Technical updates – Havell’s India and Marico Ltd

One of the ‘rules’ of the stock market – keeping in mind that stock market ‘rules’ are really empirical observations – is that the holdings of small investors in a company’s stock is inversely proportional to the fundamental strength of the stock.

For those who are mathematically challenged, it means that the better the company the lower is the holding of small investors, and vice versa. Two notable examples of this ‘rule’ are the stocks of Havell’s India and Marico Ltd.

A quick look at fundamentals: Havell’s has a net margin of 10%, RoE of 22.5%, debt/equity ratio of 0.07 and P/E of 36.2; Marico has a net margin of 14.7%, RoE of 29.2%, debt/equity ratio of 0.21 and P/E of 44.7. Both have positive cash flows from operations. Share holding of general public? 6.6% in Havell’s, and 3.6% in Marico.

Some may argue that high P/E ratios deter small investors from investing in such stocks. Really? Then how can you explain the 37.5% holding of the general public (which is more than the combined holdings of Indian and foreign promoters) in Punj Lloyd, which has a net margin of 0.1%, RoE of 0.2%, debt/equity ratio of 1.26 and a whopping P/E of 122?

Havell’s India

The 2 years closing chart pattern of Havell’s spent a couple of months (Aug-Sep ‘13) in bear territory before entering a strong bull rally that culminated with a small double-top reversal pattern at 333 (adjusted for 5:1 split) in Dec ‘14.

The stock has been in a sideways consolidation since then – receiving good support from the ‘support-resistance zone’ between 235 and 255. The stock has dropped below its 20 day and 50 day EMAs, but bounced up from its 200 day EMA.

Daily technical indicators are in bearish zones, but showing signs of recovery. This may be a good opportunity to enter/add to existing holdings.

Marico Ltd

The 2 years closing chart pattern of Marico spent a year consolidating sideways within a ‘rectangle’ pattern – finally breaking out upwards with a strong volume surge. It spent the next 2 months in another consolidation within a smaller ‘rectangle’ before rallying strongly to touch a high of 419 on Apr 16 ‘15.

A brief correction down to its rising 20 day EMA has removed overbought conditions, setting the stock up for resuming its up move.

Daily technical indicators are looking bearish, but trying to reverse direction. The stock is in a clear ‘buy on dips’ rally.

(If you are one of the unfortunate souls still mired in Punj Lloyd, get out now and get into Havell’s or Marico. You will thank me after 5 years.)

Stock Chart Pattern - Havell's India (An Update)

The previous update to the analysis of the stock chart pattern of Havell’s India was posted back in Jul ‘11 (marked by grey vertical line at the left of the chart below). The stock price was correcting from a ‘reversal day’ pattern after touching an all-time intra-day high of 451 in Jun ‘11.

Since the stock was in a bull market but near a new high, investors were advised to buy on dips, but with a strict stop-loss. A fall below 294 would have confirmed a bearish double-top reversal pattern.

The daily bar chart pattern of Havell’s India provided a good opportunity to buy as the price continued to fall before forming a small double-bottom reversal pattern at 313 in Aug ‘11:

Note that the stock price dropped below its 200 day EMA and dragged both its 20 day and 50 day EMAs below the long-term moving average. The ‘death cross’ of the 50 day EMA below the 200 day EMA technically confirmed a bear market – so how could one buy this particular dip? Was there any certainty that the price would not fall further and drop below 294 – which would be even more bearish?

Those are tough questions that don’t have easy answers. Keen observers may note that the second (slightly lower) bottom on Aug 26 ‘11 was accompanied by slightly higher bottoms in RSI and slow stochastic indicators.

Positive divergences in two of the four indicators wasn’t conclusive evidence of a reversal – but the subsequent rally and the formation of a much higher bottom in Oct ‘11 was a sign that the bulls were regaining control.

The cross above the 200 day EMA on Nov 2 ‘11 on a volume spurt followed by the ‘golden cross’ of the 50 day EMA above the 200 day EMA was conclusive evidence that the bulls were back in control.

Negative divergences in three of the four technical indicators (marked by blue arrows) stalled the bull rally and briefly dropped the stock’s price below the 200 day EMA in Dec ‘11. Note that while the broader market touched a new low in Dec ‘11, Havell’s touched a higher bottom.

The next leg of the bull rally was sharp and coincided with the rally in Sensex and Nifty. After a brief correction down to its rising 20 day EMA in Feb ‘12, the stock price rose to touch a new all-time intra-day high of 616 – nearly doubling in 7 months from its Aug ‘11 low.

However, the stock formed a ‘reversal day’ pattern. The subsequent correction formed a ‘diamond’ reversal pattern (which is like a head-and-shoulders pattern with a bent neckline). A 100 points correction followed, but the stock price has remained above its 200 day EMA.

A second lower top at 614 was touched on Jul 20 ‘12, raising the spectre of a double-top reversal pattern. Once again, three of the four technical indicators showed negative divergences (marked by blue arrows). Technical indicators have corrected from oversold conditions but are still bearish. A test of support from the 200 day EMA is a possibility.

Bottomline? The stock chart pattern of Havell’s India is in a long-term bull market. Periodic corrections and consolidations have strengthened the technical health of the chart. The company is growing well, has strong cash flows, negligible debt and has investor-friendly management – the right combination for the stock to be added to small investor portfolios on dips.

The curious case of Crompton Greaves

This is not a post about a court-room thriller, even though the title may sound like one of Erle Stanley Gardner’s page turners. That doesn’t mean that the process of discovery of the real cause behind the serious hammering of the stock price of Crompton Greaves may not be an exciting one.

First, the facts. A less than stellar Q1 result due to significant reduction in the consumer business (mainly electrical appliances) was a shock. That was followed by the revelation that the erstwhile CEO had dumped his entire stock holdings of 180000 shares earlier in the month.

The former CEO took pains to explain that:

(a) he doesn’t like to invest in the stock market but had received the shares as part of his compensation some 11 years back; at that time he had resolved to sell the shares immediately after retirement

(b) he retired on June 1, 2011 and sold the shares within a month of retirement after following due process of informing SEBI and the stock exchanges.

Doubts remained in the minds of investors because of three reasons:

1. Insider selling of large quantity of shares is considered a warning sign

2. Though he retired on June 1, 2011 Mr Trehan is still associated with the company though he doesn’t draw a salary. That means, he had insider’s knowledge about the poor Q1 performance of the company

3. The timing of the sale seemed a bit fortuitous. What if the stock market was in a deeper correction? Would he have sold his shares at lower prices? Alternatively, if the market was in the midst of a strong bull run, would he have waited a little longer to sell at a higher price?

Only Mr Trehan can answer those questions. Bottom line is that a lot of small investors were shaken by the severity of the stock price crash. Since such a crash didn’t occur when the ex-CEO actually sold his shares three weeks back, fingers are being pointed towards a bear cartel that used the fact of the insider sale as an excuse to hammer down the stock price. A fit case for SEBI to look into.

The Joint Managing Director of Havell’s – a competitor of Crompton in the consumer appliances space – does not believe that there is any cause of worry. Retail prices were hiked some time back due to increase in input costs. That may have led to consumers delaying their buying decisions. Another explanation is that distributors picked up more inventory in Q4 to avail of the then lower prices. That is why they lifted less inventory in Q1.

What should small investors do? On a TTM EPS of 10.61, the P/E at today’s closing price of 182.55 is 17.2. Not mouth-watering valuation by any means, but not hugely expensive either. If you are planning to enter, you may want to wait for Q2 results and then decide.

If you are holding the stock and are in profits, use the short-covering bounce up to book a part of it, and hold on to the rest. Remember the old stock market adage: When in doubt, stay out.

Stock Chart Pattern - Havell's India (An Update)

In the previous update to the analysis of the stock chart pattern of Havell’s India, written a year ago, I had recommended existing investors to hold or book partial profits, and new entrants to wait for a correction. The stock had closed at 661.30 – less than 15% below its Jan ‘08 high of 750; it is better to be cautious near a previous top.

The stock went on to touch a new all-time intra-day high of 892 (or, 446 after bonus adjustment) in Oct ‘10, just prior to the issue of 1:1 bonus shares (marked by the blue bell). Was my recommendation ill-timed? It would appear so – unless you take a look at the one year closing chart pattern of Havell’s India:

Note that the prices have been adjusted following the bonus issue in Oct ‘10. All price levels in the previous update should be divided by 2 for comparison. Existing holders – even those who may have booked partial profits – enjoyed the rise from 330.65 (adjusted for 1:1 bonus) in July ‘10 to 437.60 in Oct ‘10.

The MACD and ROC made lower tops, and the RSI made a flat top as the stock rose to its peak in Oct ‘10. The negative divergences gave early warning of a correction, which got exacerbated after the bonus issue.

Why? Often, investors resort to selling the stocks that they bought at high prices prior to the bonus issue. As the stock went ex-bonus (i.e. halved in value), investors sold at lower prices to book short-term losses to avail tax benefits. Many investors also sell after the bonus shares are credited to their demat accounts, to reduce their holding costs.

Whatever the reasons, the stock fell steeply to close at 293.70 on Feb 10 ‘11 – a fall of 34% from the peak, underperforming the Sensex correction of 18%. The 50 day EMA hardly went below the 200 day EMA – despite the steep fall below the long-term moving average.

Take a look at what happened next. Not only did the correction provide a better entry point to new investors, a ‘V’ shaped recovery took the stock to a new all-time closing high of 441 – recovering all its losses, and outperforming the Sensex.

The stock touched a new all-time intra-day high of 451 on Jun 15 ‘11 – a day after it closed at 441 – but formed a ‘reversal day’ pattern that started another sharp correction below the 50 day EMA.

I have drawn three ‘fan lines’ (numbered 1, 2 and 3) to ‘capture’ the rally and the subsequent correction. So far, the third fan line has provided support, keeping the rally alive. However, a break below may signal a deeper correction. A fall below 294 will confirm a bearish double-top.

The technical indicators are recovering from oversold conditions. The MACD is negative and below its signal line, but is turning around. The ROC is also negative, but has crossed above its 10 day MA. Both the RSI and the slow stochastic are emerging from their oversold zones. Volumes have picked up over the past two days. An upward bounce is in progress.

The company is fundamentally strong, with good cash flows and manageable debt. The management is investor friendly – paying regular dividends and three 1:1 bonus issues in the past 6 years. The Sylvania acquisition should start bearing fruit. Margins are under a bit of pressure. A play on the domestic consumption story and a great stock for a small investor’s portfolio.

Bottomline? The stock chart pattern of Havell’s India is in a bull market. One can buy the dips, but with a strict stop-loss. Watch the third fan line closely; a break below can turn into a deeper correction.

Contrarian plays in the Capital Goods sector

The BSE Capital Goods index has been a major underperformer over the past year because of poor performances of investor favourites like Crompton Greaves, Praj Industries, Punj Lloyd, Thermax, Suzlon. Even stocks of stalwart companies like L&T and BHEL have disappointed.

In every sector, there are always a handful of stocks that buck the trend and provide money making opportunities. 15 out of the 19 stocks that comprise the BSE Capital Goods index are in bear markets. The 4 remaining stocks can be good contrarian plays. Given below are their one year bar chart patterns.

ABB

After trading below its 200 day EMA in Aug ‘10, the ABB stock made a bullish rounding bottom pattern and rose sharply to reach a 52 week high of 975 on Sep 29 ‘10. A ‘reversal day’ pattern (higher high, lower close) marked the end of the up move. A strong 39% correction ended with another ‘reversal day’ (lower low, higher close) on Feb 10 ‘11. A ‘V’ shaped recovery culminated with a top at 907 on May 11 ‘11 – correcting 82% of the fall and restoring the bull market in the stock.

The technical indicators are suggesting that the current consolidation may last a little longer. Any dip to the 50 day or 200 day EMAs may be a good entry point.

Havell’s India

The Havell’s India stock chart pattern may look similar to ABB’s, but there are a couple of notable differences. The stock hit a pre 1:1 bonus adjusted high of 446.50 on Oct 5 ‘10 after a 19 months long bull rally. The subsequent correction was exacerbated by the additional liquidity from the bonus issue. The stock dropped below its 200 day EMA for the first time in 20 months, and reached a low of 290 on Feb 11 ‘11 – a 35% correction from its peak. The sharp recovery prevented the ‘death cross’. The Apr 27 ‘11 top of 422.50 retraced almost 85% of the correction.

The stock is consolidating within a symmetrical triangle, and the technical indicators are looking weak. Can be accumulated slowly.

Lakshmi Machine Works

The strong bull rally of the LMW stock ended with a double-top reversal pattern. After touching an intra-day peak of 2920 on Nov 8 ‘11, the stock corrected almost 32% to a low of 2000 on Feb 25 ‘11. A bullish rounding bottom pattern seemed to restore the bull market in the stock. But a sharp correction has dropped the stock below its 200 day EMA again.

The technical indicators are looking oversold, which means the down move may be ending soon. Accumulate slowly.

Siemens

The brief drop below its 200 day EMA in Jan ‘11 did not have much effect on the bull rally in Siemens. The stock is consolidating sideways, and may continue to do so for some more time. Can be added on dips.

Stock Chart Pattern - Havell's India (An Update)

The previous analysis of the stock chart pattern of Havell’s India was written 11 months back. The stock had entered a sideways consolidation pattern after more than tripling in value from its bear market low of 100.

A bullish ‘ascending triangle’ pattern was in the process of being formed, and I had advised investors to either buy during the consolidation phase, or after the break-out upwards. Readers who heeded my advice have more than doubled their investments in the intervening period.

There are several interesting technical patterns worth noting on the 1 year closing chart pattern of Havell’s India:

 

The consolidation within the ‘ascending triangle’ (flat tops and rising bottoms) lasted a little more than 3 months – from Jun ‘09 till Sep ‘09 - before the first upward break out on an uptick in volumes occurred. This has been marked by the arrow on the left.

The stock price soon drifted back into the triangular consolidation area on much reduced volumes, took support at the up-trend line and the 50 day MA, and again broke out upwards in early Oct ‘09. Note that the volumes were a little lower during the second break out (marked by the arrow on the right) – which made the subsequent up move questionable.

In a classic example of a ‘bear trap’, a small head-and-shoulders pattern met its down-side target below the 50 day MA, and what looked like a ‘false break-out’ (highlighted by the blue oval) turned into a strong bull rally. Symmetrical triangles tend to be unreliable, as price break outs can happen in either direction. But ascending (and descending) triangles tend to be much more reliable for trend prediction.

Note that from Dec ‘09 to Apr ‘10, the stock made new highs on strong volumes – but the volume peaks were lower for each high. All three technical indicators – MACD, RSI, slow stochastic – made lower tops. The negative divergences warned about the 135 points (20%) correction that followed during Apr and May ‘10.

The stock has since made up the entire correction and gained more than 150 points to reach a new high of 692. It faced a long-term resistance level and has dipped down. A test of the Jan ‘08 high of 750 is on the cards.

The technical indicators are showing negative divergences again, making flat tops as the stock made a higher top. The stock may consolidate sideways or drop some more before attempting to climb to a new high.

Bottomline? The stock chart pattern of Havell’s India is in a strong bull market, as it is above its rising 50 day and 200 day MAs. Existing investors can hold, or book partial profits. New investors should refrain from entering so near its all-time high, and buy only after a correction.

Stock Chart Pattern - Havell's India

The stock chart pattern of Havell's India is not that different from several other stock chart patterns discussed on this blog. The real difference lies in how a staid 50 years old low-end electrical equipment manufacturing company has managed to carve a niche for itself.

Industrial and domestic electrical switches, cables and wires, motors, fans and light fixtures isn't exactly a high margin product range to drool over. Against stiff competition from the organised and unorganised sector, the quality of their products has brought them fame and fortune from top clients in India, and export tie-ups with big overseas names like GE, Siemens-Electrium, Eatons, Geyer, Proteus.

60% promoter holding, nearly 18% FII holding, good growth through capacity expansion, regular dividends, strong cash flows from operations, low debt, low equity, huge reserves, back-to-back 1:1 bonus issues in 2005 and 2006 are adequate reasons for investors to put this stock on top of their buy list.

Let us take a look at the one year bar chart pattern of Havell's India to see if this is a good time to enter or not:-

After making a high of 750 (face value Rs 5) on Oct 18, '07, the stock entered a long term bear market triggered by its $300 Million acquisition of Sylvania, Germany's lighting business.

After a huge fall of 650, it made a double bottom at 100 (on Dec 2, '08) and 101 (on Mar 9, '09) before embarking on a sharp rally that took it to 332 on Jun 2, '09 - retracing 36% of the entire bear market fall (just below the 38.2% Fibonacci level of 348).

The stock is consolidating sideways for the past 3 months and has received good support from its 50 day EMA, which is rising along with the 200 day EMA.

Volumes haven't been great, but that's expected during a consolidation phase. The RSI has moved above the 50% level. So has the slow stochastic, with the %K line above the %D.

Bottomline? The stock chart pattern of Havell's India is beginning to show a bullish 'ascending triangle' formation, which has an upward breakout probability. A consolidation after an up move is usually a continuation pattern. That means, the direction of the move before entering the consolidation pattern will continue. Investors can make a small investment now, or wait for the upward breakout to get in.