Technical updates – Colgate and HUL

Why do I like FMCG stocks? Predictability of earnings. Plus the fact that most companies are almost debt free, generate huge cash flows, pay regular dividends and grow steadily whether it is a bull or a bear cycle in the market.

But aren't they expensive? Sure they are. So are BMW cars and Harley Davidson motorcycles. Just as you can (and probably do) buy expensive vehicles using EMIs, you can buy expensive FMCG stocks using SIPs.

Colgate and HUL - two of the better known stocks in the FMCG sector - gave very little capital gains for nearly 18 of the previous 24 months. But they have 'caught fire' during the past 6 months - thanks to demonetisation and GST. 

The balance of power is shifting from the unorganised to the organised sector. The FMCG sector will be one of the biggest gainers of this shift. If you have avoided the sector because it is 'too expensive', it is time for a rethink.

Colgate

Colgate's stock has tested the patience of long-term investors. But long-term investors know the benefit of patience.

After moving sideways in a broad range of about 200 points - giving longer term trading opportunities, the stock has rallied sharply to close at a high of 1128 on Jul 3 '17.

Overbought technical indicators that showed negative divergences by failing to touch new highs with the stock have triggered some profit booking. The dip is providing an entry opportunity.

HUL

HUL's stock moved sideways within a 160 points range - testing the patience of long-term investors. But their patience has been well rewarded. 

The stock rose sharply to close at a high of 1124 on Jun 21 '17. But all four daily technical indicators touched lower tops. The combined negative divergences led to a correction down to its 20 day EMA, which has provided good support.

The stock can correct/consolidate a bit more. 

The best way to accumulate HUL is to spare 10K or 20K from your monthly savings and just go on buying for the next 5 years. (I can assure you that it is better than paying EMIs on a BMW or a Harley - both of which are depreciating assets.)

Is the FMCG sector a good place to hide?

Sensex and Nifty are consolidating near their lifetime highs - moving up one day and down the next. FIIs have stared selling. Market experts are voicing concerns about near-term fundamental and technical headwinds.

What should small investors do? Stay on the sidelines, or continue to invest regularly? Where to invest? Everything appears so expensive!

At times like these, the best place to hide is the FMCG sector. Why? Because companies from the sector have visible earnings, generate a ton of cash, have negligible debt, don't require frequent capital expenditure and pay decent dividends. 

The sector is likely to benefit from GST and pent-up demand following demonetisation. If you have a long-term investment outlook (you should!) then you need to invest in this sector. If FMCG stocks appear expensive now - so did they five years back.

Brittania

The stock has been consolidating in a broad range for two years, but looks poised to break out upwards. The gradually rising 200 day EMA indicates a bull market.

Colgate-Palmolive

Colgate has gone nowhere in the past two years. A strong move above 1037 will be required for bulls to get the upper hand. It may be able to do so after a bit of correction.

Dabur India

Dabur's stock appears to be forming a large 'rounding bottom' pattern that can lead to an upward break out above 308. But it may take 2-3 months more to complete the bullish pattern.

Emami

Emami is trading below its three EMAs in bear territory. The correction may continue till it reaches the support level of 955.

Glaxo Healthcare

Glaxo is trading within a 'flag' pattern below its falling 200 day EMA in a bear market. A convincing move above its Mar '17 top of 5532 is required for bulls to regain control.

Godrej Consumer

The stock is consolidating within an 'ascending triangle' pattern near its lifetime high. The expected break out from the 'triangle' is upwards.

Hindustan Unilever

HUL has been stuck in a broad range for two years. The 200 day EMA is forming a 'rounding bottom' pattern that can propel the stock to a new high.

ITC

The stock is consolidating after touching a lifetime (bonus-adjusted) high. It has entered the dairy business, and plans to enter healthcare business - in an effort to reduce dependence on tobacco.

Marico

Marico is correcting overbought conditions after touching a lifetime high. It should continue to move higher.

Nestle

The stock has been in a down trend for almost 9 months. A false break out above the blue down trend line can lead to some more correction or consolidation.

[So, which of these stocks would be worth adding at current market price? Do a bit of due diligence during the long weekend.]

Technical updates – Colgate and HUL

FMCG company stocks should find a place in every investor’s portfolio for several reasons – steady performance through bull and bear cycles, negligible debt, tons of cash, consistent dividend payments and predictability of earnings.

There is a downside also. Valuations tend to be high. That makes timing of entry an important factor in overall returns. Those who are not comfortable about timing entry or exit can start a SIP – but the plan needs to be continued over the long term to reap benefits.

Two of the best stocks in the FMCG sector are Colgate and Hind Lever. The charts show that both are currently quoting well below their all-time highs. Both companies continue to perform well – but as often happens with FMCG stocks, they have their own bull/bear cycles that do not coincide with market cycles.

Colgate

Colgate’s stock touched a peak of 1580 on Jan 1, ‘13 but formed a ‘reversal day’ pattern (higher high, lower close) and started correcting. It subsequently touched two lower tops and dropped to 1190 on Aug 28 ‘13 – a correction of 25% from its peak that pushed it into a short bear market.

The stock has since been in an up trend, and after returning to bull territory rose quickly to touch a high of 1489 on Apr 25 ‘14. But strong resistance from the down trend line (in blue) has dropped the stock to its 50 day EMA.

Technical indicators are looking bearish. MACD is positive, but falling below its signal line. (MACD has formed a ‘cup and handle’ pattern that has bullish implications.) ROC has crossed below its 10 day MA into negative territory. Slow stochastic is dropping swiftly towards its oversold zone. Only RSI is showing bullish signs by bouncing up from its 50% level.

A test and possible breach of the down trend line is likely.

HUL

 

The chart of HUL is dominated by a huge upward ‘gap’ of about 47 points that occurred on Apr 30 ‘13 when news about a buy-back at 600 hit the market. After consolidating sideways below the 600 level for a couple of months, the stock price spiked up on strong volumes to touch a lifetime high of 725 on Jul 24 ‘13. But it formed a ‘reversal day’ pattern and started correcting.

Note how the ‘gap’ zone has provided strong support to the stock during the past 5 months. Even if the ‘gap’ gets filled – which looks unlikely at this stage – the stock price is likely to resume its up move thereafter.

Technical indicators are looking quite oversold. All three EMAs have converged together. A sharp move is likely to follow. Which direction? No prizes for guessing correctly!

Stock Chart Pattern - Colgate Palmolive India (an update)

The previous update to the technical analysis of Colgate’s daily bar chart pattern – posted on Jun 2, 2011 (marked by grey vertical line on chart below) - had the following concluding comments:

“The stock chart pattern of Colgate Palmolive is poised to test, and possibly breach, its all-time high of 996. The stock has been in a bull market since touching its 2007 low of 300 – tripling in four years. This is the kind of stock that small investors should buy whenever they have some spare cash, with the object of leaving it as a family treasure for future generations to enjoy.”

On Jun 29 ‘11, within a month of writing the previous post, a high volume spurt took the stock to a new intra-day high of 1002. It rose further to touch another new high of 1022 on Jul 4 ‘11, but formed a small double top and fell into a down trend. A triple-bottom at 896 in Aug ‘11 ended the correction. A sharp up move touched a new high of 1047 on Sep 7 ‘11.

A pullback found support from the down trend line. A sideways consolidation with an upward bias followed till the end of Oct ‘11. On Nov 1 ‘11, another high volume spurt took the stock to another new high of 1060, and then to 1075 three days later.

A 3 months long consolidation within a ‘falling wedge’ pattern took the stock price down below its rising 200 day EMA, where it formed a higher bottom at 932. The up move resumed and broke out of the ‘falling wedge’ on Jan 31 ‘12. The break out was not accompanied by an increase in volume.

The stock consolidated sideways till a volume spurt pushed the stock out of its consolidation zone to another new high of 1081 on Feb 27 ‘12. Thereafter, the stock price kept rising and touching new highs on almost a fortnightly basis till it touched 1250 on May 28 ‘12.

A 2 months long consolidation within a ‘symmetrical triangle’ pattern ended with another low volume break out, followed by a pullback to the top of the triangle and then a sideways consolidation. The stock price rose again to touch 1264 on Sep 13 and 14 ‘12 – giving 4-bagger returns in 5 years from its 2007 low of 300.

Note that all four technical indicators touched lower tops than their May ‘12 tops while the stock price rose higher. The combined negative divergences caused a sharp correction that may not be quite over yet. A drop to the rising 200 day EMA (at about 1125) is a possibility.

Over the past 12 months, the company’s stock provided a capital appreciation of 25% plus a total dividend of Rs 25 per share. The record date for the first interim dividend of Rs 13 per share for the current year is Oct 3 ‘12. The company continues to generate a ton of cash, has huge reserves and is debt-free. Top line has grown by 80% and bottom line by more than 100% during the past 5 years.

Bottomline? The stock chart pattern of Colgate Palmolive is undergoing one of its periodic corrections that provide adding opportunities. For small investors – specially those who are not adept at stock picking - Colgate is an ideal ‘SIP’ping candidate. If you think the price is too high, so is dinner at a good restaurant! Buy just 5 shares every month.

Is this a good time to enter FMCG stocks?

The answer to that question has already been provided in the previous update on FMCG sector stocks: “FMCG is my favourite sector to invest in, regardless of the state of the stock market and the economy. Strong brands, positive cash flows, low debt, generous dividends, bonus issues and stock splits make this sector worth every Rupee you invest in it.”

The secret to making money in the stock market was revealed by Warren Buffett: Be fearful when others are greedy and be greedy when others are fearful. In investing terms, it means buy when there are a lot of sellers and sell when there are a lot of buyers. That doesn’t mean all the stocks in a sector are worth buying – one has to use discretion.

Given below are the daily closing chart patterns of 10 stocks from the FMCG sector for the period Nov ‘10 till date. The period was chosen for comparison with the Sensex, which touched its all-time high in Nov ‘10 and is currently trading almost 20% lower.

Brittania

Brittania’s chart looks very bullish, but ripe for a correction. After dropping below all three EMAs in Feb ‘11, the stock spiked up sharply in May ‘11 after all three EMAs came close together (marked by light blue oval). Several months of sideways consolidation was followed by another sharp up move in Feb ‘12. However, all four technical indicators touched lower tops as the stock moved higher. The negative divergences can lead to a correction. Use the likely dip to enter.

Colgate-Palmolive

After briefly slipping below its three EMAs in Feb ‘11, Colgate’s stock has been in a steady up move, touching higher tops and higher bottoms. Negative divergences in all four technical indicators can cause a correction or sideways consolidation. This is a stock that one can buy on a regular basis instead of chasing after mythical multibaggers.

Dabur India

Dabur’s stock hasn’t performed as well as its MNC peers, but it has still outperformed the Sensex by moving higher than its Nov ‘10 high. The stock had a long correction from its Jun ‘11 peak to its Jan ‘12 trough – probably due to the unrest in the Middle East where Dabur has manufacturing and distribution facilities. The stock appears to be resuming its bull market and can be bought on dips.

Emami

Emami is the only stock that is trading below its Nov ‘10 peak. Though it reached a higher top in Jul ‘11, the subsequent correction dropped the stock’s price to a lower bottom, which is bearish. The rally from the Jan ‘12 bottom has not yet confirmed a return to a bull market. The technical indicators are looking overbought. The main promoter, who is also a director in a private hospital, was arrested due to a fire incident that caused many deaths. Avoid.

Glaxo Healthcare

Glaxo Healthcare’s stock has been in a steady up trend after the correction from the Nov ‘10 top got support from the rising 200 day EMA. Just goes to show what strong brands (e.g. Horlicks) can do to stock’s fortunes. Technical indicators are looking overbought. Use dips to add.

Godrej Consumer

After trading sideways for more than a year, Godrej Consumer’s stock has finally broken out upwards. Negative divergences in the technical indicators may lead to a correction or consolidation. Dips can be used to enter.

Hindustan Unilever

HUL’s stock formed a bullish cup-and-handle continuation pattern from which it has broken out upwards to touch an all-time high. The cup-and-handle break out has a target of 460. Hold with a trailing stop-loss.

ITC

ITC’s stock dropped below its 200 day EMA in Feb ‘11, giving a great entry opportunity. It recovered quickly and has been in a steady up trend ever since. Of late, the stock has moved up quite rapidly to touch an all-time high and is looking overbought. Hold with a trailing stop-loss.

Marico

Marico’s stock price is in a bull market. It formed a cup-and-handle continuation pattern from which it has broken out upwards. The upward target is 196. Hold with a trailing stop-loss.

Nestle

Nestle’s stock chart pattern should be an example for those who don’t believe in a long-term buy-and-hold investment strategy. Buy-and-hold doesn’t work for all stocks, but stalwart stocks can give fabulous returns over many years. This is another stock that can be added on a regular basis.

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Stock Chart Pattern - Colgate Palmolive India (an update)

I had written an analysis of the stock chart pattern of Colgate Palmolive almost two years back. It was interesting to go through some of the comments on that post – including one where I had mentioned that the stock could be bought at any price.

In a post on FMCG sector stocks in Jan ‘11, a brief update was provided. The stock was consolidating within a symmetrical triangle after touching an intra-day high of 996 in Nov ‘10. Partial profit booking was suggested as the stock had entered the triangle from above, which indicated a possible break below the triangle.

The one year bar chart pattern of Colgate Palmolive shows some interesting technical developments that exemplify how strong the stock is technically:

Shortly after I wrote the brief update in Jan ‘11, the stock dropped below the triangle, took support from the 200 day EMA as expected, and jumped back inside the triangle. That was a warning of what was to follow.

By the end of Jan ‘11, a high volume break down breached the 200 day EMA and reached an intra-day low of 783 on Feb 2 ‘11 – correcting 21% from the Nov ‘10 peak of 996, slightly underperforming the Sensex (which lost 18%).

Despite spending several trading sessions below the 200 day EMA in Feb ‘11, the stock started to recover and by Apr ‘11 had moved up to the resistance level of 918 – its closing high in Sep ‘10. A sideways consolidation till May 10 ‘11 culminated in several unsuccessful attempts to break out above 918. The negative divergences in all the technical indicators ‘resisted’ the break out attempts.

A correction in a narrow downward channel breached the 20 day EMA but found support from the 50 day EMA. Today’s spurt on good volumes pushed the stock above the 918 level once more – but not convincingly as yet.

Note that the entire corrective move after touching the Nov ‘10 peak, including the consolidation within the symmetrical triangle, has formed a bullish cup-and-handle continuation pattern. A test and likely breach of the previous top is on the cards.

The technical indicators are turning bullish. The MACD has changed directions in the positive zone, though it is still below the signal line. The ROC has climbed above its falling 10 day MA into positive territory. The RSI bounced up from the edge of its oversold zone and is touching the 50% mark. The slow stochastic has moved up from its oversold zone towards the 50% level.

Fundamentally, the stock remains as solid as ever – growing its top and bottom lines, generating a ton of cash from its operations, with negligible debt in its books. The reserves have been built up considerably. A bonus issue won’t be a surprise. Like most FMCG companies, margins are under a bit of pressure.

Bottomline? The stock chart pattern of Colgate Palmolive is poised to test, and possibly breach, its all-time high of 996. The stock has been in a bull market since touching its 2007 low of 300 – tripling in four years. This is the kind of stock that small investors should buy whenever they have some spare cash, with the object of leaving it as a family treasure for future generations to enjoy.

When stock markets slide, FMCG is the sector where investors can hide

FMCG is my favourite sector to invest in, regardless of the state of the stock market and the economy. Strong brands, positive cash flows, low debt, generous dividends, bonus issues and stock splits make this sector worth every Rupee you invest in it.

But when stock markets start to slide sharply – with or without any logical reasons – investors learn to really appreciate the FMCG sector. Why? Because the stocks in the sector tend not to fall as much as the broader market. The high-flying momentum stocks with promises of bright futures may give you phenomenal returns in quick time, but there won’t be any place to hide when those same stocks start tanking.

The Indian markets have underperformed global indices for the past two months by correcting about 10% from its Nov ‘10 top. It is not a huge fall for a bull market that rose from 8000 in Mar ‘09 to 21000 in Nov ‘10. But investors are already showing signs of fear and panic. Corrections are part and parcel of investing in the stock market. If you lose sleep every time the market corrects, be overweight in the FMCG sector.

Here are the chart patterns of 10 leading stocks from the FMCG sector in alphabetical order. The sector is a great defensive bet but not all stocks are worth investing in at this point in time.

Brittania

The Brittania chart pattern looks the weakest. Right after the 5:1 stock split in Sep ‘10, the stock hit a high of 535 (split-adjusted), made a high-volume reversal day pattern and moved into a down-trend. Of late, it has dropped below its 200 day EMA and is likely to breach the long-term support of 355. Avoid.

Colgate-Palmolive

The Colgate chart pattern shows consolidation within a symmetric triangle after the stock touched a high of 996 and a low of 815 in Nov ‘10. A likely break below the triangle can test support from the rising 200 day EMA. Partial profit booking may be in order.

Dabur India

After the 1:1 bonus in Sep ‘10, the Dabur stock hit a high of 112 (bonus-adjusted) before correcting down below its 200 day EMA to the support level of 91 in Nov ‘10. A sharp pullback took the stock above all four EMAs. It has been consolidating sideways between 99 and 105 for the past month. Accumulate.

Emami

Following the 1:1 stock split in Jul ‘10, the Emami stock steadily moved up to touch a high of 512 (split-adjusted) in Oct ‘10. It started to drift down and then suddenly collapsed below its 200 day EMA, down to 312 in Dec ‘10. A quick pullback has taken the stock above its long-term moving average, but the stock is trading below its falling 50 day EMA. Hold, with a stop-loss at 405 (200 day EMA).

Glaxo Healthcare

The Glaxo Healthcare chart pattern is in a bull market. After reaching a high of 2460 in Nov ‘10, the stock has been consolidating in a symmetrical triangle from which the likely break out is upwards. The stock is trading above its rising 100 day and 200 day EMAs. Buy, on a high volume break out above the triangle.

Godrej Consumer

The chart pattern of Godrej Consumer entered a downward-sloping channel after touching a high of 480 in Sep ‘10. It slipped below its 200 day EMA to get twin support from the level of 354 and the lower end of the channel in Dec ‘10. It has moved up to the upper end of the channel. Buy only on a high-volume break out above the channel.

Hindustan Unilever

From Jan ‘10 to May ‘10, the HUL stock traded well below its 200 day EMA, trying the patience of its long-term investors. It started its up move from Jun ‘10 and hit a high of 320 in Sep ‘10. It has since consolidated in a rectangular channel between 320 and 283. An upward break out earlier this month on decent volumes saw no follow-up buying, and the stock is back within the rectangular channel. The stock is trading above its rising 100 day and 200 day EMAs. Note that HUL reached a higher top than the one in Nov ‘10, while the Sensex made a lower top. Accumulate.

ITC

After the centenary 1:1 bonus issue, the ITC stock rose steadily to reach a high of 185 before starting a sideways consolidation between 166 and 181. The stock is trading above its rising 100 day and 200 day EMAs. Like HUL, the ITC stock touched a slightly higher top in Jan ‘11. Accumulate.

Marico

Like the Godrej Consumer stock, Marico is trading in a downward-sloping channel. After hitting a high of 153 in Oct ‘10, the stock fell below its 200 day EMA and the support level of 119 down to 115 in Dec ‘10 – a 25% correction. The recovery has been tepid. Buy only on a high-volume break out above the channel.

Nestle

The Nestle chart pattern is in a strong bull market. It touched a high of 4199 in Nov ‘10 and has been consolidating sideways, with good support from the rising 50 day EMA. The 100 day and 200 day EMAs are also rising. Use dips to accumulate.

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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.