Technical updates – Bartronics and Bilcare

There are two kinds of stocks that never fail to attract small investors – ‘theme’ stocks and RJ stocks. Just like a flame never fails to attract moths. The end results of such attractions are almost equally disastrous.

There are no better examples of these two kinds of stocks than Bartronics and Bilcare. The former is a ‘theme’ stock with a story (high-tech electronics, bar code readers - the next great invention since sliced bread, etc.) that was successfully promoted by brokers and analysts.

The latter is a typical RJ entrapment. Supposedly bought at much lower prices and well publicised as being in RJ’s portfolio, small investors piled into it to push the stock price sky high (to 1830 in Jan ‘08) before the bottom fell out.

With the stock market touching a lifetime high, several ‘theme’s are playing out on message boards (water treatment, agri-related, defence-related etc.), not to mention current RJ favourites. Do yourself a favour. When you hear ‘theme’ or ‘RJ’ in a conversation at a get-together, excuse yourself and leave. 

Bartronics

The stocks price of Bartronics had touched a high of 294 in Jan ‘08. It then dropped to a low of 55 in Nov ‘08, recovered to a high of 194 in Jul ‘09 and then had a one-way fall that seems to have finally bottomed out at a low of 5 touched in Aug ‘13.

The stock has since tripled by closing at 15 on Jun 6 ‘14, but is consolidating sideways within a symmetrical triangle pattern. The stock has returned to a bull market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has technically confirmed that.

But triangles are unreliable. The break out can be upwards or downwards. Daily technical indicators are looking bearish. If you are thinking about buying because the stock is cheap, forget it. Fundamentals are awful.

Bilcare

The stock price of Bilcare dropped from 1830 in Jan ‘08 to a low of 36 in Dec ‘13 – losing 98% from its peak (like Bartronics). The stock closed at 106 on Jul 7 ‘14, almost tripling from its Dec ‘13 low and returning to a bull market.

The stock price has formed a ‘rounding bottom’ bullish pattern, suggesting more upside. There is resistance at the 138 level, but it may take a while to get there. Daily technical indicators are looking bearish. Some more correction is likely.

Fundamentals are almost as bad as those of Bartronics. Loss-making with a huge debt that is like a millstone round its neck. Best to avoid.

Should small investors follow in the steps of well-known market players?

Many small investors believe that stock market investing is a zero-sum game. Some one buys and some one else sells. If a stock or index goes up after the transaction, the buyer wins and the seller loses. If the stock or index goes down, the buyer loses and the seller wins. Pretty simple, right?

Not quite. The commonly-held belief that ‘for every buyer there is a seller’ may be grammatically correct, but reality is entirely different. Here is an example: Today, the market was agog with the news that HSBC had sold major chunks of its holdings in Axis Bank and Yes Bank. Several hundred thousand shares changed hands.

Was there a single buyer who came forth to buy all the shares of Axis Bank and Yes Bank? No. How do I know that? From the price action. Axis Bank dropped 2.75% and Yes Bank dropped 2.25% after the news hit the market. There were several buyers for the Yes Bank offering. Fewer buyers for the Axis Bank offering.

Against one seller in both bank stocks, there were several buyers. If both stocks continue to fall in tomorrow’s trade, there will be one winner and several losers. A negative-sum game. If both stocks rise tomorrow, there will be one loser and several winners. A positive sum game. It is important to understand this – because it leads to the answer of the question.

Axis Bank and Yes Bank are well regarded and managed private sector banks. Buying their stocks and facing a temporary loss at current market price may not be a big deal because both companies are likely to perform well in future. Chances of making up the loss and moving into profit are high.

Now, replace HSBC in the above example by your favourite market player – RJ, RD, NK, etc. Imagine one of them is holding a large chunk of shares in companies like Bilcare, Delta Magnets, Bartronics. He first lets it be known that he has entered these companies. That attracts the attention of small investors. Then he keeps the market primed with all kinds of positive news – great acquisitions, fantastic prospects, brilliant technology tie-ups.

Small investors get sucked in, because every one loves to ride the gravy train. When the market price of the stock gets pumped up to a sufficiently high level, the selling begins. It’s a hugely negative-sum game. Only one winner, and thousands of losers.

If you want to be on the winning side in the stock market game, you have to work hard. Analyse companies fundamentally and technically, read newspapers and business magazines to keep updated on local and global economic issues, and trust your judgement but not your intuition.

Most important of all, do not try to follow in the footsteps of well-known market players. They are in the market to make money – from people like you and me.

That was the long answer. The short answer is: NO!

How small investors can widen their Circle of Competence

Warren Buffett is a strong believer of the Circle of Competence concept. If a company or business doesn’t fall within his Circle of Competence, he won’t touch it. He famously avoided buying into any high-tech company in the 1990s – when every one and his brother-in-law were investing in dot.com companies. He didn’t understand how high-tech companies were making money, and whether they had sustainable businesses. He missed the boom – and the inevitable bust that followed.

Warren Buffett is one of a kind. You and I will never be able to match his skill and wisdom in investing. That doesn’t mean we shouldn’t follow some of his money-making principles. What if our Circle of Competence is too limited? Is there a way to widen the Circle?

Let me give you the bad news first. You can’t widen your Circle of Competence in a hurry. It is a process that will take a lot of time and effort. The good news is that the process is not difficult or complicated. It takes patience, perseverance, and a plan.

First make a short-list of all the knowledgeable people you know. The list isn’t likely to be a long one if you are looking for people with real knowledge. Not some one who knows how many hundreds Tendulkar scored before the age of 25, or the exact locations of the seven wonders of the world. But some one who knows about the economy, business and industry.

Next, figure out how you can meet such people without imposing too much on their time and patience. May be he is a friend’s father or your wife’s uncle. If you inform them in advance that you want to meet them, and the reasons for the meeting, knowledgeable people will be more than happy to share some of their experiences.

Don’t know anyone knowledgeable enough? Join discussion forums and investment groups. There are many in cyberspace. Each group or forum will have a few knowledgeable members. Try and pick their brains.

Going to a family wedding or a party? Don’t just waste your time eating and drinking and being merry. Introduce yourself to people you don’t know, and find out about what they do. If you show genuine interest in their activities, they will give you a lot of information that you won’t find in TV channels or pink papers.

Carry on this process for some time, and you will be amazed at how much wider your Circle of Competence can become. Then, have the discipline to stick to your Circle of Competence when choosing stocks to buy. That will prevent you from getting badly stuck in the shares of a company that you really know nothing about. Like Suzlon, or Punj Lloyd, or Bartronics.

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Why do retail investors fall prey to the ‘get rich quick’ syndrome?

Most retail investors enter the stock market for the first time near a peak, after hearing about their friends or relatives who became rich overnight by investing in stocks. They think – like many poor souls before them – that getting rich quickly from the stock market is the best idea since sliced bread.

In a country with a large number of educated youth and inadequate employment opportunities, there are enough con-men and charlatans trying to make a quick buck by promising jobs. They usually lure unemployed youth with guaranteed jobs – even overseas jobs - if they can first cough up a sufficiently large amount of money.

One can appreciate and understand why an unemployed person may get tricked by such scams. He has a genuine need of money to sustain himself and his family. But it is really shocking that young people who are not just well-educated but also well-employed falling prey to the ‘get rich quick’ syndrome.

After announcing the re-opening of subscriptions to my Monthly Investment Newsletter in a recent post, I received an email that went something like this:

‘I lost a large sum trading intra-day. I went long in Nifty futures. The spate of scams made the market tank. Booked heavy loss. Then went short in Nifty futures, but the market moved up. Again booked heavy loss. Now my only hope is your investment calls will not only help me to recover my losses but make some profit also.’

I was at a loss as well – for words. He was expecting more than a 150% gain to cover his losses and make some profit. Why did he get into this mess in the first place? He thought making money in the stock market was a piece of cake. In other words, he had fallen prey to the ‘get rich quick’ syndrome.

Any long-term investor will say with confidence that if one buys good blue chip stocks at reasonable prices and holds on for 3 to 5 years, one can easily make 15-20% per annum returns on investment. Those returns adequately cover the risk-free bank interest and the prevailing rate of inflation.

But one should not expect higher returns over the long-term. Higher returns may happen in a particular year. Not over several years. Rome wasn’t built in a day. A portfolio of strong stocks that provide steady returns year after year also takes time and patience to build.

Unfortunately, today’s generation prefers instant noodles, 20-20 cricket, and paying by plastic cards. ‘Patience’, ‘discipline’ and ‘long-term’ are replaced by ‘I want it now’ in the dictionary. No wonder young investors find Tata Steel and Colgate boring, and run after Suzlon and Bartronics in the hope of getting rich quick.

Stock Chart Pattern - Bartronics India (An Update)

The previous analysis of the stock chart pattern of Bartronics India was mainly to warn my readers about the deteriorating fundamentals of the company, so that those still invested in the stock could get out before it became too late.

Every bull run in the stock market throws up a few ‘favourites’ which are strongly backed by broker and analyst recommendations. These tend to attract small investors with little or no prior experience of stock selection. They get enamoured by the ‘theme’ and invest in droves without doing due diligence about the company, its promoter’s track record, and the business fundamentals.

The more esoteric and ‘high tech’ sounding the theme, the more attractive the stock appears. Some of these ‘theme’ stocks of the previous bull run have taken many small investors to the cleaners. Cranes Software (engineering software), Suzlon Energy (wind power), Praj Industries (alternative fuel), and Bartronics (bar code readers and smart cards) are a few examples.

The Bartronics stock was hovering near its 200 day EMA around the 150 mark when I wrote the previous post back in Mar ‘10. Those who heeded my advice and sold out have saved themselves a lot of money. The one year bar chart pattern of Bartronics shows that the stock has lost 50% of its value:

The stock desperately tried to cling on to its long-term moving average – some times dropping below, then recovering above – till it convincingly broke down in Aug ‘10 and quickly dropped to 100, which happened to be a long-term support level.

A high-volume bounce in Sep ‘10 raised bullish hopes, and took the stock above its falling 20 day EMA. The respite was brief. The stock started sliding down towards the 100 level with the 20 day EMA acting as a strong resistance.

Another bounce from the 100 level on decent volumes in Nov ‘10 saw the stock briefly clear both the 20 day and 50 day EMAs. With all four EMAs falling in unison, bears used the upward bounces as opportunities to sell.

Once the stock fell convincingly below 100, bears took control and the stock slid sharply down to a low of 72 on Dec 20 ‘10, losing more than 50% in 9 months. The technical indicators are all bearish. The MACD and ROC are negative. The RSI and slow stochastic are in their oversold zones.

If you are one of the unfortunate few who are still holding on with hope and a prayer, I’m afraid I can’t provide any solace. There is not much hope of any improvement, and prayers don’t work too well when a stock is fundamentally and technically weak.

Bottomline? The stock chart pattern of Bartronics – as well as the other stocks mentioned – are in strong bear markets. Just goes to show that a bull market does not necessarily drive up prices of all stocks. Small investors should do their homework before investing in popular ‘themes’. Better still, avoid well-publicised ‘theme’ stocks completely.

Is it a good strategy to ‘average down’ when the price of a stock starts to fall?

The short answer is ‘NO’. Many small investors lose money by trying to ‘average down’ when the price of a stock, which they bought at higher levels, start to fall. How do I know? By the emails I receive from readers and the questions I hear on business TV channels.

Here is a recent email:’I bought Bartronics at an average price of 138. Now it is falling. What should I do?’ Reading between the lines, one can guess that the investor bought at a higher level than 138 and bought more as the price fell, to ‘average down’.

I wrote two posts on Bartronics – first in Jun ‘09 when the stock closed at 165 and the second in Mar ‘10 when the stock closed at 150. On both occasions, investors were advised to get out before it was too late, because the fundamentals of the company were poor. So, I referred the investor to my earlier posts.

The response was: ‘Thanks, I’ll sell Bartronics tomorrow at whatever price I can get, and reinvest in Punj Lloyd or Suzlon.’ I wrote back immediately that both those stocks should be avoided like the plague!

Why? Instead of providing 1000 words of explanation, I’ll take recourse to some pictures:

The Bartronics stock tried a brief recovery above the 200 day EMA on decent volumes in Jul ‘10 – setting up a perfect bull trap. The subsequent waterfall-like drop has taken the index well below the 200 day and 50 day EMAs on increasing volumes.

The Punj Lloyd stock went briefly above the 200 day EMA back in Jan ‘10, and has since been in a steady decline well below the 200 day EMA – making lower tops and bottoms. Volumes have been higher on down days. Signs of stocks going from stronger to weaker hands.

The Suzlon stock also went above the 200 day EMA in Jan ‘10, and has since fallen continuously – well below the 200 day EMA. Even if you are enamoured by wind energy, stay away from this bag of wind.

Note that while the Sensex has been making new highs for the past year in a bull market, all three stocks are in bear markets, with no end to their bottoms in sight. ‘Averaging down’ on such stocks can only lead to increasing your losses.

As a contrast, here are some other pictures:

After a long sideways consolidation, the Akzo Nobel (former ICI India) stock has had a huge upward break out.

Automotive Stampings is a small-cap auto ancilliary from the house of Tatas that was rising steadily before a sharp break out on strong volumes.

After making a loss and languishing due to the debt burden of the Jaguar-Land Rover acquisition, the Tata Motors stock has comfortably out-performed the Sensex over the past year.

I am not suggesting that you buy these stocks right away. It is better to be cautious when a stock is near a 52 week high. But here are a couple of thumb rules that can be easily followed by novice investors:

1. When a stock is moving up above a rising 200 day EMA, it is in a bull market. The strategy should be to buy the dips. That means ‘averaging up’. Use a trailing stop-loss to protect your profits.

2. When a stock is moving down below a falling 200 day EMA, it is in a bear market. You don’t make money in a bear market by buying, but by selling. The strategy should be to sell on every rise.

If you can buy the shares back at the next bottom and sell on the following rise, you can make a ton of money. But such a strategy – known as ‘short-selling’  - is not advised for inexperienced investors.

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Stock Chart Pattern - Bartronics India (An Update)

The reason for analysing the stock chart pattern of Bartronics India back in June 2009 was not because this small investors' and brokers' favourite was looking like a 'good buy'. It was to suggest to existing holders that it was time to say 'good bye' to the stock.

Why? The company is in a supposedly high-tech field with great growth opportunities. Technically also, the chart was looking impressive. But one look at the fundamentals painted a completely different picture. It supports my oft-repeated refrain that a stock should be bought only when the technicals and fundamentals are indicating a 'buy'.

The cash flow from operations for year ended Mar '09 improved considerably over the previous year, but still remained negative. Which means, the 10% dividend and the tax on 'profits' were paid out of borrowed money. No wonder the debt to equity ratio increased from 1.3 to 1.8 and financial expenses zoomed more than 5 fold from Rs 4 Crores to Rs 22 Crores.

That dented the NPM from 17.8% to 12.8%. Prudent management would not have declared a dividend on such worsening financials. May be it was an effort to improve sentiment and keep the stock price high. Guess what? It didn't work.

The 2 years bar chart pattern of Bartronics India shows that the stock has gone nowhere:-

Nine months back, the stock had closed at 165. Today it closed at 150. In between, it peaked at 194 in July 2009, made a trough at 130 in Nov 2009 and fluctuated within the 130-194 band.

The stock has sought support from the 200 day EMA several times and both the MACD (which is in the negative zone) and the RSI (which is below the 50% level) are showing weakness.

Only the OBV is showing positive divergence - moving up while the stock moved sideways. But looks can deceive. What looks like 'accumulation' is actually 'distribution'. Why? A look at the shareholding pattern will reveal all.

The Indian promoters (27% holding) and the FIIs (6% holding) have been reducing their holdings while the general public, which now holds a whopping 45% of the steadily rising equity capital, have increased their share over the previous two quarters. No better example of stocks moving from strong hands to weaker ones.

Bottomline? The stock chart pattern of Bartronics India and the fundamentals are looking quite weak. Get out before it is too late. Die-hard hopefuls should note the strong resistance zone between 180 and 195. Only a cross above the zone can take the stock to a new high.

Stock Chart Pattern - Bartronics India

There is a specific reason for analysing the stock chart pattern of Bartronics India, but I will not divulge it right away. This is one of those much-talked-about-by-analysts-on-Business-TV-channels kind of stock. That means it is well-known among retail investors - particularly those who can't get by without their daily dose of stock tips.

It is funny how these TV stock tips work. By the time an analyst finishes discussing the stock, it spurts in value and some times even hits an upper circuit or two. Retail investors try not to miss the bus. A few fund managers get caught up in the chase. Pretty soon, every one and his brother-in-law owns the stock.

Specially when the company is in so-called 'high-tech' fields - like barcode readers, RFID tags and smart cards - then the exuberance and excitement progresses geometrically. No one doubts the potentially huge market for these 'untapped' technological marvels. More so because they have seen it all in action in one of their '11 days, 10 nights' conducted trips to the USA or Europe.

The positive sentiment is quite apparent from the 1 year bar chart pattern of Bartronics India:-

The stock made a low of Rs 55 on Nov 20 '08, followed by a test of the low on Dec 3, '08. It made another low of Rs 61, three months later on Mar 9, '09 - thereby creating a typical double-bottom chart pattern.

The rally that followed was on expected higher volumes, albeit after the stock cleared the Rs 80 level. Both the RSI and slow stochastic indicators quickly hit overbought zones and then started to decline.

The stock reacted from Rs 115 to Rs 85, where it received support from its 50 day EMA while it consolidated sideways. Note that the on-balance volume (OBV) remained flat when the stock reacted in late April '09. This positive divergence gave an indication that the next move would be a continuation of the up move.

The sharp up-move from May 18, '09 onwards after the election results again took the RSI and slow stochastic to overbought zones. Both indicators have since moved down as the stock reacted from a long-term resistance level of Rs 180.

But observe the MACD, which is flat and the OBV, which has made a new high. These indicate a possible continuation of the rally. Looks like the chart pattern of Bartronics India is suggesting a 'buy-on-dips' strategy.

That's not why I'm writing about this stock. If some thing looks like it is too good to be true, it usually is. So I took a quick peek at the cash flow from operations and the Profit and Loss statement. And guess what? The 'excellent' profits are a big bag of wind!

In the year ending Mar '07, adjusted PAT was Rs 13.4 Crores; cash flow from operations was (-) Rs 75.7 Crores. It got worse in Mar '08. Adjusted PAT was Rs 33.1 Crores, a 'creditable' increase of 147%! But the cash flow from operations? (-) Rs 219 Crores - a fall of 189%. The company actually paid a tax of Rs 8.3 Crores with money it did not have!

How is this company surviving? A look at the balance sheet will reveal all. Almost a doubling of equity capital from Mar '06 to Mar '08; plus a whopping unsecured loan of Rs 253 Crores - at much higher interest rates than that prevailing now. No wonder the Mar '09 Q4 results were awful.

Bottomline? The Bartronics India stock chart pattern looks very encouraging, thanks to the positive sentiment in the markets, but the fundamentals are apalling. Get out before this house-of-cards comes tumbling down.