BUY What has NOT Fallen

After hitting its year highs in November, the markets have corrected by almost 8% with the Mid-Cap index falling over by 10% and above.

The key reasons behind this fall could be:

• Concerns regarding sovereign default in Europe
• Rising inflation and a tightening monetary condition in China
• Corruption charges on government agencies which brings down the attractiveness of India as an investment destination, and
• Sell of in the mid-cap space because of SEBI's allegation on many companies for insider trading

A lot of people whom I know including even market participants asked me to suggest them few stocks that were beaten down in the down turn. Then someone also suggested me as to why should you bother about the stocks which have fallen and BUY them just because they are cheap and why not focus on very few stock in the mid-cap space which despite this turmoil have not corrected.

The Idea I am trying to say is that "There is no Smoke Without Fire" there has to be some reason because of which most of the mid-caps had fallen and so why not focus on the good quality ones which stood firm in the sell off or on the ones in which you see absolutely no reason for a sell off, but have still fallen in the markets. Picking the latter one requires more analytical and reasoning skills compared to the former.

So to hunt for some good stocks I took NSE Mid-Cap index as my sample base and out of 100 stocks there are only 10 stocks which have not fallen from there highs of early November and of them some of the really good ones which I believe have a good business, good track record of operational performance and strong management areand should be given a thought are Indraprastha Gas, Glenmark Pharma, Exide Industries, Educomp Solutions and Areva T&D.

Its just like when you go to see a horse race you never bet on the loosing horse but on the winning one and so I believe the same logic should be applied in the Equity Space and the looser should not be chased as they will be the first ones to be hammered in the next leg of mid-cap selling.

Crest Animation... A BUY in the SELL OFF

I Believe that in the current sell off one of the stocks that investors should consider buying with a long term perspective is Crest Animation Studios at the current market price of around Rs. 69. The key rationale I believe are:

• One of the only animation company in India who instead of only being an outsourced animation content provider, also is a partner in the movies it provides animation for

• JV with Lions Gate Entertainment of US, one of the biggest production houses for providing animation to their movies and having a profit share in the same

• 1^st movie Alpha and Omega released in September 2010 and have already done a business of over $40 million and is poised for a world wide release in 2D and 3D space, moreover the movie is in Oscar eligibility list, the 1^st animation movie from India in this category

• On an average an animation movie produced by major production houses of US makes around $ 100 mn in profit

• I believe Crest’s Alpha and Omega to do 50% below average, which gives a profit of around $50 million

• Here Crest’s Share being 25% of profit, gives it a value of around $12.5 million

• Which is around INR 56 cr of profit, given total number of shares, comes to EPS of around Rs. 25/share, which it would book over FY11 and FY12 (normal practice in movie industry)

• Thus given the current market price of around Rs. 68 gives it a forward P/E of around 5.7 in a high growth animation industry where peers like Prime Focus, Tata Elexsi and DQ Entertainment trade at a P/E of over 20 times their forward earnings

• Even taking the worst case scenario of a forward P/E of around 10 (50% below the industry average) the fair price comes to around Rs 150, which is double from the current levels

• This EPS expansion or growth will continue because it is slated to release one more movie in tie-up with Lions Gate in 2012 titled “Norms of North” then in 2013 titled “Ribit” and from then on a movie each year

• De Shaw holds over 15% of the company and Deutsche Bank holds around 7%

The only risk with the company I see at the current point in time is that its still loss making and the first set of earnings will start coming from the quarter ending March 2011.

Happy Investing...!!!

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...!!!

Ayodhya Verdict and Markets

On Thursday, the Allahbad High court will deliver its judgement in the 60-year old Ramajanambhoomi- Babri Masjid case and I believe even though the verdict will be out after the market hours, there could be an opportunity for traders to capitalize on the outcome.

The verdict, which no one is aware of could be:

• In the favor of the the Hindu community or the Muslim community
• Or the court might also deliver a kind of a neutral verdict and ask the parties involved to have an out of the court settlement (A dream outcome for most of peace loving people)

I believe that the way markets should react on Friday morning depends precisely on this verdict. If the verdict is in favor of any of the community, then the other will reach or is expected to react violently and thus bringing politically instability to the system and could lead to an sell off in the markets.

However, if its an neutral verdict asking for out of the court settlement (very low probability) then the markets which are expecting a sell off would react positively and should gain higher momentum.

In, either of the scenarios, what is common and is expected on Friday is UNCERTAINTY or high VOLATILITY. Thus, in order to capitalize on this active traders could use options to buy volatility.

The implied volatilities are also quite low and the strategy to buy a straddle (buying an at the money Nifty call and put options, around 6000 levels) or a strangle (buying an 6200 call and a 5800 put) could lead to a decent returns, if markets as expected remains volatility.

Thus, ones who have traded in the options in the past and are aware of the inherent risk in trading in derivatives should go ahead and execute the strategy, however freshers or novice in trading should avoid derivatives.

Happy Trading...!!! (For the first time :D )

YEN Movement Tells a LOT

One of the major indicators that could help investors/traders understand the direction of the global equity markets is the movement Dollar-Yen Movement.

A currency in general appreciates if the interest rates offered by the government is high compared to the interest rate offered by the government of the counter currency. Moreover, the currencies of the developed nations also appreciate against their developing counterparts because they are more liquid and accepted globally vis-a-vis the developing market currencies which are not highly liquid.

However, the one peculiar character YEN has that it is also regarded as a safe heaven currency. In the time of economic crisis investors want to hold yen as a flight for quality investments. Over the last few months the way YEN has appreciated despite the fact that the currency offers least amount of returns to the investors. The fundamental reason behind this is that the Japanese economy is gripped with negative inflation is also a net creditor to the world, thus its currency is much more stronger and hence at the time of crisis it offers good reasons for capital preservation.

The only thing this suggests the fact that the investors from all over the world (except India) are in a continuous process of booking their profits form all the risky asset classes that has given a tremendous run up over the last 1.5 years and probably parking their investments in YEN.

Moreover, the current one week rally especially in the Indian markets has also gone parallel with a over 2% depreciation in YEN. Thus, I strongly believe that one should keep a strong vigil on the USD-JPY movement and should start booking profits if yen strengthens form here, the level of 85 should act as a good level to act on.

ECB in 2008 = RBI in 2010 ?

I am sure that the subject of my article would be very confusing for some of you or may be strange for a lot of you. What I am trying to convey with this one is again some graduation level economics which I studied during my Macroeconomics paper in 2005, which I believe the world central bank's heads are forgetting or trying to overlook over more complex understandings.

The core objective of any Central Bank is to do a through analysis of the forthcoming economic situation of an economy (growth and inflation) and accordingly adjust the liquidity flow into the system. It also involves taking into account any major local or global events that could shape up the economic situation in the country and hence being prepared for the same.

Thus, in nut shell I would say that the core objective of any monetary policy is to manage liquidity into the system so that the economy grows (with minimal inflation), but this decision should be based on ex-ante analysis and not ex-post analysis.

This precise mistake I believe ECB committed in July 2008. In July 2008, when the global credit crisis was almost about to reach its peak, the global growth outlook was bleak and most of the central bank's around the world were either growing through rate cuts or on the verge of doing so, ECB announced a rate hike of 25 bps, which as per experts is one of the many important reasons of the current EU turmoils. The move as said by Mr. Trichet was" mainly on account of "heightened concerns at the ECB about inflation in Europe".

The inflation which was just a temporary phenomenon in EU because of the high commodity prices, made ECB think beyond the US Sub-prime and Global credit crisis and took a rate hike decision, saying that "the crisis was one belonging to US and will not have impact on EU". Thus in October when the US crisis started spreading wide the EU was down of out because of the decision in July.

The same is what RBI has done on Friday, going by its ex-post and probably present rate hike analogy has gone ahead with a rate hike. Its done probably at a time when the Indian banking system is already crunched for liquidity because of 3G and BWA auctions, can have a long repercussion. The RBI also said like EU said in 2008 that "Inflation is a bigger concern than EU Crisis".

Thus going further, I strongly believe that if this EU crisis spreads more (which has high chances) Indian economic growth and more importantly the stock indices could see a blood bath.

The Indian markets as of now is quite insulated from the global turmoil, but like EU in 2008 this move by RBI on Friday could lay the foundation for a big Index correction.