Wednesday, July 22, 2009

Stock Chart Pattern - Bharat Bijlee

The stock chart pattern of Bharat Bijlee has an important lesson for small investors who are interested in mid-cap and small-cap stocks. While such stocks can give whopping returns during the later stages of a bull market, they can fall off a cliff when the bears take control.

Bharat Bijlee is not one of many fly-by-night, chameleon-like operations that dot the mid-cap field. It has been around for quite a while. Its supposedly mundane business of manufacturing electrical motors and distribution transformers, with sales to a number of State Electricity Boards with long payment cycles, has still thrown off decent positive cash flows from operations.

This has enabled the company to finance its expansion and growth through internal accruals and debt, leaving the small equity capital of Rs 5.65 Crores intact for the past several years. Last year, both the top line and bottom line were hit by the economic downturn and the increased prices of raw materials.

The 2 year closing chart pattern of Bharat Bijlee shows how badly the bears have mauled this profitable, dividend paying, well-managed small-cap company:

Bharat Bijlee_jul2109

After hitting a high of 3950 in Jan '08, the stock had a one way fall to a low of 301 on Mar 13, '09 - dropping more than 90% from its peak. Such a huge fall is technically very negative, as it may take the stock a long time to retrace even 50% of the fall.

A 'V' shaped recovery, accompanied by heavy volumes, took the stock up to 1015 on June 4, '09 - a rise of about 235% in less than 2 months. After a brief sojourn above the 200 day EMA, the stock has been consolidating in a downward sloping trend channel and has slipped below both the 20 day and 50 day EMAs.

Notice how the 20 day EMA moved down after touching the 200 day EMA. Unless the short-term and mid-term moving averages go above the 200 day EMA, the bull market will remain elusive for Bharat Bijlee.

The RSI, MFI and slow stochastic have bounced off oversold regions. The MACD is negative. Looks like the consolidation in the downward channel may last a while longer.

Bottomline? At today's closing price of 785, the stock is available at a P/E ratio of 9.2. The stock chart pattern of Bharat Bijlee may be providing an entry point for really patient investors. With the current emphasis on building the power infrastructure in India, the stock can hit 1500 in a year's time.


Abhijit said...

Hi Subhankarda,
Excellent analysis. Could you please take a look into balkrishna industries. This should fall under "your" category of company.

Subhankar said...

Thanks, Abhijit.

Balkrishna Industries has several good things going for it. But there is an overriding 'bad' - it has been in a long term bear market since the top of 1200 made in Jan '06. The recent low of 120 was a drop of 90% from the peak. Small companies rarely make it back from such a huge fall. Even if it does, it would take a long time.

The other 'negative' is that it usually trades very low volumes - which can make getting in or out a problem.