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.)

Technical updates – Punj Lloyd and Suzlon

The two budget proposals during the week were met with widespread selling in the stock market. Huge expectations from the Modi-led NDA government had caused a sharp rise in stock prices – particularly of stocks from the infrastructure sector.

It turned out to be a case of ‘buy the rumour and sell the news’. The budget proposals had few populist measures and no big-bang reform proposals. Perhaps it was too much to expect from a government that has spent less than 2 months in power.

Interestingly, many stocks hit their peaks in June ‘14, well before the two budgets. The two stocks discussed below were darlings of small investors during the 2003-2007 bull market. Their tough times continue despite significant gains from recent lows.

Punj Lloyd

The stock of Punj Lloyd had closed at 63 back in Jan ‘13. But that was a bear market rally top. The stock soon dropped below all three EMAs. Another rally carried the stock to a lower top of 56 in May ‘13 – but the long-term support/resistance level of 57 stalled the rally.

The stock plummeted like a stone to drop to a low of 21 in end-Aug ‘13, where it formed a small double-bottom reversal pattern and started to recover. After climbing above its 20 day and 50 day EMAs, the stock entered a sideways consolidation with a slight upward bias that lasted 7 months.

All three EMAs converged in May ‘14 – and as often happens, a sharp price spurt on strong volumes followed. The stock again faced resistance from the 57 level, and has corrected down to its 50 day EMA. Technical indicators are looking bearish and oversold, which may lead to a bounce up.

The stock is technically in a bull market – but invest at your own peril. Fundamentals are atrocious.

Suzlon

The Suzlon stock has a love-hate relationship with me. I love to hate it. If you don’t know why, please read this post.

The stock spent a long period in bear territory and dropped to penny-stock status in Jun ‘13. It dropped to a low below 6 in Aug ‘13 before recovering to test its 200 day EMA in Oct ‘13.  The next 6 months were spent in a sideways consolidation in and out of penny-stock status.

A sharp rally in Apr ‘14 propelled the stock to a 2 years high of 36 in Jun ‘14 – a whopping 6-bagger gain in less than a year! All four technical indicators became overbought. The subsequent correction has dropped the stock to its 50 day EMA.

Technical indicators are looking oversold, and the stock price may bounce up from here. The company has huge losses and massive debt. Stay as far away as possible.

How to read an Annual Report

It is that time of the year when Annual Reports start hitting the mailboxes of investors. There are three things you can do with the Annual Reports you receive:

1. Toss it into the recycling pile with the old newspapers and beer bottles without even opening the envelope

2. Check the Profit & Loss statement and the dividend amount before tossing it into the recycling pile

3. Actually take the trouble of going through the Annual Report in detail to find out whether the company whose stocks you are holding is growing, stagnating or flying kites.

In the wild west days in the USA, there used to be a saying: The only good Indian is a dead Indian. Of course they didn’t mean people from India (though Columbus thought he had reached the East Indies – the islands of South East Asia - when he landed up on the shores of the Bahamas).

If you believe that the only good Annual Report is the one lying ‘dead’ in the recycling pile, then this post isn’t for you. If you think otherwise, please read on.

First, go to the Cash Flow Statement to find out if the company is generating enough cash from its business to finance part or most of its expenditure for growth. If you don’t know how to read a Cash Flow Statement, please read my posts of  Mar 22 2011, Mar 24 2011, Mar 29 2011 and Apr 5 2011.

Next, check out the Profit & Loss statement and the Balance Sheet. Of particular interest should be inventory and accounts receivable (if percentage increases are more than the sales percentage increase, they are warning signs); increase in equity capital and loans (not a good sign if these increase frequently); cash in hand/banks should tally with the figure in the Cash Flow Statement (so that a Satyam-like situation doesn’t recur).

Next comes the Directors’ Report and Management Discussion and Analysis. Read through these even though there will be hardly any negative feedback in them. They will give an idea about the industry and the company’s growth plans and (rosy) prospects.

Last, but not the least, are the Notes on Accounts. However boring these notes may seem – particularly to non-accountants like me – they contain a wealth of information that usually have adverse implications on profits. If a company suddenly announces a surprising turnaround or spectacular recovery in results, chance are that they have ‘cooked their books’ (a Punj Lloyd speciality). Look for changes in depreciation calculation and inventory valuation, which can significantly alter profits without an actual improvement in performance.

Also look at the court cases – usually with various tax authorities regarding disputed demands. Prudent managements will make at least part provisions against likely future liabilities. For companies that provide stock options to their employees, use the diluted EPS to calculate P/E ratios. For companies that have several subsidiaries – listed or otherwise – use the consolidated results for analysis.

There are many other things to look for in an Annual Report – but these are the broad areas for a first-cut analysis to ensure that business and growth are on track.

(Note: Thanks to reader Jalal for suggesting this topic.)

How small investors can widen their Circle of Competence

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

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

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

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

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

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

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

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

Related Post

What is your Circle of Competence?

A Tale of Two Charts – Voltas and Punj Lloyd

Why write about these two charts? They are like chalk and cheese. One a boring stalwart from the house of Tata that doesn’t get a passing glance from small investors. The other a darling of the previous bull market that was hailed as the ‘next L&T’, and found a place in the portfolio of many small investors.

Back on Mar 24 ‘10, I had posted an update on the stock chart pattern of Voltas Ltd. The stock had touched a high of 190 in Jan ‘10, only to correct down to the long-term support zone between 145-150 before moving up to 177. The technical indicators were looking bullish, but valuations were a bit stretched. This is what I had recommended to my readers:

‘Existing holders can place a stop-loss at 150 and remain long. New entrants can use any dips to the 150 level to enter... Those who are stuck in debt-ridden, operating cash flow negative stocks, like Punj Lloyd, can make a switch.’

That last sentence motivated me to compare the two charts, when I decided it was time to write another update on the stock chart pattern of Voltas Ltd. Here are the one year bar chart patterns of Voltas and Punj Lloyd.

Voltas

The closing price of Voltas on Mar 23 ‘10 – marked with the blue arrow – was 177.60. The stock was in the middle of its bull rally. After testing the support from its rising 200 day EMA in May ‘10 – when it dropped to an intra-day low of 157 – the stock continued its bullish pattern of higher tops and higher bottoms. It finally reached a high of 262.50 in Nov ‘10, falling short of its high of 267 touched in Dec ‘07.

The first leg of the correction found support above the rising 100 day EMA. The stock moved up to test its previous high, fell just short at 260 and formed a bearish double top pattern that gave a signal to book profits. The subsequent correction has been exacerbated by the not-so-great Q3 results (profits were lower both on YoY and QoQ basis).

The stock dropped to an intra-day low of 159 on Feb 9 ‘11 – close to its May ‘10 low of 157 - correcting almost 40% from its Nov ‘10 peak. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by a blue oval) confirms a bear market. Note that the pullback rally of the past few sessions has found resistance from the falling 20 day EMA.

All four technical indicators are bearish. The stock may fall to its support zone of 145-150. If the support doesn’t hold, a drop to 100 is possible. Voltas remains a good stock fundamentally, and lower levels mentioned could be good entry points.

If any investor had listened to my advice and switched from Punj Lloyd, but failed to book profit in Nov ‘10 or Dec ‘10, today’s (Feb 16 ‘11) closing price of 177.20 means he has still not made a loss. What if some one had hung on to Punj Lloyd or, horror of horrors, bought more thinking that the down side was limited? See for yourself.

Punj Lloyd

The stock’s bull rally had peaked out at 276 in Oct ‘09. Within the space of the next 8 trading sessions, the stock dropped below its 200 day EMA after the bad news of its UK project delays and resulting penalty hit the markets. The stock was already five months into a bear market. Its closing price on Mar 23 ‘10 – marked with the blue arrow – was 177.35, prompting me to recommend the switch to Voltas.

Punj Lloyd continued in its bear market, making lower tops and lower bottoms – except for a brief attempt at revival during Sep and Oct ‘10. The bears snuffed out all bullish hopes before the stock could touch its falling 200 day EMA from below. Disastrous Q3 results (a loss at the net level) caused heavy selling.

The stock has fallen 73% from its Oct ‘09 peak, and can fall much lower. The huge debt burden coupled with severely negative cash flows from operations is a killer cocktail. If you are still invested in this stock, ask yourself: Why?

Bottomline? Comparing the stock chart patterns of Voltas Ltd and Punj Lloyd exemplifies Benjamin Graham’s statement: In the short-term the market acts like a voting machine, but in the long-term it is a weighing machine.

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

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

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

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

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

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

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

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

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

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

As a contrast, here are some other pictures:

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

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

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

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

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

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

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

Related Post

Some do's and don'ts about Cost Averaging

Stock Chart Pattern - Voltas Ltd (An Update)

My previous look at the stock chart pattern of Voltas Ltd was back in June 2009. The stock of this fundamentally strong infrastructure company from the Tata group had a one way ride from the low of 31 in Mar '09 to a high of 146 in Jun '09 and was pausing to catch its breath at 122.

The technical indicators were hinting at a further correction down to the 90-100 zone, which could have provided a decent entry point for new investors who had missed the first part of the rally. It is time for an update, so let us have a look at the 1 year bar chart pattern of Voltas Ltd:-

The very next day (Jun 18 '09) after I wrote about the stock, it dropped to a low of 107, recovered and then tested the low by falling again to 109 on Jul 6 '09. That is the lowest price it has seen since, as it steadily moved up to make a high of 190 on Jan 20 '10.

A sharp correction took the stock down to the 150 mark, where it received strong support from a long-term support-resistance zone (145-150). A couple more tests of the support was followed by a sideways consolidation from which it has broken out upwards this week to touch a high of 180.

The 20 day EMA has moved above the 50 day EMA after spending a few days below it. The 200 day EMA is moving up nicely. The OBV remained pretty flat during the recent correction. The MACD has re-entered positive territory and is above the signal line. The RSI is rising above the 50% level. The technical indicators are hinting at a test of the recent high.

In the longer term 3 years chart, the stock made a mountain-like pattern from which most small and mid-cap stocks face a tough time in recovering:-

From the high of 267 made in Dec '07, the stock dropped a massive 88% to the low of 31 in Mar '09. The subsequent recovery to 190 in Jan '10 has already retraced 67% of the entire bear market fall.

The 61.8% Fibonacci retracement level of the entire bear market fall is at 146. Isn't it amazing that the stock had reacted exactly from this level back in June '09, and failed to clear that level convincingly till Aug 25 '09? No wonder in technical parlance the 0.618 ratio is some times called the 'golden ratio'.

Valuation wise the current stock price does not leave much in terms of 'margin of safety'. The Dec '09 quarterly result was nothing to write home about - both sales and profits were down quarter-on-quarter. But this conservatively managed company will surely return back to the growth path in the near future.

Bottomline? The stock chart pattern of Voltas Ltd is showing resilience at the 150 level. Existing holders can place a stop-loss at 150 and remain long. New entrants can use any dips to the 150 level to enter, with a tighter stop-loss. Those who are stuck in debt-ridden, operating cash flow negative stocks, like Punj Lloyd, can make a switch.

Some practical examples of Behavioural Finance

Some practical examples of Behavioural Finance will show a different aspect - more from the psychological point of view - at how and why investors buy and sell stocks. It goes against the grain of Efficient Market theory that is built upon rational decision making taking into account all available information.

One of the interesting advantages of writing a blog is that readers get an opportunity to react almost immediately and let the writer know what they think about his opinions. Thereby opening a direct window to the workings of their minds.

In a recent post, I had suggested that investors should bail out of the telecom sector stocks, instead of jumping in after the price correction. In another post, I suggested investors should sell the Punj Lloyd stock at every rise, after it posted awful Q2 '09 results.

The reactions were swift. While some agreed with my views, many did not. The arguments were strong and apparently 'rational'. But what about investment behaviour?

"Bharti Airtel is the best in customer service, has a pan-Indian network, is a leader with a stash of cash, will be less affected by the price war and number portability. So, the stock was a 'steal' at 350 and more should be bought if it slipped below."

Why 350? Because it was 30% lower than its recent high of 500? Possibly. The human mind likes to work with nice round numbers. A classic example of 'recency bias' in Behavioural Finance. The price of 500 had remained in the investor's mind as a 'recent high'.

A few more readers thought 350 was a good price to enter. An example of 'confirmation bias' - investors looking for confirmation of a 'buy' decision. What happened when the stock dropped to 340?

"I sold at 340 so that I can buy it back at 325", was one comment. An example of 'loss aversion'. This is one of the most insidious biases for long-term investment success. Instead of admitting a mistake and booking the small loss, an investor tries to take on additional risk to avert the loss.

I'm not sure what this particular investor did when the Bharti Airtel stock first fell to 325 and then went below 300.

A comment about Punj Lloyd was:

"I sold the stock at 290 and was happy to buy it back at 240. Will buy more if it goes further down. The company has a huge order book, has global operations and is a Larsen and Toubro in the making."

Now that the stock has dropped below 200, 'Regret theory' in Behavioural Finance suggests that the investor has probably avoided selling the stock and is holding on to it to avoid the regret of making a bad decision.

'Prospect theory' in Behavioural Finance postulates that investors behave differently in situations depending on whether they are faced with a loss or a gain. They feel more pain at the prospect of losses than they feel elated by an equivalent gain. In other words, a 10 point loss in a stock costing 100 may cause more distress, than a 10 point gain causes happiness.

In actual experiments with different groups of investors, when evaluating the prospect of a sure gain, most investors become risk-averse; but faced with sure loss, they become risk-takers.

No wonder, Benjamin Graham has written: "The investor's chief problem - and even his worst enemy - is likely to be himself."

How to use Financial News - revisited

With results season upon us, financial news is flooding the airwaves and the pink sheets. Some companies are declaring better than expected results - like Tata Motors and ITC. Others are disappointing the market with poor Q2 '09 shows - like Punj Lloyd and Tata Steel. A few had so-so results - like L&T.

I had written an earlier post on this subject when the market was down in the dumps. At that time, my suggestion was to categorise each item of financial news into 'great news', 'good news', 'bad news' and 'worse news'.

The stock market is in a much healthier state now, but is in the throes of a good correction. Does that put a spin on the decision making process? Not really. The same categorisation principle applies.

Let us take the examples of the companies mentioned above.

Tata Motors and ITC pleasantly surprised the market. The Jaguar-Land Rover deal was supposed to weigh down the former, and the bad monsoon was expected to affect the FMCG sector. The Tata group's huge resource raising capability helped to manage the large debt; plus the pick-up in commercial vehicle sales was 'good news'. So was ITC's considerable profits from cigarettes and reduced losses from FMCG.

What happens with such 'good news'? Stock prices usually perk up, which is used by smart investors to sell. Within a few days, the stocks tend to trade near their earlier range.

Punj Lloyd and Tata Steel declared results that were way below consensus estimates. Tata Steel's Corus debt hangover and poor offtake of steel in Europe wasn't entirely unexpected. But it is a fundamentally strong and well-managed company. The selling pressure on 'bad news' can provide re-entry points for smart investors.

Punj Lloyd's is a case of 'worse news'. Why? The management had given the impression that the Simon Carves UK penalty issue was not a big problem and will get resolved soon. Far from it. On top of their singular inability to generate cash from their core operations which led to their huge debt burden, the effort at hoodwinking investors have not gone down well at all.

The stock is falling off a cliff but still trading at a P/E of 19 at today's closing price of 202. Investors should not make the mistake of using this fall as a buying opportunity. Instead, sell at every rise. I won't be surprised if it revisits its March '09 low. A stock to avoid.

L&T's case is a little strange. While their results were not a major disappointment, the low rate of conversion from their huge order book is a concern for the market. This is not a buy on 'bad news' yet, because of the valuations. Patient investors should wait before re-entering.

The 'bad news' about Idea's results could be a harbinger of the overall derating of telecom stocks. Bharti's stock price got battered by 7% in anticipation of similar 'bad news'.

There has been no 'great news' among the financial news in the results season so far. The economy is still recovering, and unless the export-import business picks up to its earlier glory, the stock market may fail to reach greater heights.

Related post

Should Indian investors switch out of Telecom Sector stocks?

Stock Chart Pattern - Gayatri Projects Ltd

The stock chart pattern of Gayatri Projects Ltd has several interesting formations. But before I start discussing them, questions may arise. Why discuss Gayatri Projects? Why not IVRCL or Punj Lloyd?

Good questions. The short and simple answer? Cash flows from operations. Most of the construction and infrastructure companies generated more hype than cash. During the boom period between 2004 to 2008, IVRCL and Punj Lloyd had bloated order books but negative cash flows from operations.

Gayatri Projects created far less hype but not only booked good orders, they executed them and collected payments. It helped them to generate decent cash flows from operations. Taxes and dividends came out of this cash. The current downturn has dented their margins - but they are unlikely to go around with a begging bowl.

At the height of the bull market in Jan '08, this Rs 10 face value stock almost hit the Rs 700 mark. The dramatic drop all the way to Rs 40 in Mar '09 was way overdone. Let us look at the 6 months bar chart pattern of Gayatri Projects Ltd to see what happened:-

Making a 'V' shaped bottom, the stock quickly ran up past the Rs 90 mark and then entered a bullish saucer-shaped consolidation pattern. The breakout from the pattern was stunning. 11 straight upper circuits took the stock past the Rs 160 mark!

After almost hitting Rs 200 - a 5-bagger within the space of less than 3 months - the stock reversed from a strong resistance zone, and has entered a downward sloping channel. In spite of the sharp run-up, the stock has barely retraced 25% of the massive fall from the Jan '08 top.

During the ongoing correction, the volumes on up days have been much stronger than those on down days. The OBV indicator is reflecting this accumulation by smart investors.

The RSI has moved down sharply from heavily overbought territory and is about to enter the oversold zone. The MACD is still positive but below its signal line. Both are moving downwards.

The slow stochastic reacted from the overbought zone, corrected briefly around the 50% mark and has once again resumed its downward journey towards the oversold region.

Today's trade has taken the stock below the 20 day EMA. This is short-term bearish. The technical indicators are hinting at a further correction to the Rs 140 level where the 50 day EMA may provide support. A breach of the 50 day EMA could set the next target at Rs 120 - which would be a 50% retracement of the recent rise.

Reaching the all-time high any time soon may be a tall order. After the correction runs its course, the stock may hit upside targets of Rs 225/250/320 before facing major resistance. That means a possible 50-100% rise from the current level.

Bottomline? Existing holders of IVRCL or Punj Lloyd may think about switching to this hidden gem. The stock chart pattern of Gayatri projects is encouraging enough for even new investors to get their feet wet in the infrastructure sector. But please do not forget to maintain stop-losses.

PS You can read more about Gayatri Projects at Rajeev's blog.

Related post

How to Select Stocks within Infrastructure Sector

Now, learn portfolio strategies from a game of stud poker

One of the best ideas for managing your portfolio on an ongoing basis is to treat each stock (or fund) in your portfolio as a hand in a game of stud poker. Not my idea. Peter Lynch mentioned it in his book: "One Up on Wall Street".

Stud poker is a 'man's game', pitting strong-willed men with nerves of steel and expressionless faces against each other across a card table. The game has been immortalised in several Hollywood films.

Two of them - my favourites - come to mind. The old pro, Edward G. Robinson playing against the new kid on the block, Steve McQueen, in "The Cincinnati Kid". And a sophisticated Robert Shaw being taken for a ride by a bumbling Paul Newman in "The Sting".

The game - for the uninitiated - is simple enough. A card is dealt face-down, which can only be seen by the player to whom it was dealt. This is immediately followed by a second card dealt face-up to each player. All players get to see the face-up cards. A round of betting follows. Each bet is for a specific amount.

A player has the option to 'fold' (i.e. take no further part, if the cards he has been dealt are not to his liking); 'call' (i.e. stay in the game by betting an equal amount) or 'raise' (i.e. increase the bet by a pre-determined amount). Every time a player raises the bet, another round of betting follows.

The process is repeated three more times, as a card is dealt face-up to each player remaining in the game. After all five cards for each hand have been dealt (one face-down and four face-up) and the betting is concluded, the players remaining in the game show their hands to the others. The player with the best five card combination wins.

I'm not a gambling man, nor do I advocate a gambling mentality in the stock market. But the analogy - that each stock (or fund) in your portfolio is akin to a hand at stud poker - seems very apt.

The face-down card is like some knowledge or information you may have about the company that may not be known to the general public. Each face-up card is some bit of financial news or company-specific information that becomes available in the market.

As each 'card' is dealt, you need to take some action as an investor. If it is pretty bad news - like the Satyam fraud, or Punj Lloyd's overseas subsidiary delaying a project and incurring a huge penalty - you should fold (i.e. sell) that particular hand.

If it is so-so or good information - like Larsen and Toubro bagging a new order, or Tata Investment declaring a marginal profit and matching last year's dividend - you may hold your stock (or fund).

If it is better news - like 3i Infotech declaring increased profits when most IT companies were struggling in the down turn - raise the bet (i.e. buy some more).

You'll need the mental and physical discipline of tracking each bit of information about each of the stocks (or funds) in your portfolio, analysing the consequences and filing it properly at a place from where it can be retrieved easily.

It is not rocket science, but it has to be followed diligently on a regular basis - at least once a week. That means not only tracking company results and announcements, but also the forex rates and macro-economic and political news to understand the implications and likely effects on your portfolio.

Many intelligent individuals never succeed in their market investments. A probable cause can be the lack of time and/or discipline in following a regular process of updating information about their portfolio holdings.

Life becomes a lot easier if you manage to limit your holdings to 10-12 stocks or 5-6 mutual funds. Keeping track of fewer companies improves your chances of being able to move quickly as the situation demands.

Weekly tracking of a smaller number of companies (or funds) means you will tend to remember the important bits of information necessary for taking buy-sell-hold decisions.

Is the stock market reflecting everyone's excessive euphoria on election results?

There is a well-known myth in the stock markets - usually touted by 'experts' when the markets are moving up. It goes something like this: the stock markets always discount the future.

Nothing could be farther from the truth. Just flashback to the month of September 2007. The sub-prime crisis had begun to affect the financial sector as far back as in Feb 2007.  By the summer, it had all the signs of a full-blown crisis.

Indian stock markets had the grand finale of the bull run between Oct - Dec 2007. The markets should have fallen instead because the future was bleak. What the market really does is discount the hopes and aspirations of the buyers and sellers.

The UPA won a mandate that even surprised them. The decimation of the Left parties will surely lead to hastening of the financial reforms process. The sidelining of the third and fourth fronts by the electorate means a comparatively stable government with a set of coalition partners who won't be able to pull much weight because of the few seats they hold.

Please remember that the new government hasn't been formed yet. After it gets its house in order, it isn't going to rush into reforms and privatisations. A budget will need to be placed and approved. That will take 4-6 weeks.

There may be a strong dose of taxation to cover the huge deficits caused by loan waivers, subsidies, pay increases. The Congress party policies have always been socialistic and their poll plank of concern for the 'aam aadmi' ('average Joe') will need to be catered to. That may not be palatable for market participants.

Does all that justify a historic, first ever, double upper circuit in the Indian stock markets, followed by suspension of trading for the day? The video footage of cheering, table-thumping, laptop-kissing traders and business media analysts would probably indicate a resounding  'YES'.

But look at the volumes traded. Barely Rs 3000 Crores. Most of it in F&O. That  seems like a desperate attempt at short covering rather than frenzied buying by investors. Today's up move close to the BSE Sensex index level of 15000, followed by a flat close means there were as many sellers as buyers.

In this post in Feb '09, I had categorised financial news into good, great, bad and worse and discussed their effects on the stock market and advised investors about what they should do.

Where does news of election results fit in? Regular political news have very little impact on the markets - other than wars and terror attacks. But news of a surprising election result bringing back a pro-reform team without the excess baggage of the Left parties is definitely 'good news' for the stock markets.

Why isn't it 'great news'? Not yet. That may happen after a year or two if the pace of reforms and divestments from public sector companies really push-start our economy forward to 9% GDP growth.

Till then, we have to contend with results season. Most companies have postponed results declarations till the end of June '09. Many results will be awful. The real estate and infrastructure companies that have seen an unjustified spurt recently will face selling pressure. (Punj Lloyd has already declared a huge Q4 loss.)

My advice to investors is to stay calm, not feel 'left-out' and use the temporary price spurt on 'good news' to get out of non-performing stocks. Saner voices will prevail and euphoria will evaporate.

The BSE Sensex index is looking overbought. It may not go down to 8000, but may see 10000-12000 levels in the near future. That will be a better time to start buying.

How to Select Stocks within Infrastructure Sector

During the later stages of the previous bull market, stocks from the real estate and infrastructure sectors were on the top of investor buy lists. Those who invested in these sectors are sitting on massive losses as most stocks have fallen much more than the Sensex.

Many inexperienced investors are tempted by the current low prices to try and lower their average holding cost per share. That would be akin to 'catching a falling knife'. Averaging down may be a smart move if you are 100% certain about the management quality and the business outlook of the company. Most real estate and infrastructure companies will not qualify on either count.

Unfortunately, despite the massive fall in prices of real estate and infrastructure shares, investor fascination has not completely waned. Last week, I received a couple of investor queries that brought this shockingly to the forefront.

One asked: Which one is a better buy - IVRCL Infra or GMR Infra? The other asked: Is Punj Lloyd a good buy at Rs 95?

I decided to do a little digging by visiting the Rediff site. Here is what I found (for three years ending Mar '06, Mar '07 & Mar '08):

IVRCL had negative cash flows from operations for all three years - going from -83 Cr to -377 Cr; decreasing Net Profit Margins (NPM) - 6%, 5.9%, 5.6%; EPS of Rs 15.80 (in '08).

GMR had negligible cash flow from operations in '06 and negative cash flows of -7 Cr and -57 Cr in '07 and '08; wildly fluctuating NPM - 58%, 8%, 60%! EPS of a miniscule Rs 0.34 (in '08).

Punj Lloyd had negative cash flows from operations for all three years - going from -84 Cr to -233 Cr; marginally increasing NPM - 2.5%, 2.7%, 4.9%; EPS of Rs 7.30 (in '08).

Now the three years in consideration also happened to be the three biggest boom years for the infrastructure sector in India. And our three 'gems' failed to earn a single Rupee in cash! Wonder what they will do during this prolonged Bear Market? Keep wondering - just don't touch these stocks.

Since I am a firm proponent of buying only the best and leading stocks in any sector, I took a quick look at the figures of L&T. And this is what I found.

L&T had positive cash flows from operations for all three years - 1369 Cr, 2130 Cr and 1945 Cr; increasing NPM - 6.7%, 7.7%, 8.5%; EPS of Rs 74 (in '08). Based on these figures, I am inclined towards discounting GMR's ridiculously high NPMs in '06 and '08. (May be these were typos on the Rediff site.)

Since all four companies have shares with face value of Rs 2, the EPS figures are comparable. On all counts, L&T is the clear choice - and by my reckoning, the only stock to be considered in engineering and construction within the infrastructure sector.