Friday, July 18, 2014

Technical updates – DLF and Unitech

Real estate stocks were all the rage during the later stages of the previous bull market in 2007. The term ‘land bank’ entered the stock market jargon dictionary. Companies were falling over each other in trying to acquire land parcels at any price. Banks and NBFCs joined the race of lending money against ‘land banks’.

Stocks of companies in completely unrelated businesses – particularly older companies in the doldrums – were getting highly valued on the basis of their ‘land banks’. Small investors relished the idea of making quick money and jumped on to the real estate band wagon.

A real estate bubble had been created, and it burst with a loud ‘pop’. Paper wealth of small investors vanished into thin air. Two of the most popular and high fliers among the real estate stocks were DLF and Unitech – despite the reported poor quality of their construction and unfavourable agreement clauses with buyers.

Both stocks have been in long down trends for the past 6 years. The moral of the story? Buy real estate; shun real estate stocks.

DLF

DLF_Jul1714

DLF stock had gone past the 1200 mark in Jan ‘08 before the bottom fell out. In just over a year, it fell almost 90% from its peak. The subsequent rally saw the stock cross the 450 mark in Oct ‘09 – giving 3-bagger returns from its Feb ‘09 low, but failing to retrace even 50% of its huge fall. That kept the stock technically in a bear market.

That was a signal for bears to take charge. The stock price has formed a bearish pattern of lower tops and lower bottoms that dropped the price to 122 in Aug ‘13 – which was lower than its Feb ‘09 low. The rally to a high of 241 gave almost 100% gains from its Aug ‘13 low. The stock is undergoing a price consolidation, and may try to breach the resistance level of 241. Only a convincing move above the Mar ‘13 top of 285 will negate the ‘lower tops-lower bottoms pattern’.

Technical indicators have corrected overbought conditions and are in bullish zones. Another test, and possible breach of 241 is likely. The company is saddled with massive debt and valuations are sky high. Best to avoid.

Unitech

Unitech_Jul1714

Unitech stock had touched headier heights in the 5-figure range in early 2006. A huge bonus and stock split brought the price down to more reasonable levels. The stock price continued to rally and tripled to cross the 600 mark in May ‘07. A 1:1 bonus could not stem the rush to buy and took the stock price up to the 550 level in Jan ‘08.

The crash was extraordinary, as the stock price dropped more than 95% to touch a low of 22 in Nov ‘08. The subsequent rally took the stock price to 118 in Sep ‘09 – more than 400% gain from its Nov ‘08 low – but retracing less than 20% of its massive bear market fall. It has been all down hill since then.

The stock touched a low of 11 on Mar 3 ‘14 – 50% lower than its Nov ‘08 low. The recent rally saw a sharp rise to 38 last month – 3-bagger returns in 3 months! Daily technical indicators had become extremely overbought. The stock price corrected below the support/resistance level of 30, and is struggling to move up again.

Interest expenses were more than twice the reported net profit last year and P/E ratio is 88. Don’t be swayed by budget sops. Avoid with a capital ‘A’.

2 comments:

Karthikraja K said...

Ji,
Avoid with a capital ‘A’ - Could not able to understand the punch line.

Subhankar said...

It's not a small 'avoid' but a big 'Avoid'.