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 – 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 - Marico Ltd (An Update)

The previous update to the technical chart pattern of Marico Ltd was posted on Mar 23 ‘11 when the stock had closed at 129.45 (marked by grey vertical line on chart below). Earlier, after touching an intra-day top of 153 in Oct ‘10, the stock had started correcting a little ahead of the broader market. On Feb 9 ‘11, the intermediate correction had ended with a high volume ‘reversal day’ pattern as the stock touched an intra-day low of 112.10 – well below its 200 day EMA.

The 20 day EMA had briefly fallen below the 200 day EMA, but the 50 day EMA did not do so. That was an indication that the bull market was intact and the dip was a buying opportunity. The concluding comments in the previous post are worth repeating: “Small investors should add such stocks to their portfolios for steady gains and downside protection, instead of running after mythical multibaggers. Existing holders can top up their holdings. New entrants should wait for a convincing break above 136 to buy.”

The daily bar chart pattern of Marico Ltd clearly shows that investors would have benefitted by following the recommendation to buy:

Shortly after the previous post, the stock price rose to test the support-resistance level of 136 and crossed above. A few days of sideways consolidation in Apr ‘11 was followed by a sharp rise to 150 – an unsuccessful test of the Oct ‘10 peak of 153. The stock price dropped down below its 20 day and 50 day EMAs in May ‘11, but found good support from the rising 200 day EMA.

Another test of its previous top stopped short at 151.80 on May 31 ‘11. This time, the correction received combined support from the 50 day EMA and the 136 level. The subsequent up move comfortably crossed the previous top of 153 and touched a new high of 172.70 on Jul 27 ‘11 – a respectable 33% gain in 4 months.

For the next 6 months, the stock was in a period of consolidation during which the 200 day EMA provided good support – except for a few days in Dec ‘11, when it dropped below its long-term moving average and the 136 level. Dec ‘11 had marked the 52 week low on the Nifty and Sensex charts, while Marico’s stock touched a higher bottom.

The entire 6 months long consolidation formed the ‘cup’ of a ‘cup and handle’ bullish continuation pattern. The ‘handle’ formation took about a month – from early Feb to early Mar ‘12 – with the stock price getting support from the rising 50 day EMA. The next leg of the up move reached a new high of 184.40 on Apr 25 ‘12.

Before touching the new high, the stock started consolidating within a rectangular pattern between 176 and 184 and broke down from the pattern on May 14 ‘12. A drop to the rising 200 day EMA (at about 160) is a possibility, which may provide an opportunity to add/enter.

The technical indicators are quite bearish and pointing to a deeper correction. The MACD is below its signal line and has dropped inside negative territory. The ROC is negative and below its falling 10 day MA. The RSI has bounced up from the edge of its oversold zone. The slow stochastic is inside the oversold zone.

Bottomline? The stock chart pattern of Marico Ltd is undergoing a bull market correction and providing an entry opportunity. At the risk of sounding like a broken record (or a scratched CD), investors should seriously consider adding FMCG stocks like Marico to their portfolios. The high P/E ratios of FMCG stocks should not be a deterrent. Good things are never cheap!

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 - Marico Ltd (An Update)

The previous update on the stock chart pattern of Marico Ltd was in May ‘10. The stock had just hit an intra-day low below 100, and the technical indicators as well as volume spikes on down days were pointing to further downside.

But the stock took support from its rising 200 day EMA, and embarked on the next leg of the rally, hitting a new intra-day high of 136 on Jun 30 ‘10. When I wrote the original post back in Jul ‘09, the stock had moved above its Jan ‘08 bull market peak and was looking overbought at 90. Reader Sumit disagreed, and suggested a target of 160 within 2 years. I am not ashamed to admit that Sumit was right – as the one year bar chart pattern of Marico Ltd will reveal:

The stock price corrected from 136 down below the 50 day EMA to 116 on Aug 12 ‘10 – which happened to be a high volume ‘reversal day’ (lower low, higher close). The next rally ended with a sharp intra-day spike to 153 on Oct 25 ‘10 – nearly meeting Sumit’s target.

The stock continued to move higher on a closing basis for a few more days, but the down trend had begun. Note the negative divergences in the technical indicators (marked with blue arrows) – they touched lower tops as the stock reached a higher top.

The down trend appears to have ended with another very high volume ‘reversal day’ pattern on Feb 9 ‘11. The subsequent rally first broke the down trend line on Mar 7 ‘11, followed by a breach of the support/resistance level of 136 on Mar 16 ‘11.

A pullback to the down trend line is in progress. Twin supports from the rising 50 day EMA and the down trend line should make this a possible entry point. Despite the stock spending several trading sessions below the 200 day EMA and correcting more than 25% from its Oct ‘10 peak, a bear market didn’t get confirmed because the 50 day EMA never crossed below the 200 day EMA (‘death cross’).

Both the 50 day and 200 day EMAs are rising again with the stock trading above them, signifying a bull market. The technical indicators are showing some weakness – thanks to the pullback. The MACD is positive but has slipped below its signal line. The ROC has dropped below its 10 day MA into negative territory. Both the RSI and slow stochastic are falling towards their 50% levels after visiting their overbought zones. The stock may consolidate a bit between the down trend line and the 136 level.

Marico Ltd is fundamentally strong, though margins are under pressure. A TTM P/E of more than 32 doesn’t leave any ‘Margin of Safety’. Still, the stock has given more than 25% returns in 10 months – a good reason why small investors should take a serious look at this FMCG company.

Bottomline? The stock chart pattern of Marico Ltd is an example of why FMCG is my favourite sector. Small investors should add such stocks to their portfolios for steady gains and downside protection, instead of running after mythical multibaggers. Existing holders can top up their holdings. New entrants should wait for a convincing break above 136 to buy.

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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Stock Chart Pattern - Marico Ltd (An Update)

When I analysed the stock chart pattern of Marico Ltd in end-July '09, it had risen from a low of 47 to a high of 92 and was showing signs of being overbought. Brokerages were giving 'buy' calls but I expected a correction.

A growing, fundamentally strong FMCG company like Marico Ltd is just the kind of company that small investors should consider investing in - particularly during uncertain times. But one should always exercise caution near a chart top.

It is time to have a re-look at the one year bar chart pattern of Marico Ltd:

 

The stock corrected from 92 down to 78, where it received support from the rising 50 day MA. Now 14 points don't seem like much of a correction, does it? But for a Re 1/- face value stock that isn't a measly amount. In fact, it was a 31% retracement of the rise from the bear market low of 47 to 92, and a 15% correction from the high of 92.

The technical health of the stock got restored, and it rose steadily for the next 3 months to hit a new high of 113 in Nov '09. Thereafter, the stock got into a sideways consolidation phase that lasted almost 5 months.

A second bottom at 96 in late Feb '10 saw the stock moving up smartly, ending with a sharp upward breakout from the consolidation zone. The stock touched a high of 122 on Apr 5 '10 - but on low volumes. All three technical indicators made lower tops - indicating negative divergences.

The bears took the opportunity to go on the offensive. The stock hit a low of 105 earlier this month, then rallied to 118 before dropping to 100 in quick time. A bearish 'lower top - lower bottom' pattern has formed.

The stock is trading at an EPS of 28, which is higher than ITC's EPS of 25. Support levels at 96, 92, 87 and 78 have been marked on the chart. The 92-96 zone should provide strong support. The band between 78 and 87 could be a better entry opportunity.

The MACD is getting deeper into negative territory. The slow stochastic has entered the oversold zone. The RSI is showing positive divergence, by making a higher bottom as the stock made a lower one.

Bottomline? The stock chart pattern of Marico Ltd is hinting at more weakness. Prices neither rise nor fall in one go. So a bit of up move and consolidation can be expected. Further down side is indicated by the down day volume spikes, which are a sign of distribution.

Stock Chart Pattern - Marico Ltd

Before analysing the stock chart pattern of Marico Ltd, it may not be out-of-place to look at their Q1 results and some projections.

Consolidated net sales grew 16.8% Year-on-Year and volumes rose 14%. Gross margins expanded 3.5% due to a fall in prices of raw materials. Advertising costs increased by 1% to 12.2% of sales and other expenditure increased by 2%. PAT grew 29.6% Year-on-Year to Rs 60 Crores.

These figures look pretty impressive. Positive cash flows from operations and regular dividends are other plus points. Debt is increasing to fuel the growth in overseas markets. The high percentage of advertising expense-to-sales is another concern.

As per a report by Motilal Oswal, the PAT is expected to grow at the rate of 20% for the next three years. At the current price, the stock is trading at 22 times its projected EPS of 3.9 in '09-'10 and 18 times its projected EPS of 4.8 in '10-'11.

Fundamentally, this is another strong stock from the FMCG sector and the 'BUY' call seems justified. The 2 years bar chart pattern of Marico Ltd gives a different picture:-

The Re 1 face value stock made a top at 83 and a bottom at 47 in Jan '08. The bear market in the stock lasted till Nov '08. It tested the Jan '08 low twice - once in Oct '08 and once in Nov '08.

The up move that started from Nov '08 took the stock above its 200 day EMA in Feb '09 and its 50 day EMA crossed the long-term average in Mar '09. The stock moved into a bull market when the BSE Sensex index was making its bottom!

From Apr '09, the rally became stronger with higher volumes. Earlier this month, the stock sailed past its previous high and recently hit 91 before starting a bit of consolidation.

The bull rally is definitely looking stretched. Except for the MACD, which is a lagging indicator, the other three - RSI, MFI and slow stochastic - have all corrected from overbought zones and are showing negative divergences from the stock chart.

But most ominous is the difference between the stock, its 50 day and 200 day EMAs - which typically warns of a change of trend. In Jan '08, the stock went way above its 50 day EMA, which in turn was way above its 200 day EMA. The stock had corrected sharply.

In Nov '08, the opposite happened. The stock was way below the 50 day EMA, which was well below the 200 day EMA. The stock shot up shortly thereafter.

Bottomline? We have a similar situation on the stock chart pattern of Marico Ltd to that of Jan '08. Will the pattern repeat? With technical analysis, one can never be certain. Just let me ask you this - after seeing this pattern, will you bet on the up side or on a correction? If it corrects, how low can it go?

(Thanks to reader Eswar for suggesting this stock.)