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Wednesday, August 19, 2009

Stock Chart Pattern - Sesa Goa

The stock chart pattern of Sesa Goa provides another example of a fundamentally strong, well-managed company that has cut through all the noise about Sensex index movements and forged ahead on its chosen path.

Strong growth in sales, high net margins, negligible debt, huge cash flows from operations, and regular dividends make this iron ore exporter a suitable stock for any long term investor's portfolio.

A dark cloud on the horizon may dampen Sesa Goa's party. There is a proposal by the steel ministry to charge a royalty of 10% from iron ore exporters. If that proposal goes through, then Sesa Goa's EPS may get reduced by about 10%.

The stock market seems to be discounting that piece of 'bad news'. The 1 year bar chart pattern of Sesa Goa is showing a bearish rounding top formation:-

Sesa Goa_Aug1909

After making multiple bottoms in the 60-71 zone from Oct '08 to Mar '09, the stock embarked on a sizzling rally that took it to a new high of 259 on Aug 6, '09 - a 330% gain in 9 months.

The stock made a low today at 216, which is the same level as its two previous tops made on May 30, '08 and Jun 12, '09. It is also just above its 50 day EMA. Previous tops, combined with the proximity to the medium term moving average, should provide good support.

If that support fails, then further supports are at 180-185 level, and below that, at its 200 day EMA at 160 (for this Re 1 face value share).

Volumes have been strong, if not spectacular. The technical indicators are all pointing to some more correction.

The RSI is below the 50% level. The MFI is just above its 50% level, but moving down. The MACD is still positive, but is falling and has dropped below its signal line. The slow stochastic is well into the oversold zone.

Bottomline? The stock chart pattern of Sesa Goa is showing some weakness. Investors can use the opportunity to enter by buying small quantities at every dip.

9 comments:

scorpio said...

Is shorting a good option. Also most of their business is in china, would that not have an short term impact with the china markets moving down and pushing the commodities down as well?

SG Money Mind said...

This is another stock coming up on my radar. My fundamental screen tells me it as value buy below 220.

Subhankar said...

@scorpio: I will be wary shorting in a market that is behaving like a yo-yo, Ashish. The China impact and the royalty overhang is already 'discounted' in the price.

@SGMM: Are we using the same stock screens?! You have almost got your price.

SG Money Mind said...

Subhankarji,

No. Mine is a old model spreadsheet with DCF calculations combined with a bit of judgement.

Subhankar said...

Ah! A vital ingredient - a bit of judgement. Comes from experience.

scorpio said...

What kind of stock screeners are we talking about?

@SGMM - would be interested in knowing how you do your stock screening with DCF, if that is ok to ask

SG Money Mind said...

DCF is the last step (valuing the company to derive the approximate share price based on Free Cash Flow) I employ on any stock. Because applying DCF or low PE or low PB logic on any stock may result on a +ve result substantiating the bias the investors has already built up.

So I judge the company first based on its management and fundamentals.

There are several companies which have consistent RoE > 20, no debt. E.g. Hawkins Cookers, TTK Prestige or Numeric systems. But I won't touch them or won't apply the DCF on them.

SG Money Mind said...

Vedanta has increased its stake in Sesa Goa by 2.12% through market purchase between Sep 10 to 18. This means the promoters have bought the stock at a price > 241.

Does that indicate the promoters are seeing value even at this price?

The last time they hiked the holding through allotment, the price was around 162.

Subhankar said...

The Sesa Goa stock is looking pretty bullish on the charts, so I'm not surprised that the promoters have increased their stake.

It could dip to 230 before the next up move.