Some Strange Statistics and Deja vu

I was going through the morning report published by Kredent Advisors and some very strange numbers I have come across which I would want to highlight. These numbers conflict each other to great extent and does not highlight to true recovery or may be highlights that the recovery is hollow.

• Over the year the crude oil prices have risen by 2.93%, however YTD the gas prices have fallen by over 40%. The crude oil and the gas are more of less substitutes and this weird movement in their prices I believe could be because of the reason that crude gets more media attention and hence in order to show to the world that recovery is genuine the crude have being kept at a higher level compared to gas

• The Baltic dry index have fallen by over 17% (YTD) whereas the price of copper have risen by over 14% and that of other base metals like zinc or nickel or aluminium have also risen by a decent amount. Now Baltic dry index measures the freight charges that the shipping companies around the world charge to ship dry substance around the globe, the higher the real demand for metals is, the higher are the freight charges and hence the higher Baltic dry index. The reverse movement in to two I believe that could be because of a lower real demand for the metals, however the speculative demand in the futures market resulted in their price rise

• Gold and Silver YTD is up by 24% and 44% respectively, whereas the US equities is up by around 6% and the USD is only down by around 4% for the same period. This trio-logy also denies the correlation between the three assets. If the world is so bullish about the equities, with emerging markets like India being up by over 16% ytd, then why are they buying gold. They may say that they are loosing the confidence in the paper money, but then they should sell the USD which is also not down significantly. What has happened that in the first half of the year the gold rose because of EU crisis and people buying gold as a safe heaven and in the second half it rose because of a weakening dollar. Whatever reason they may say to speculate on gold, I believe that GOLD and Equity and Currency can not and will not move in the same direction for longer

With Indian rupee also gaining strength hurting the export oriented sectors, lack luster Q2 earnings perform and no upward revision in Sexsex's FY12 earning by broking houses and on top of that BIG TICKET IPOs and people borrowing DPIDs and buying Coal India IPO application, all highlights the same kind of scenario as in 2008 beginning. So my advice is please be cautious.

It all appears like a Deja vu...!!!

Why Compact Disc will Not be a Multi bagger...?

Couple of days back I came across a brilliant company. Its one of th biggest animations players in South Asia (claims to be).

Here are some of the key factors which at the face gave me an impression that I have come across yet another multibagger:

• A compounding growth rate in profit of over 75% in the last 3 years and that of over 60% in sales
• Part of a very fast growing animation content outsourcing segment in India
• ROE of whopping 52% and ROCE of around 43%
• Almost debt free (D/E of 0.22)
• Operating margins have been continuously expanding
• Couple of movies lined up to be releases in the next one year one "Eternal Love" based on the story of Taj Mahal and other a foot ball based movie based on Pele, this would further expand the margins and gives revenue visibility
• Part of 200 companies list that the FORBES magazine recently came up with, best under a billion dollar companies in Asia and growing further

Over and above all this, available at a throw away valuations. A trailing P/E of only around 1.3 and a Dividend yield of around 3.1%.

This, kind of story is a dream for any fundamental value stock picker, even the likes of Peter Lynch and Buffets of the world would want to look into this kind of company at this cheap a valuations.

However, as an analyst what I have learned over the years from my experience and reading these veterans that whenever something like this sounds too good to be true, there has to some catch (on 8 out of 10 occasions and on remaining 2 you actually find a MULTI BAGGER). So, the catch with this company is its management.

The actions of management is highly susceptible and that is why market is not rewarding the stock.

• Over the years despite the company showing such a record growth, the management shareholding has fallen from around 40-45% to around 20%
• The shareholding pattern of the company (for June 2010) shows 75% of the shares as being held by the public. My guess is that a large chunk of these are ‘benami’ holdings of insiders who offload shares once the price takes off
• That is why the company every now and then comes up with big ticket rumors like acquiring some company in UK, new movie tie ups and later no such action actually takes place
• The biggest problem is that the company is promoted by the infamous Seengal group and its one of the Directors Rashmee Seengal also belongs to the same group.
• The Seengal group in the past has faced SEBI and also CBI probes for floating several bogus companies and raising money via IPO and announced various projects which never happened to see the light of day. These included an LPG-related business, a hotel company and at least three more ventures.

Thus,the market which now is smart enough to see and realize these things are not giving any premium to the company which at the face of it looks exceedingly brilliant and even though valuations are cheap and business is great. It wold be difficult for the stock to generate any returns.

Happy Investing...!!!