CAPITAL GOODS STOCKS: FULL OF PROMISES

One should have presence in stock market in a sector which is relevant and have the potential to grow aggressively in short and medium term. And icing on the cake will be if one can pick up stocks in that sector at an attractive value. The above is the most ideal situation for any investor.

The renewed emphasis on Indian infrastructure sector is noticeable in recent past, and the capital goods stocks are reaping maximum benefits. They have ever increasing order books as the result of overall well being of Indian economy. The strong quarterly numbers in this sector confirms that the general concern of this sector like execution risk, momentum of order book and funding will not be problem in foreseeable distance. We should not forget, we are targeting 9% GDP growth in the 11th Five Year Plan.

I have identified some stocks which in all probability will be the future leaders in capital good sector. The large caps like L&T, BHEL, Suzlon Energy are already been in the radar of most of the small investors.

The strong momentum of some visible mid caps is noticeable; Thermax, Punj Llyod, Cummins, Siemens, Alfa Laval etc are holding good promises.

Now for small investors let’s go back to first para of this blog: to pick up the selected capital good stocks at attractive value. Stock market is full of surprises, nobody is sure when the stocks will be presented to us on a platter to our likings. But can we pick them at that opportunate moment? I am not sure, downward price of any stock makes us doubting Thomas, and we miss the opportunities.

Let’s be prepared and not miss any opportunity. These stocks will make our portfolio richer.

THE GREAT INDIAN BULL RUN

It seems that I am destined to miss the excitements of stock market during any of my hiatus from the blog to attend other engagements. The Sensex remained there at tantalizingly near 20,000 when I shined off, then it slided by around 2000 points for lack of cues. It made a resounding recovery of 924 points in a biggest single day rally to be there at its very correct place near 20,000. It reconfirmed my standing (my earlier popular blog: Should we buy stock now?) that there is still some time left for Bears to set in. For now it is the “Great Indian Bull Run”.

Market pundits always maintain, “bull markets don’t just die of old age, historically only one factor has terminated bull runs: rapidly rising interest rates. Bear markets occur when earnings collapse due to an economic recession, which in turn is brought about when real intereat rates cross the threshold of pain”. (Ruchir Sharma: The Sky Isn’t Falling –Yet, November 5, 2007, Newsweek)

To go by the above referred article there are still some way to go before the Indian Stock Market enters into the “bubble” territory. History shows the bubbles peaks when average stock price reach the level of 50-60 times projected earnings for the coming year. Some examples of bigger bubbles are NASDAQ in 1989 and Hong Kong market back in 1973, when the P/E ratio peaked at 55. The bubbles were busted by respective central banks by tightening measures.

Any tightening measure will result in slowing of overall economics of our country which the government will very reluctantly opt for, in all possibilities.

There are some theories floating around like “look beyond the index stocks”. This is a dangerous proposition to small investors as most of the small investors only look at the stock price movement, not beyond that. Some penny stocks are good bait for those unsuspecting small investors by those big great white sharks lurking in the deep blues of uncertainties. They should always value the fundamentals rather than unwanted tips from those uncertain sources.

A few issues back Outlook Money (15th October, 07) came up with nine good mid cap infrastructure stocks which seem to fit the bill for small investors. For small investors these stocks may be kept in their radar for picking up when the stock price and market allows picking (refer my earlier very popular blog: Waiting forever to be discovered by world). For our benefit let me note them down below:

Bharat Bijlee: Good order book and earning visibility.
Bharati Shipyard: Cost competitiveness results in better standings.
Era Infra Engg: Good project execution.
Hercules Hoists: Diverse Product Range in a modern manufacturing facility.
India Cement: Biggest cement manufacturer in South India.
Indo Tech Transformer: Impressive growth potential.
International combustion: Niche product range.
Paramount communication: May be the growth story to come next.
Voltamp Transformers: Should ride the infrastructure growth story.

In the mean time let us bask in the glory of Sensex Sun and as old adage says: make hey while the sun shines.

SPARK IN THE BANKING STOCKS-II

The recent news of ING Vysya trying to acquire stakes in Centurion Bank of Punjab and Kotak Bank and the subsequent denial (or no comment) from ING Vysya indicates that there are some activities going on in Indian Banking Sector. After some subdued session the Benkex is actively participating in the present rally. State bank of India is already shining with all the news of stock split, bonus and preferential allotment of shares. ICICI Bank is trading at all time high. The growing interest of foreign banks to have foothold in our capital market certainly needs some vehicle. The mid cap private banks are the best bet for them.

How and where the FIIs have their exposure is a fascinating study. I have come across such a study in the Hindu Businessline (link-here); it sported a table on some prominent FII moves. FIIs are following some stock specific strategy not the sector specific buying. However it was noted the FIIs avoiding the oil refining sector and is going slow in pharma and health care sector (exception Glenmark, Glaxo and Nicholas Piramal).

Coming back to our context the FIIs raised their stake in Yes Bank from 15.3% in June-06 to 52.51% in june-07, i.e. a raise of 37.21%. It certainly is a substantial increase. Yes Bank has already established a niche model of banking which is different from other banks and seems it has all the support from Rabo Bank. Mr. Rana Kapoor is an ex-Rabo Bank Executive and Rabo Bank has a substantial stake. The above presents some rosy picture for the stock holders of Yes Bank.

The Centurion Bank of Punjab and Kotak Bank will definitely qualify to get a hold from Brokers if not outperformer.

Earlier post: SPARK IN THE BANKING STOCKS

BLUNT DECISION MAKING IS AN ART NOT SCIENCE

The question of selling Cummins (500480.bo) frequented my mind all day long, and my friend told me to consider and search the followings for the company and not to regret in future
1. EPS
2. P/E
3. PEG
4. Operating profit margin
5. Net profit margin
6. ROE

I heard those terms before like most RSHI. But hardly have the time and resource to scout them for all the stocks I have in mind.

I have a “nine to five” job; it is a modest eleven hours per day including the journey time. I don’t have the confidence to give up my present job and start “stock”ing. Don’t have access to that kind of money too.

I don’t want to enroll myself to some SMS and Tips for Money Experts. I have seen them in performance, laundering money and giving peanuts in returns at best.

Stock price is a number that carries many information about the future prospect of a company. And also emotion plays a major role, if it takes over, the stock price and its valuations lose touch, the stock is then either over valued or undervalued. However the stock will correct itself accordingly in time. These are the thumb rule of the market.

But I am a very small investor. I cannot wait for the stock to correct itself aligning with its intrinsic value and that kind of blah-blah-blahs. I will sell the stock Cummins and book profit. I should not wail if the stock sees new highs. A bird in hand is better than two in bush.

Then where I will invest the proceeds? IFCI (ifci.ns) is not a bad candidate with a very low P/E and fantastic volume to boot. It is a momentum stock at present, already made a run. I will be aggressive and buy more if the stock corrects and hold it for about a month or two. Target: 20-30% growth of my small capital.

My second investment was HCL Technology (hcltech.ns), it seems the stock is not going anywhere, may be for the regained strength of Rupee. I have respect to the capability of Mr. Shiv Nadar. May be some good news in a week or so will push the stock up.

SERENE SMALL-CAP AND MODEST MID-CAP?

“We are in bear phase barring 6-7 stocks”.

May be it is true for Sensex and Nifty stocks. But if we consider Mid-cap and Small-cap stocks, it is entirely a different picture. They have outsmarted Sensex and Nifty by a wide margin. The launch of Mid-cap and Small-cap specific funds by all and sundry Fund Houses are the best proof of it.

Mid-cap and Small-caps offer ample opportunities, but question is how to identify them. There are thousands of stocks listed in BSE and NSE. To pick the winner should be definitely an arduous job. I am trying to frame rules for me for the vary purpose

The stock should be in news, so that people know that it exists.
The news should be in positive note. Financial well being and acquisition aboard goes well with Indian investors.
Investors’ interest is to be judged by the P/E value. It should be in higher range than its peers. Mid-cap and Small-cap stocks do not follow rationality; they tend to have unreasonable valuations.
Have any experts told anything positively in prime time TV, studied and reviewed in popular finance magazines? If yes it is a good sign.
Never go near them in downward market, they tend to go down at a much faster pace than the market.
Invest only the portion of your money, which you can effort to lose completely.
Monitor closely, book profit at the drop of anyone’s hat.

I will try to frame more rules and welcome anyone’s addition to this set of rules.

Some Mid-cap favorites of my fancy are:

Yes Bank because it has the potential to go further.
JBF Industries for the good stories behind.
Dena Bank as it is bookies favorite.
Finolex Industries for the high opinions of Small investors.
East India Hotel may be it is in an emerging sector.
Sriram Transport, you need logistics everywhere.

I will buy at least two of them after the market cools down and invest around ten thousand bucks on each. If I am lucky in picking up the correct scripts I may even double my money in double quick time.