of stocks are u gonna invest.

Learn More about Investment

What is Earnings per share?

We often come across the term EPS(Earnings per share) in the television channels when the companies report their quarterly/annual reports. Lets see whats exactly is EPS

Earnings per share = (Net Income - Dividend paid) / Outstanding shares

Where Outstanding shares = Total number of shares held by the investors. This is referred to as Capital stock in the company balance sheet.

EPS can be used as a comparison tool for evaluating companies. However we should compare EPS of companies in the same domain and not across various sectors.The decision to buy a company's share should not be totally dependent on one technical parameter. It should be based on collection of all technical parameters.

Instead of comparison of two companies by comparing their net income , comparing their EPS would give a more better comparison in terms of efficiency of the company to generate profit for each share that the investor holds.Two companies may have same net income,but one might have a higher EPS, because it has used less number of shares to generate that income.Given that net profit of two companies are same, the one with a higher EPS is better for investment.

There are three types of EPS reported.

Trailing EPS = Net profit for the last financial year/outstanding shares.

Current EPS = Estimated profit for the current financial year/outstanding shares.

Future EPS = Estimated profit for the upcoming financial year/outstanding shares.

When the company splits the stock bases, say from a face value of Rs 10 to face value to Rs 1,the EPS of the company would also get adjusted.

EPS is used in measuring PE ratio,which is again much discussed technical parameter.We shall see this in detail in the next blog entry.

Learn More....

Investment Rules

Investment is a simple concept which is often complicate too much by investors. Always "keep it simple" and be "disciplined" in investments. There are certain rules that needs to be followed while investing for a longer term.

1.Identify your short,medium and long term goals.

2. For Short and medium term goals(2-5), park your money in fixed income instruments and avoid going the equity route.

3. For long term goals (>5 years), go for equity investing.

4. Keep it simple in equity investing. Go for good diversified mutual funds with good track record.

5.Ignore hot sectors or stocks which are being most talked about in televisions and newspapers.

6.Invest Regularly. Start a SIP(Systematic Investment Plan) in mutual funds to bring in discipline in your investments.

7.Execute "Buy and Hold" policy. Do not churn your investments often.

8. Last but not least, "Start Early".

Happy Investing!

Tags: Investment

How to pick a stock?

While choosing a stock, following criteria's need to be analysed for choosing the correct pick

ROCE(Return on Capital Employed)

ROCE = profit after tax + interest earned on investment in long term funds by the company

Higher the ROCE , better is the company.

ROE(Return on Equity)

ROE = Profit After Tax/Shareholder funds.

Higher the ROE, better.

Last 10 years sales growth

Compare the growth percentage with the industry average to figure out if the company is a underperformer or outperformer

Free Cash Flow:

Free Cash Flow = Operational profit - capital expenditure.

Higher the free cash flow, better is the company.

Debt/Equity Ratio

Debt/Equity Ratio = Debt used for business/equity capital used for business

Ratio of > 2 is risky.

Working Capital

Working capital = Cash needed to run daily business.

Higher (Sales/Working capital) is a good sign.

Profit Margins

Net profit Margin = Net Profit/Sales.

Higher margin, better prospect.

Tags: stocks