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Tuesday, October 27, 2009

How to use Financial News - revisited

With results season upon us, financial news is flooding the airwaves and the pink sheets. Some companies are declaring better than expected results - like Tata Motors and ITC. Others are disappointing the market with poor Q2 '09 shows - like Punj Lloyd and Tata Steel. A few had so-so results - like L&T.

I had written an earlier post on this subject when the market was down in the dumps. At that time, my suggestion was to categorise each item of financial news into 'great news', 'good news', 'bad news' and 'worse news'.

The stock market is in a much healthier state now, but is in the throes of a good correction. Does that put a spin on the decision making process? Not really. The same categorisation principle applies.

Let us take the examples of the companies mentioned above.

Tata Motors and ITC pleasantly surprised the market. The Jaguar-Land Rover deal was supposed to weigh down the former, and the bad monsoon was expected to affect the FMCG sector. The Tata group's huge resource raising capability helped to manage the large debt; plus the pick-up in commercial vehicle sales was 'good news'. So was ITC's considerable profits from cigarettes and reduced losses from FMCG.

What happens with such 'good news'? Stock prices usually perk up, which is used by smart investors to sell. Within a few days, the stocks tend to trade near their earlier range.

Punj Lloyd and Tata Steel declared results that were way below consensus estimates. Tata Steel's Corus debt hangover and poor offtake of steel in Europe wasn't entirely unexpected. But it is a fundamentally strong and well-managed company. The selling pressure on 'bad news' can provide re-entry points for smart investors.

Punj Lloyd's is a case of 'worse news'. Why? The management had given the impression that the Simon Carves UK penalty issue was not a big problem and will get resolved soon. Far from it. On top of their singular inability to generate cash from their core operations which led to their huge debt burden, the effort at hoodwinking investors have not gone down well at all.

The stock is falling off a cliff but still trading at a P/E of 19 at today's closing price of 202. Investors should not make the mistake of using this fall as a buying opportunity. Instead, sell at every rise. I won't be surprised if it revisits its March '09 low. A stock to avoid.

L&T's case is a little strange. While their results were not a major disappointment, the low rate of conversion from their huge order book is a concern for the market. This is not a buy on 'bad news' yet, because of the valuations. Patient investors should wait before re-entering.

The 'bad news' about Idea's results could be a harbinger of the overall derating of telecom stocks. Bharti's stock price got battered by 7% in anticipation of similar 'bad news'.

There has been no 'great news' among the financial news in the results season so far. The economy is still recovering, and unless the export-import business picks up to its earlier glory, the stock market may fail to reach greater heights.

Related post

Should Indian investors switch out of Telecom Sector stocks?


feltra (Raman R) said...

Dear Subhankar ji,

I went back and read the first post (Feb 1). The last para in that post makes eminent sense. Basically what you have given are guidelines to understand re-rating of stocks. Yes, one can certainly benefit if one understands that. From now on, I will try to slot the news into such bins (good,great,bad etc) as I read a piece of news... Thanks for the great tip..

Keep up the good work

Best Regards,

Subhankar said...

Appreciate your comments, Raman.

I wrote a blog post about the telecom sector when I felt that the entire sector was likely to be derated. Investors haven't been able to digest that, and are discussing about 'buy' prices of Bharti and RCom.