The Sensex Fool’s Four stocks

This is a sequel to last Thursday’s post: Fool’s Four stock investment strategy. Before proceeding further, let me thank readers Googol, Purnendu and Rishi for providing me with their lists.

There are a few stocks common in their lists with mine, but there are differences due to changes in current market prices, adjustments for split/bonus and calculation of dividends. I have checked the list to the extent possible, without turning it into a research project. But there may be errors in my list as well.

The point to note is that the stocks that make the list – with one notable exception – have under-performed the Sensex by various degrees. That is the whole idea behind the Fool’s Four strategy. Without further ado, here are the Sensex Fool’s Four stocks:

1. NTPC
2. Jaiprakash Associates
3. ITC
4. ONGC
5. Wipro
6. Tata Steel

Why 6 stocks? Well, if you read the previous post, you will know that the stock ranked 1 – viz. NTPC - is supposed to be dropped from the list. That leaves 5 stocks. Regular readers may be aware that I am biased against PSU stocks because the government treats them as ‘free ATMs’ and run them to the ground. That eliminates ONGC from my list.

Given below are the one year closing charts of the remaining four – compared with the Sensex (in green):-

Jaiprakash Associates

Jaiprakash Associates has been a significant underperformer for the past one year, and it isn’t a surprise that it is at the top of the list. The company’s ambitions have far exceeded its execution capabilities. The huge debt burden is a millstone around its neck. Since it has fallen so much, the chances are better for a higher percentage gain when the market eventually turns around.

ITC

ITC is the odd-one-out of this list. It was a market performer till Feb ‘11, but has significantly outperformed the Sensex from Mar ‘11 onwards. The special centenary dividend boosted the dividend yield. The dividend is unlikely to be repeated next year. But this is a great stock to own – even if it wasn’t on the list.

Wipro

Wipro had outperformed the Sensex till mid-Jul ‘11. It is the last two months that haven’t gone well. There are management issues that haven’t yet been sorted out to the market’s satisfaction. Of late, it has fallen behind aggressive competitors like Cognizant and HCL Tech. But it is a good company and may fight back.

Tata Steel

Like Wipro, Tata Steel has underperformed the Sensex in the last two months. It is the lowest cost integrated steel maker in India and extremely well-managed. The Corus integration is still a work-in-progress, and the real benefits of the acquisition may be a couple of years away. But I have no doubts that the current problems in Europe will be overcome, and the company’s bottom line will significantly improve.

The Fool’s Four strategy suggests that you invest equal amounts of money in all four stocks, and make any adjustments only after one year. Will the strategy work? There is only one way to find out – by investing. Or, you can opt out by only investing ‘on paper’ and check back after one year.

The implication of high oil price for investors – a guest post

With oil prices ruling above $100 per barrel, India’s trade deficit is widening and inflation remains a major concern. In this month’s guest post, Nishit looks at the implication of high oil prices for investors, and suggests how we can benefit from this adversity.

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From a low of about $33, Crude Oil has now spiralled up to a high of almost $110 a barrel. Crude Oil is the lubricant which runs the world, so let us investigate why the rise in price and what are its implications for India.

Most of the crude oil deposits lie in the Middle East. Middle East has been racked by turmoil and unrest. Supply of oil has been threatened in Libya and other parts like Saudi Arabia. The price rise has been mainly on the back of supply concerns.

India imports 70% of its oil, and if the price rises it implies that it would need to spend more dollars to buy the fuel. A country earns dollars by exports, inward remittances by Indians settled abroad and also foreign investments into India.

We spend the dollars on imports. The difference between exports and imports is known as Current Account Deficit. As we import more than we export, we are always in trade deficit.

If Oil is pricey, the deficit widens, and India’s credit worthiness declines making it less attractive for foreign investors. Petrol price rise gets passed on to the consumer, thereby leaving him with less income to spend.

Subsidy on Diesel of almost Rs 18 to a litre weakens government finances leaving it with less money to spend on infrastructure and developmental activities.

In 2008, crude oil price rose and peaked at around $145 per barrel. All the time, as oil price was rising the equity markets did not react too much to the price rise. A month after the prices peaked, the markets tanked. This was aided also by the Lehman Brothers meltdown.

Now how do we play this as small investors?

We have oil producers like ONGC and Cairn. Cairn is a major beneficiary but now caught up in legal tangle over its acquisition by Vedanta, and ONGC has to bear the subsidy burden.

The legal tangle has no effect on its daily operations and hence I would still prefer Cairn to ONGC. Portfolio allocation could be these two companies and Gold. Average gold price per ounce is 15 times a barrel of oil. This implies fair price for Gold now is $1650 per ounce.

This also means avoid the Auto sector, Banks and anything which is linked to rising Interest Rates. Rates will keep rising as government battles inflation and also seeks to raise more money to pay for oil.

Don’t like the petrochemicals sector? Long Gold and short Banks could be an interesting option.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Related Post

Cairn India: an oil story worth betting on – a guest post

Which stocks are keeping the Sensex down?

The BSE Sensex index comprises 30 stocks. 16 of them are currently trading above their 200 day EMAs – indicating bull markets. 14 are trading below their 200 day EMAs, preventing the Sensex from reaching new highs.

Here are brief thumb sketches of the laggards:

BHEL: Bounced up sharply from a low of 1905, but found resistance from the 200 day EMA; currently trading just below the long-term moving average.

CIPLA: Touched a low of 286 before a sharp rally to 332 – above its 200 day EMA; now consolidating between the 50 and 200 day EMAs.

DLF: The rally from the low of 209 stopped well short of the falling 200 day EMA; the stock has dropped down to seek support from its 50 day EMA.

Hero Honda: The stock touched a low of 1378; a spirited rally was stalled at its falling 200 day EMA; the stock has started to drop towards its 50 day EMA.

HUL: The stock dropped below its 200 day EMA on Jan 27 ‘11; it has been trading sideways since then, alternately going above and below the long-term moving average.

Jaiprakash Assoc.: From a low of 70, the stock reached a high just short of the 100 mark but well below its falling 200 day EMA; it has dropped down to seek support from its 50 day EMA.

L&T: The stock is trading sideways in a narrow range, just above its 50 day EMA but well below its falling 200 day EMA.

Maruti: Trading below the 200 day EMA for the past three months, the stock had a day’s close above the long-term moving average, only to drop below its 50 day EMA.

NTPC: The stock has been trading below the 200 day EMA since end-Oct ‘10; a couple of brief forays above the long-term average saw strong selling pressure; currently trading below its 50 day EMA.

ONGC: The bonus and stock split didn’t help the stock much; a day’s close above the 200 day EMA was followed by a steep drop below its 50 day EMA.

Rel. Comm.: A rally on strong volumes could only sustain above its 50 day EMA briefly, and has fizzled out already; the stock is well below its 200 day EMA.

Reliance: The stock has been trading in a broad sideways range, oscillating around its 200 day EMA – giving no returns to its investors; currently trading just below the long-term moving average.

Rel. Infra.: Another ADAG stock with equally disastrous results – a brief rally on good volumes above the 50 day EMA that is showing signs of weakness; the stock is trading way below its 200 day EMA.

Sterlite: A sharp rally accompanied by a volume spike took the stock from a low of 45 to a high of 68; but it stopped short of its falling 200 day EMA and started correcting.

Unless some of these 14 stocks start to rally soon, the Sensex may remain range-bound. Technically, the most likely candidates to help propel the Sensex upwards are BHEL, CIPLA, HUL, L&T, Maruti and Reliance. Dropping Rel. Comm. and Rel. Infra. from the index would not hurt either.

12 Sensex stocks displaying the ‘death cross’

The main reason why the Sensex isn’t showing a ‘death cross’ yet, is that only 12 of the 30 Sensex stocks are showing the ‘death cross’. The balance 18 are technically still in a bull market. For the uninitiated, the ‘death cross’ is the 50 day EMA crossing below the 200 day EMA on a price chart, signalling the beginning of a bear market. (The 50 day EMA crossing above the 200 day EMA, signalling the beginning of a bull market, is called a ‘golden cross’.)

Chart patterns of the 12 Sensex stocks displaying the ‘death cross’ (marked by blue ovals) are discussed below:

BHEL

BHEL is a PSU blue-chip that started correcting after hitting a peak in Oct ‘10. The correction in the Sensex from Nov ‘10 exacerbated the fall. The ‘death cross’ occurred in end-Nov ‘10, two days after the stock dropped sharply to an intra-day low of 2060. A strong pullback took the stock up to 2379, where it faced strong resistance from the combined 100 day and 200 day EMAs.

Though technically in a bear market, the stock is trying to build a base. A move above 2379 will create a bullish pattern of higher tops and higher bottoms. The RSI and slow stochastic are showing positive divergences, having reached higher tops as the stock made a lower top. Use the dip to accumulate.

DLF

DLF, the real-estate high flier, doesn’t really score very high on management ethics, accounting transparency or investor friendliness. The stock is in a long-term bear market. A brief rally took the stock to a 52 week high of 397 in early-Oct ‘10. That was an opportunity to sell. The ‘death cross’ in Dec ‘10 has restored the bear market. With the recent tightening of loans to real-estate players by banks and housing finance companies, you can forget about investing in this stock even as a contrarian play. It may be headed down to two-digits.

Hero Honda

Hero Honda was one of the stars of the bull market till its peak of 2094 in Apr ‘10. A technically overbought condition started a corrective spell. The confirmed news of Honda, Japan pulling out of the joint venture was given a thumbs down by the market. The uncertainty about the future has led to heavy selling. The ‘death cross’ in end-Jan ‘11 is signalling a bear market for this blue-chip. Avoid.

Jaiprakash Associates

Jaiprakash Associates has been in a down trend since touching a high of 180 in Oct ‘09. The ‘death cross’ occurred in May ‘10, confirming the bear market. The rally from Sep-Nov ‘10 was an exit opportunity. Launching huge projects and borrowing money by the truck-load seems to be the core competency of this company. The stock is headed towards low double-digits. Avoid.

Larsen & Toubro

It is a bit disappointing to see a blue-chip like Larsen & Toubro in this group of bearish Sensex stocks. It started correcting with the Sensex after touching a peak of 2212 on Nov 4 ‘10. The sharp fall in Jan ‘11 was partly due to the less-than-expected Q3 performance. The re-structuring into 9 separate companies has also caused some uncertainty in the minds of investors. The ‘death cross’ will occur tomorrow, but I would use this dip to accumulate the shares of this fundamentally strong and investor-friendly company.

Maruti Suzuki

Maruti Suzuki’s chart pattern has two ‘death crosses’ – one in May ‘10 and the other in Jan ‘11. What does it indicate? Technical analysis is not a science, and no rule is sacrosanct. The ‘death cross’ usually indicates the start of a bear market. But not in this case. The stock has been consolidating sideways since reaching a top of 1740 in Sep ‘09 – causing the ‘death cross’ to occur twice without entering a bear market. Yesterday’s low of 1170 formed a possible double-bottom. The RSI and slow stochastic are indicating a likely upward bounce. Accumulate.

NTPC

The NTPC stock chart pattern is also showing two ‘death crosses’ – the first in May ‘10 and the second in Nov ‘10. The stock has been drifting downwards since touching a peak of 242 on Dec 31 ‘09, and is in a bear market. The hype about the phenomenal growth and profit opportunities in the power sector has proved to be just that – hype. Avoid.

ONGC

The ONGC chart also has two ‘death crosses’ – one in Apr ‘10 and the other in Jan ‘11. The first one didn’t cause too much damage to the bulls. The current one is unlikely to do much damage also – because the FPO has been scheduled for Mar ‘11, and the DIIs are likely to buy at dips till the FPO goes through. This is a great company but the government’s meddling has messed up its operations. This is a major reason why I avoid all PSU stocks. Accumulate.

Reliance Comm

Where is the ‘death cross’ in the Reliance Communications chart? It happened more than two years back, and is not showing up in the one year chart pattern! The stock is in a long-term bear market and should ideally be removed from the Sensex 30 index. Only big-brother can bail this company out. Don’t go anywhere near this.

Reliance Infra

Reliance Infra chart also has two ‘death crosses’. The first one was caused by the sideways movement in Feb ‘10. The next one in Sep ‘10 signalled the bear market. Anil Ambani has proven to be a big bag of wind with a slow leak. If you are invested in this company, bail out now before it becomes too late.

Reliance Ind.

Reliance chart has two ‘death crosses’ as well – one in Aug ‘10 and the other in Jan ‘11. The first one was due to the sideways consolidation that has generated negative returns in the past one year. But the second one looks more ominous. The fall in Jan ‘11 has been steep and on increasing volumes. If Reliance doesn’t recover soon, it will drag down the Sensex with it. The technical indicators are hinting at a further fall. Wait for the correction to play out before entering. 

Tata Power

The ‘death cross’ in the Tata Power chart hasn’t yet happened – even though it has been marked in Sep ‘10. The 50 day EMA spent only a few trading sessions below the 200 day EMA due to the sideways consolidation, followed by a 52 week high. The current corrective spell may push the stock into a bear market. Wait for the correction to play out before entering.

Oil is on the boil – how can investors benefit? (A guest post)

Oil price is once again making headlines as it inches up towards the $100 mark. Food inflation shows no signs of cooling off, making another round of interest rate hikes by RBI almost inevitable. Rising price of oil will be an additional headache that will lead to rising import costs, worsening India’s trade deficit. Another rise in petrol and diesel prices – unless the government becomes proactive by reducing taxes – will further stoke the fire of inflation.

Is it all darkness and doom? In his guest post this month, Nishit looks at the silver lining. He discusses two stocks that are likely to benefit from higher oil price. Before we get to Nishit’s post, here is an announcement from Nishit’s friend Anuraag about an interesting Panel Discussion that readers in Mumbai may want to attend:

With the purpose of spreading awareness among Market Participants, in association with Eco Ashram, we are organising a Panel Discussion on the topic “Stock Markets or Rigged Casinos?” on 21st of January 2011 at "Y. B. Chavan Centre, Mumbai" from 5:00 P.M. to 7:00 P.M. The event is called "NATIONAL ECONOMIC DEBATE".

The Panelists are Dr. Ajit Ranade (Chief Economist, Aditya Birla Group), Shri. G. Anantharaman (Former Whole-Time Member, SEBI) & Dr. R. Vaidyanathan (Professor, Finance & Control – IIM, Bangalore).

The discussion will be followed by release of the book, “Sense, Sensex and Sentiments – The Failure of India’s Financial Sentinels” written by Shri. M.R. Venkatesh, Chartered Accountant.

For more details, contact:

Anuraag Gupta
Profound Consulting Pvt. Ltd.
502, A-Wing, Delphi, Hiranandani Business Park, Powai, Mumbai - 400076
Telefax: 022 25704357
Cell: +919892832789; anuraag@nedindia.com

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Crude prices have risen to 92 dollars a barrel. Now, the question is how do we benefit from this? One way is buying crude as a commodity on the MCX Exchange, which is beyond the reach of most retail investors. My sincere advice to retail investors is to stay away from Commodity Trading. So, how do we play it on the stock markets?

We could buy companies dealing in crude. The downstream players are HPCL, BPCL and IOC. Now these companies mainly refine crude and sell the products. They have to bear a subsidy burden on Diesel and Kerosene. The government has come with a formula of 1/3^rd burden by refiners, 1/3^rd by government and 1/3^rd by the upstream companies like ONGC, Gail and Oil India. Now, crude prices can go over the roof and the government has no defined mechanism to handle it.

Keeping that in mind the downstream companies are strictly off the buy list. Coming to ONGC, the price which ONGC gets is strictly capped due to the subsidy burden. ONGC is supposed to come out with a FPO in mid-March 2011. The stock is getting split along with a bonus issue for which the record date is yet to be announced. So at the closing price of Rs 1205 (Jan 7 ’11), you would be getting 4 shares for every 1 share you buy now.

Arguments in favor of buying ONGC:

1. Government Company - so a very safe buy
2. EPS of 74 and P/E of 16 - so not very expensive. Safe play on crude oil. A multi-bagger over past 10 years. Can buy and hold
3. If the Government wants the FPO to go through, they will clear the air on subsidy burden, thus making it an attractive offering

Argument against ONGC:

1. The subsidy sword keeps dangling over ONGC. Until clarity comes nothing can be done to enhance profitability
2. FPO in March ’11. Experience over past 1 year is stock prices of government companies which come for FPO are usually kept depressed before the FPO, so folks get a good rate

Cairn India is a good company, which I like and had written about in a post in August ‘10. Here is the link:

http://investmentsfordummieslikeme.blogspot.com/2010/08/cairn-india-oil-story-worth-betting-on.html

To update the story, Vedanta has to get approvals from the government, which are expected in the middle of February ‘11. If this goes through, the Open offer will be at Rs 355 for a 20% stake. The promoters of Cairn have been paid Rs 50 as non-compete fee. There is speculation that the open offer could well be at Rs 405.

Now taking crude oil prices to be around 96 dollars, the fair value of Cairn is already around Rs 350. Vedanta has the muscle to pump in funds to make acquisitions and companies taken over by Vedanta in the past have sizzled post acquisition. Sesa Goa and Hindustan Zinc are prime examples.

Government approvals should be in place, ONGC will negotiate to get rid of their royalty burden on joint oilfields with Cairn in return for giving a NOC.

How do we play all this?

In Cairn, the downside looks limited, so should be bought now. One can buy ONGC during the FPO. The reason for this is FPOs are always at a discount to market price, plus the retail fraternity gets additional 5% discount to the offer price. By buying Cairn now, we are getting a crude oil exposure. Crude going up means the fair value of Gold is 1380 dollars. Normally 1 ounce of Gold should buy 15 barrels of Crude Oil. Time to add Gold along with the Crude.

Cairn India’s market cap is 1/4^th of ONGC’s. ONGC is the old giant whereas Cairn India is the new kid on the block.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why did the Sensex fall so much today?

One of the favourite pastimes (or is it bread-and-butter?) of market analysts is to assign reasons for gyrations in the Sensex after it has gone through a big up or down move.

Some times the reasons are genuine and accurate. Mostly it is an exercise in trying to explain the unexplainable. The Finance Minister said that inflation in food prices will slow down, so the Sensex moved up. Several Indians are on a ship hijacked by Somali pirates, so the Sensex moved down. You get the drift.

I have no intention of doing a post-mortem. I'd rather quote from this recent article:

'... stock markets generally 'discount' good or bad news months in advance. If you own stocks that make up the Sensex (or Nifty) index, and if such stocks have risen a lot already and are now showing signs of hesitation - then they may fall if the results are perceived to be less than great. Only positive earnings surprises can cause them to rise more.'

Larsen and Toubro's Q3 Profit After Tax (PAT) grew 15% on a Year-on year (YoY) basis; the stock fell more than 6.6%. BHEL's Q3 PAT rose more than 35% on a YoY basis; the stock dropped 4.25%. Wipro's Q3 PAT increased more than 21% on a YoY basis; the stock dipped by 2.2%. ONGC's Q3 PAT was higher by 23%; the stock shaved off 2%.

Is the market behaving irrationally? Not at all. The results were below the market 'expectations'. It was the expectations that were irrational.

Will the Sensex fall some more? The probability is high, because the expectations of growth of the Indian economy has been on the irrational side as well. The actual growth is likely to be lower.

For the April to December '09 period, indirect tax collections have suffered. A 13% dip in excise duty, a 6% drop in service tax and a hefty 28% cut in customs duty has led to an overall 18% lower collection over the previous year's same period. These figures will not enthuse market players.

World indices are facing headwinds, with the Dow dropping like a stone at the time of writing this post. FIIs have been selling for some time, and buying by DIIs may not stem the rot.

What should small investors do? If you have been reading my blog posts regularly, you already know my answer. Wait and watch, but stay nimble. Curb the urge to dive in. This could be a quick, sharp cut before the Sensex recovers. The India growth story is far from over.

Stock Chart Pattern - Maharashtra Seamless

The stock chart pattern of Maharashtra Seamless will reveal that you can not keep a good stock down for too long. It is a market leader in its niche of seamless pipes used in gas and oil exploration in India and overseas.

With low debt, positive cash flows from operations (except a blip in '06), regular dividend payments and steady growth, Maharashtra Seamless should find a place on the buy list of mid-cap stocks for seasoned investors.

The headwinds of the global slowdown and the lower oil prices have curtailed investments and affected most players in the oil and gas segment. Maharashtra Seamless is no exception.

But its credibility in the export and domestic markets, overseas tie-ups coupled with a decent cash hoard will help it to ride out the downturn better than its competition. A recent repeat order from ONGC worth Rs 750 Crores will surely help its cause.

Enough about fundamentals. Now a look at the technicals:-

(Please right-click on the chart; open it in a new tab or window for a better view.)

The stock has broken upwards after making a bullish 'rounding bottom' pattern that indicates gradual accumulation by smart investors.  There are a couple of interesting things to note.

Both the RSI and slow stochastic moved out of their oversold zones and gave 'buy' signals even before the stock price moved above its 20 day EMA. By the time the 20 day EMA crossed above the 50 day EMA, confirming the bullishness, the stock had completed the 'rounding bottom' pattern.

The expected correction followed briefly and formed a 'cup-and-handle' pattern. The correction was well supported by the 20 day EMA as the stock continued to march upwards.

The lower volumes in Mar and Apr '09 were a concern. But the volume has picked up considerably in May '09, supporting the bullish move.

Is it a good time to enter the stock? Yes, if you are an investor with a 3-5 year outlook. If you have a 1-2 year outlook, you may want to wait for the next correction to enter. It is possible that the stock may drop to the 200-220 level to seek support again from its 20 day EMA.

The rise in May '09 has been too steep and the stock looks overbought. Both the RSI and slow stochastic have made lower highs while the stock has moved further up. This is a negative divergence and suggests caution.

Bottomline? If you like mid-caps and are looking for a fundamentally strong, profitable, low debt company with real cash in its books, look no further than the chart pattern of Maharashtra Seamless.

Stock Market News, Financial News - Mar 3, 2009

Govt brings blue chip PSU subsidiaries under performance scanner

By Gunjan Pradhan Sinha, Indian Express Finance

The performance of subsidiaries of blue chip public sector companies may now come directly under the government's scanner. This will especially pin down high-profile arms of oil PSUs such as ONGC Videsh, Mangalore Refineries & Petrochemicals, Numaligarh Refineries and Chennai Petroleum Corporation to numerical financial and operational targets set by them in consultation with the government.

The department of public enterprises (DPE) has recently decided to include all subsidiaries in addition to parent companies while entering into a MoU at the beginning of the financial year. In the MoUs, firms agree to certain targets - operational and financial - agreed voluntarily in consultation with the ministry. (More ... )

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Auto sales grow in Feb but industry outlook still bleak

By ENS Economic Bureau

Automobile sales in February have shown that launching new vehicles even in tough economic times pays off. Market leaders Maruti Suzuki, Hyundai Motors India Limited (HMIL) and for the first time in 7 months even Tata Motors have managed to record positive sales growth.

Arvind Saxena, senior vice-president, marketing and sales, HMIL, said in a cautionary mood, "February 2009 sales saw a slight upturn with double digit growth for the industry but the overall market situation continues to be challenging and not much should be read into the February growth as last year in February the budget was to be announced and a substantial amount of sales were deferred till March. We expect a fairly flat sales growth curve for the industry for the first quarter ending March, 2009."  (More ... )

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Jubilant gets Canada regulatory approval for heart drug

By Financial Express Bureau

The domestic integrated pharma player Jubilant Organosys Ltd, now stands poised to grab a significant market share of the injectible drug, Sestamibi, meant for heart disease and coronary artery disease in Canada. The current market size of the drug stands at around $25 million in Canada. Jubilant announced on Monday that Draxis (the company's subsidiary in Canada), has received approval for the generic Sestamibi from the drug regulator Health Canada'.  (More ... )

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Spectrum fee relief to save top telcos Rs 4,000 cr each

By Anandita Singh Mankotia, Indian Express Finance

The country's top three GSM operators Bharti Airtel , Vodafone Essar and Idea Cellular will save around Rs 4,000 crore each in the current financial year, as the department of telecommunications (DoT), has left it to the new government to take a decision on charging a one-time spectrum acquisition fee from these companies for holding spectrum beyond 6.2 mhz.

All the above companies have spectrum in excess of 6.2 mhz in some circles. In view of this, communications and IT minister A Raja had earlier said the government is working on a formula to charge these firms for the excess spectrum held by them. (More ... )