Stock Chart Pattern – Delta Magnets

There is one – and only one – reason for discussing the stock chart pattern of Delta Magnets. It is to warn small investors to stay away from buying small-cap companies with unknown products or services and horrendous fundamentals that start shooting up like Diwali rockets only to explode with a loud bang.

Such companies suddenly become ‘hot stocks’ near bull market tops, burn a big hole in the pockets of small investors and disappear without a trace. Some times, they reappear again in a new ‘avatar’ – just like Delta Magnets has done – to go through the entire cycle of shooting up out of nowhere and burning bigger holes in investor pockets.

May be this time it is different? I don’t think so. Let us go back in history. A company called G. P. Electronics started manufacturing hard ferrite (ceramic compound) magnets with Japanese collaboration at its factory in Nashik back in 1985. These magnets – of various shapes and sizes, viz. arc, ring, rectangular – find applications in motors and dynamos used in bicycles, two, three and four wheelers, as well as in loudspeakers, telephones, headphones.

After 25 years of operations, the company’s sales were Rs 9.32 Crores in 2009-10, on which it made an ‘adjusted’ net profit of Rs 13 lakhs. On a TTM EPS of 1.46, the P/E ratio is 47.6 at today’s closing price of 69.55. No one knew or cared much about the company. For the past 9 years the stock has oscillated between Rs 5 and Rs 25 – except for peaks of 42 in 2005 and 43 in 2008. That same year, the name of the company was changed to Delta Magnets. That didn’t prevent the stock from making a low of Rs 9 in Dec ‘08.

Then, from a level of Rs 21 in Jul ‘10, the stock shot up to touch Rs 70 in 4 months. What happened? The market became aware that Delta Magnets is owned by Delta Corp – another ‘hot stock’ with poor fundamentals that supposedly has expertise in real estate and casinos. But wait a minute! Isn’t Delta Corp the new name of an unknown textile company called Arrow Webtex?!

To summarise, an unknown textile company changed its name to become an overnight expert in casinos, and then acquired a hard ferrite manufacturer that has been showing losses at the operating level for the past five years (may be even more?), and changed its name as well! Reminds me of a school mate who used to bring up the rear in class. He changed his name through an affidavit in court just before going through an arranged marriage. Wonder why?!

If you are one of those who think that it is all about taking risks and making quick short-term gains, have a look at the one year chart pattern of Delta Magnets before you throw all your money away:

Since Jul ‘10, the stock has been moving up by hitting frequent upper circuits and all three EMAs are moving up with the stock well above them. Typical sign of a bull market, right? Yes and no. While it looks like a very bullish chart, look at the peak volume days on Jul 16 ‘10, Aug 27 ‘10 and Nov 1 ‘10. All three were down days that occurred after the stock hit a new high. A clear sign of ‘pump and dump’ distribution.

The RSI and slow stochastic are in their overbought zones. The MACD is above the signal line and both are moving up sharply. The ROC (and RSI) failed to make new highs, and are showing negative divergences with the stock’s price. The stock is getting primed for another ‘dump’ operation.

Looks like retail interest is pushing the stock higher – thanks to a number of ‘buy’ calls by self-styled stock ‘gurus’ who copy-paste each others’ recommendations in different fora. The stock may move up some more – thanks to the hype created by frequent announcements of acquisitions in India and abroad. Wonder where the money for the acquisitions is coming from!

Bottomline? The stock chart pattern of Delta Magnets is a classic example of how small investors get duped by pump-and-dump schemes. If you enter now, be sure you understand the consequences of  the ‘greater fool theory’. Smart investors can read this post for entertainment (hope I’ve provided enough!) and avoid the stock like the plague.