How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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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. You can reach him at nish.stockid@gmail.com)

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Market Cycles and Sectors

Which Sectors should you Invest in?

Is the stock market defying conventional logic?

Interest rate has started coming down. So has inflation. WPI inflation is actually negative. IIP number is positive and inching up – indicating manufacturing growth.

Forex reserves are at an all-time high. Sales of medium and heavy commercial vehicles are rising – which is an indication of a recovering economy. Passenger car sales grew after 2 years of de-growth.

These are all signs of an economy that is returning to a path of growth. As per conventional logic, a growing economy should lead to a rising stock market.

So, why is the stock market defying logic? It is like asking: “Why do mosquitoes sting?”  The answer is: “It is their nature to do so.”

Experts and analysts try their level best to explain the reasons for a market correction. As if they really know.

Some said that expectations of poor Q4 results led to the correction. But everyone has been expecting poor Q4 results for quite some time.

Others said that PSU divestments and IPOs are sucking out cash from the secondary market. Weren’t these same experts saying a couple of weeks back that a lot of ‘cash is waiting in the sidelines’? 

(By the way, ‘cash waiting in the sidelines’ is one of those enduring myths in the market. Unless the cash gets invested in FPOs or IPOs, it always remains in the sidelines. Think about it.)

One talking head on a business channel said: “The market has been boosted by a liquidity driven rally.” Wonder what kind of a rally will occur without any liquidity!

The market has a tendency of going against consensus estimates and expectations. Which increases the probability that Q4 results will throw up some positive surprises.

IndusInd Bank has declared very good results. TCS came out with a decent set of numbers – if you look beyond the one-time bonus payment to employees.

Smart investors look for opportunities to buy during such corrections. That doesn’t mean you need to jump in feet first. Do your homework, be patient and wait for opportunities.

Have you looked at hospitality sector stocks lately? Most small investors are shunning them. The “e-Visa on arrival” scheme should be a huge boon for the sector.

Evolving IT Services Market Warrants Attention

The global IT services market may be worth $1 Trillion, but it is highly fragmented. The top three players – IBM, HP, Accenture – account for 12.5% global market share. Other top players – like CAP Gemini, Computer Sciences Corp., Cognizant – account for around 1% share each.

The bulk of the market is shared by hundreds of smaller companies that do low margin but regular work like Business Process Outsourcing, software maintenance, data centre operations, application hosting. Most Indian companies get their bread and butter from such ‘outsourced’ work.

Some of the larger outfits – like TCS, Infosys, HCL Tech – have moved up the value chain through higher margin but more discretionary systems integration projects. But they are well behind the big boys in the top end, high margin consulting business.

In a recent article, Andrew Lange of Morningstar has provided an overview of the current global IT services market and its prospects. Those already invested in the sector, and particularly those planning an investment in some of the smaller Indian players, may find the article useful.

Is it a good time to buy IT stocks? – a guest post

Restrictions on gold imports, lower capital goods imports due to a slowing economy and strong FII inflows have contributed to a strengthening Rupee and a lower Current Account Deficit. While that may be good for the Indian economy, it may not be so great for exporters.

Most Indian IT companies generate a significant amount of revenues from exports. A depreciating Rupee had helped companies to increase profits. But a strengthening Rupee has led to profit booking in IT stocks, which are trading below their recent highs.

In this month’s guest post, Nishit makes a strong case for using the corrections to enter IT stocks now. What do you think? Do you feel IT stocks are too expensive? Good things in life usually are.

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IT stocks have corrected from their recent highs. The corrections range from at least 10% from the tops in case of TCS and HCL Tech and 15% in case of Infosys. So, is it a good time to buy IT stocks? Let us try and examine the pros and cons.

Why have the IT stocks corrected? The rupee has strengthened 5-6% since January 2014 due to lower gold imports and FII inflows in the hope of a Narendra Modi led Government being sworn in. A strengthening rupee hits the profit margins of all exporters, including IT companies.

The upside to the profits is capped for the time being because of rupee appreciation. Also, IT stocks have run up in the past 1 year. TCS itself has gone up 70-80% from its lows and Infosys has doubled from its lows.

TCS recently had a con-call where it expects 2015 to be a stronger year than the current year. Overall, the IT stocks are dependent on the US and European economies which are slowly recovering back to normalcy. So, the core business of the IT companies which is the main driver for growth is doing just fine.

Now, a strengthening rupee is just an excuse for booking profits. If no strong Government comes at the centre then expect the markets to tank and the rupee to trade in the 66-68 band.

Let us look at the valuations right now. Infosys trades at a P/E of 19 and TCS at 23. None of these stocks are frightfully expensive if one looks at their growth prospects.

If one were to look at Indian IT, I would not look beyond TCS, Infosys and HCL Tech at the moment. These 3 stocks capture the essence of Indian IT.

What happens if Narendra Modi wins? The rupee may appreciate further but the Government would not let it appreciate beyond a point as exports would get hit.

TCS and other IT stocks would act as a hedge for the portfolio as also an investment option. With a 3 year horizon, they look a pretty solid bet.

IT stocks are not dependent on Government policies, have operating margins of 25-30%, have strong brand names. They cancel out most of the negatives which hang over the Indian markets right now.

There are many players listed on the stock market in IT but Infosys, TCS and HCL Tech represent the best bets. TCS from sheer size and scale, HCL Tech for its strength in the Infrastructure management space, and Infosys with the wild card of Narayanmurthy cleaning up the house.

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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.)

IT Sector stocks – an update

Despite the global economic slowdown, or perhaps because of it, IT sector companies have been relative outperformers in the Indian stock market. Devaluation of the Rupee against the US Dollar has been an added boon.

Large-cap IT stocks have done particularly well. Mid-cap IT stocks haven’t been far behind. But small-cap stocks in general have faced a rough time. In the IT sector, retaining talent is a challenge. That is where smaller companies are at a disadvantage.

IT services remain the major revenue earner. Consulting business is yet to catch on in a big way. With increasing visa impediments – particularly in the USA - the larger companies have focussed on offshore and India businesses. Software product development activity is mostly limited to MNCs.

HCL Tech

The stock has gained more than 200% since the bull run began back in Aug ‘12. Daily technical indicators have corrected from overbought conditions but showing negative divergences by failing to touch new highs with the stock price. There are rumours of a stake sale. May be a good idea to take some profits home.

Infosys

Lack of leadership and so-so performance kept the stock in a sideways range till Narayanamurthy took back the reins. Lot of top-level executive departures have put a question mark on succession issues. The market is obviously encouraged by an improvement in performance.

KPIT Cummins

After an 8 months bear phase (from Sep ‘12 to Apr ‘13), the stock is back in a bull market. Q3 result disappointed the market, causing a sharp fall. Can be added on dips.

Mindtree

The stock is in a terrific bull run, gaining 300% in the past 2 years. Founder and CEO Ashok Soota’s departure has been long forgotten. The stock is looking overbought and ripe for a correction. Dips can be used to add.

MPhasis

This stock has gone nowhere in the past 2 years. Likely drop in business from parent HP and possibility of sale of HP’s entire stake has kept the stock price in a sideways range. Avoid.

Oracle Financials

The stock price is undergoing a correction after touching 3400 in Jan ‘14 – its previous top was also 3400 touched in Jan ‘13. If the stock price falls below the support/resistance level of 2990, the possibility of a bearish double-top pattern may open up.

Tata Elxsi

After a prolonged sideways consolidation that tested the patience of most investors, the stock has broken out sharply and tripled in 5 months. Daily technical indicators are looking overbought. Part profits can be booked.

TCS

The ‘big daddy’ of IT companies has been in a steady bull market with frequent corrections that have kept the chart ‘healthy’. This is a stock that every investor should have in their portfolio. All dips are adding opportunities.

Tech Mahindra

It is a great credit of the M&M management that Satyam Computers has been so well integrated with the company, turning Tech Mahindra’s stock into an outperformer with gains of more than 200% in 2 years. Add on dips.

Wipro

Even after sorting out management issues, Wipro’s performance has been tepid. The stock has returned to a bull market, but gains have been moderate. Switch.

Related Post

IT Sector stocks – time to change the game plan?

The ‘second coming’ of Narayana Murthy – a guest post

Once a darling of IT professionals and FIIs, and a beacon of transparency and corporate governance, the fortunes of Infosys have been on a downward drift for more than 2 years. What has been going wrong?

The global economic downturn affected all IT services companies. A strategy of moving up the services value chain by focussing on business consulting activities didn’t quite pan out as expected. Failure to make big ticket acquisitions despite a cash surplus reduced growth options.

Most crucially, the able stewardship of Narayana Murthy and Nandan Nilekani could not be emulated by lesser mortals like Gopalakrishnan and Shibulal. In this month’s guest post, Nishit takes a look at Narayana Murthy’s return to the helm of Infosys, and its likely outcome.  

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Last week, the markets were abuzz with the announcement that Narayanamurthy was returning to head Infosys. Let us try and examine if this is a good thing and if there will be any change in the fortunes of Infosys.

As we all know, Infy has been doing pretty badly when compared with top IT firms like Cognizant, TCS and HCL Tech. It was in danger of being left behind in the race. It was becoming a laggard like Wipro.

Much of Infy’s prime position was due to the aura built around Murthy and Nandan Nilekani. After the departure of these two, it became just another software company. It also had a weird succession plan. Each of the founders got to be the CEO in rotation. This wasn’t a good plan. Being one of the founders and being able to lead are two different things.

Also, this policy led to many talented second rung executives leaving the company, like Mohandas Pai. Infy had become just like some of our political parties, where leadership is all in the family. Here it was all with the founding fathers.

One more area of concern being raised is Murthy will be assisted by his son. Now, this may or may not be a good thing, although his son is well qualified.

Throughout history, one has seen companies where leaders have returned to revive stagnating fortunes like Steve Jobs for Apple, Starbucks CEO, Google founders, and so on.

The return of Murthy also means that his succession plan was flawed. The challenges in front of him are two-fold. First is winning back the confidence of customers, employees and shareholders. Second is getting the succession policy right the second time around.

In life, very few get a second chance and a third chance never happens. This is the last chance for Murthy to lay down his legacy. The second attempt is fraught with danger - if there is a mess up, his legacy may get tarnished.

We live in an era of fast food. People want quick results. Unfortunately, the results in this case, will take time to show up. It could take even two or more years. He will not have a magic wand which will conjure up results immediately.

Once upon a time, Infy was a place where people aspired to work. Salary was not the issue; it was the brand which people wanted on their CV. The brand has lost its allure now. Will the lost glory days return or will it be another failed experiment?

Another issue with the comeback is that all the talk of morality and Corporate Governance goes out of the window. For the immediate term, the move has been greeted with universal acclaim but will that be the story two years down the line?

All said and done, one must acknowledge and appreciate Murthy’s guts to come back and try and set things right. It is very easy to sit back and relax. At the age of 67, to take this risk speaks volumes of the courage and spirit of Murthy.

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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.)

Is OnMobile Global for sale?

A few weeks back, there was a rumour in the market that TCS was looking at the possibility of buying OnMobile Global. That remained a rumour and did not become news. Those who may have bought the stock on the basis of the rumour may be waiting for an opportunity to sell.

That opportunity may not be far away. As per a recent article in Business India magazine, OnMobile Global is on the block and the latest suitor is Idea Cellular (of the Aditya Birla group). Apparently, Idea is ready to buy a 60% stake in the company at a price of Rs 100 – which is 33% higher than today’s closing price of Rs 74.40.

If this rumour turns out to be true, then investors may be able to pocket a neat gain if they enter at the current market price. Acquisition of a 60% stake – or even a lower stake - will trigger an open offer to existing shareholders.

In a post on the telecom sector a couple of months back, it was observed that the OnMobile stock was trying to form a bottom by consolidating within a rectangular band between 54 and 73. It was suggested that the stock could be a contrarian bet, but with a strict stop-loss at 52.

In Jan ‘12, the stock crossed above the rectangular consolidation zone, rose to an intra-day top of 84 on Feb 15 ‘12 and briefly breached its falling 200 day EMA. It has now pulled back to the top of the rectangular band. An upward bounce can be used to add/enter.

What if the rumour about Idea‘s stake buy remains a rumour – like it happened in the case of TCS? The company is fundamentally strong, and its overseas businesses, which contribute nearly half of its total revenues, are supposedly doing well. Domestic business is under pressure. Q3 results showed 12% top line growth but a 11% dip in the bottom line.

With smart phones becoming cheaper by the day and 3G service roll-outs in progress, OnMobile’s expertise in value-added software services should see growing demand. Even if the stake sale doesn’t go through, it may be worth holding on to the stock. A buy-back by the management, with a ceiling at Rs 85, is currently in progress.

IT Sector stocks – time to change the game plan?

Recently, Sabeer Bhatia (of Hotmail fame) was in Calcutta/Kolkata for a little R&R-cum-business. (December and January are the two most pleasant months in the city, and attracts NRIs by the hordes.) Along with spending quality time with his in-laws and playing golf, Sri Bhatia indulged in promoting his latest venture (JaxtrSMS - free SMS through the Internet), hobnobbing with the Chief Minister and giving press interviews and speeches at IT industry gatherings.

One of the important points he raised was that Indian IT companies are over-dependent on selling services through hiring out consultants to overseas clients. Successful Indian software products are conspicuous by their absence. Apparently, JaxtrSMS has been totally designed and created by Indian software engineers sitting in India. It is time that other companies follow his lead.

Certainly the 10 chart patterns of Indian IT companies attached below indicate that Sabeer Bhatia may be right – it is time to change the game plan from services to products if the Indian IT sector wishes to retain its position in the global pecking order. Already, Philippines and East European countries are taking away IT-enabled service contracts from India.

HCL Tech

HCL Tech formed a double-top reversal pattern during Apr ‘11 to Jul ‘11 and dropped sharply into a bear market. The chart is looking weak and the price can dip to test the Aug ‘11 low. Switch to Wipro.

Infosys

The recent changes in management seem to have robbed Infosys of whatever little aggression it had. The recent attempts at getting back into a bull market have fizzled out. The stock is looking oversold, and can bounce up towards the blue up-trend line. That will be a selling opportunity.

KPIT Cummins

After touching a peak in Jul ‘11, KPIT Cummins is making a bearish pattern of lower tops and lower bottoms, and is in a bear market. The chart is looking weak, and the stock can test and break the Dec ‘11 low. Sell.

Mindtree

Ashok Soota’s departure from the helm of affairs hurt the market sentiment badly. The Mindtree stock is trying to extricate itself from a strong bear grip – with some degree of success. The stock is making a bullish rounding bottom pattern, and can be added on dips (but with strict stop-loss).

MPhasis

Not sure what MPhasis is doing currently, but the chart pattern shows that it is not doing it well. The stock is deep inside a bear market and likely to fall further. Avoid.

Oracle Financials

The stock of Oracle Financials peaked out in Jul ‘11 by making a small double-top reversal pattern, and is in a bear market. The stock is expected to resume its fall soon as both the RSI and the slow stochastic are showing overbought conditions. Sell.

Tata Elxsi

Tata Elxsi seems to have lost its way, and is sliding in a bear market. The current rally has been on falling volumes and both the RSI and the slow stochastic are looking overbought. Avoid.

TCS

Despite its gap-down fall below the blue up-trend line – probably in sympathy with the Infosys stock – TCS is technically in a bull market. Both the RSI and the slow stochastic are looking oversold, and a pullback towards the blue trend line is on the cards. Use the opportunity to book partial profits. Q3 results may not be as bad as some are expecting.

Tech Mahindra

Tech Mahindra is another stock that peaked out in Jul ‘11 and quickly slipped into a bear market. The next leg of the down move may start soon. Get out.

Wipro

Wipro has recovered very smartly after a short spell in a bear market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market. Change of CEO has brought in new direction and aggressiveness that was lacking earlier. Use dips to buy.

Related Post

In which IT Sector stocks should you invest?

Why Japan’s calamity can hurt the global economy and stock markets

There is an English proverb: Misfortune never comes alone. In Japan’s case, misfortune seems to be coming in droves. Before the stoic and resilient people from the island country could recover from the horrendous calamity of the massive earthquake and devastating tsunami, the explosions and radiation leaks from the ageing Fukushima nuclear power plant has sent shock waves through the entire global economy.

Oil prices dipped on the assumption that demand from Japan will diminish as the economic growth may stall while the nation reconstructs the severe damage to life and property. Japan is the third largest oil consumer in the world, and there may be a drop in demand in the near term.

But global demand for oil may increase. Many countries, including the USA, depend on oil for their energy requirements – unlike India where coal-fired power generation is the norm. The US-India civilian nuclear treaty was supposed to be a win-win agreement for both. New nuclear power plants built with US technology was supposed to alleviate India’s perennial power shortage, and boost the demand for US-made equipment and consultancy services. The crisis in Japan’s nuclear power plant, built with equipment and technology from the US giant General Electric, will now put nuclear power as an alternative energy source on the back burner.

Japan also happens to be a large market for luxury goods, with more than 10% of world sales. Any further slowdown of an already slowing Japanese economy will seriously affect the businesses of luxury goods makers the world over. Many of these luxury goods – whether Gucci bags or parts for BMW cars – are actually manufactured in Asian countries.

With the Japanese Nikkei index taking a beating, investors are likely to pull out of Japanese funds that invest in global stock markets to cover their losses. As per a CNBC report, more than US $7 Billion has been invested by Japanese funds in Indian markets – and that is less than 20% of their total investments in emerging markets as a whole. The Sensex dropped 18% when FIIs recently pulled out US $2 Billion. Any Japanese withdrawal can cause a much bigger correction. Already, European indices have felt the heat.

Many Indian companies have built up their Japanese bases over a long period of time. Infosys and TCS are among them. There is talk of repatriation of Indian employees. It remains to be seen what effect that may have on the bottom lines of Indian companies.

Unlike the rise in oil prices, which every one expects to moderate in the near term as the unrest in North Africa and the Middle East gets quelled with firm hands, the crisis in Japan isn’t going to end soon. A melt-down in a nuclear reactor in a populated area can have serious long-term repercussions. Operations of many global companies will be disrupted because of damaged roads and ports, and shutdown of manufacturing facilities.

Indian investors need not sell in a panic. Corrections due to ‘black swan’ events, like the one in Japan, provide buying opportunities. Be patient and stay prepared for a deeper correction.

In which IT Sector stocks should you invest?

The IT Sector had been one of the star performers in 2010. With the US and Eurozone economies showing signs of recovery, it is expected that the sector will perform well in 2011 also. A performing sector doesn’t mean all the companies in the sector are worth investing in. Some stocks are leaders; some are laggards. Some are just not getting anywhere.

Here are the chart patterns of 10 IT sector stocks – including the four big guys and a few mid-caps. With demand for experienced manpower on the rise, the problem of attrition is causing concern. The big guys with their geographically spread out operations in different verticals is better able to manage attrition than the smaller players.

TCS

TCS is the jewel in the crown of the IT sector, and has been in a raging bull market, touching new highs on a regular basis. After a decent correction during Mar-May ‘10, when the stock almost fell to the 200 day EMA, the stock touched a lower bottom, but the RSI made a bullish higher bottom. For the past month, it has been in a consolidation mode with an upward bias. The stock is at an all-time high, so caution is advised. The RSI and slow stochastic are showing negative divergences. Hold. Add on a slightly deeper correction.

Infosys

The Infosys stock is also in a strong bull market, touching higher tops and bottoms for the past 12 months. The correction during Apr-May ‘10 touched a higher bottom. Both the RSI and slow stochastic have fallen sharply from their overbought zones. The correction may continue for a while longer. Hold, and add the dips.

Wipro

Wipro is also in a bull market, but the Oct ‘10 high has not been breached yet. The stock is showing some weakness near its previous high, and a bearish double-top pattern may be forming. Wipro has never quite been in the same league as TCS and Infosys. It is reflected in the stock’s performance. Book partial profits.

HCL Tech

HCL was an established company when Infosys first appeared on the scene. Somehow, their head-start in the small computer manufacturing and marketing field could not be leveraged into leadership in the software services field. That doesn’t mean that their stock is doing badly. It is in a bull market, and has given decent returns in the past 12 months. Can be added on dips.

Oracle Financials

The Oracle name hasn’t changed the fortunes of the original iFlex. Though the stock is technically in a bull market (trading above a rising 200 day EMA), it has traded in a sideways range for the past year and has given negative returns to shareholders. Switch.

MPhasis

Mphasis hit a peak in Feb ‘10, fell well below the 200 day EMA, and has since been oscillating around its long-term moving average. The stock has given negative returns to its shareholders in the past year. Switch.

Tech Mahindra

Tech Mahindra is trading below its falling 200 day EMA, making lower tops and bottoms and is technically in a bear market. The British Telecom connection has broken and the Satyam amalgamation will be a heavy cross for investors to bear. Avoid.

Mindtree

The Mindtree stock is not going anywhere. It is making an effort to move above its 200 day EMA, but is trading within a bearish pattern of lower tops and bottoms. Not quite as bearish as Tech Mahindra, but an ‘avoid’.

KPIT Cummins

The KPIT Cummins stock dropped like a stone below its 200 day EMA back in May ‘10. It recovered sharply to double in value in Aug ‘10. It has been in a down trend ever since, and is about to drop into a bear market. Sell.

Tata Elxsi

Tata Elxsi touched a high-volume peak in Mar ‘10, and has been oscillating around its 100 day EMA since then. Shareholders have got no returns. The stock is technically in a bull market, but the chart pattern does not inspire any confidence. Hold.

Related Posts

Should you invest in Telecom Sector stocks?

10 years Gold Chart Pattern: a parabolic rise

Two months back, the gold chart pattern indicated a slow down of upward momentum which led me to caution investors that a drop below the 14 day SMA may be the first warning of a possible change of trend.

I had also mentioned the possibility of a bearish double-top pattern forming on the gold chart, which could also lead to a change of trend. Neither of the bearish scenarios played out. All that happened was a brief dip to the 14 day SMA, followed by a $100 rise to a new high above the $1350 level.

A bout of profit booking took gold’s price below the 14 day SMA for a few days, but the $1300 level was not breached on the downside. The next up move took the price to another new high above the $1400 level, where some consolidation is taking place.

I have been looking at the 1 year chart of gold prices, and failed to observe the long-term bullish strength of the yellow metal. This time, let us look at the 10 years closing chart pattern of gold:

Gold prices have seen a parabolic rise during the strong bull market of the past 10 years. The bear phase during 2008 was the only occasion when gold prices dipped significantly below the 200 day SMA.

If this parabolic rise continues, gold prices could double or even triple from current levels within 18-24 months. The recent QE2 announcement by the Fed seems to have provided fuel to the bullish fire. Should investors enter at this late stage of the bull market?

That should depend on your experience, comfort and asset allocation plan. Remember that an investment in gold doesn’t provide any returns in terms of dividends, splits, rights issues or bonuses – like an IBM or TCS stock does. The entire play in gold is about safety and low-risk capital appreciation. A 100% gain in two years is no mean achievement.

To put things into perspective, the TCS stock has gained 300% in the past two years (adjusted for the 1:1 bonus issue last year) – and that doesn’t include all the annual and interim dividend payments. Even silver has outperformed gold by rising 200% in the past two years.

By all means, consider investing in gold even at current prices if you haven’t invested earlier. But keep the allocation to gold at 5-10% of your total portfolio value. Physical gold has associated safety and storage issues. Gold ETFs are readily bought and sold on the stock market like shares. 

Why has the Sensex remained rangebound for 10 months?

Many small investors are perplexed about the rangebound Sensex over the past 10 months – trading between 15300 and 18300 in a slightly upward sloping channel.

Of late, the Sensex has been trying to break above the trend line connecting the tops. But every time it has fallen back into the trading range, despite continuous buying by the FIIs.

So what gives? There could be two possible reasons. The first is that most of the Sensex stocks appear fully valued or even over-valued, so action has shifted to the mid and small-cap stocks. The second is that some Sensex-constituent stocks are performing very well, while others have lagged the Sensex.

Trying to analyse the possible first reason would require access to FII buying and selling data that I do not have. It is based on anecdotal evidence. But the second reason can be verified more easily with a quick, back-of-the-envelop calculation.

Here is what I gathered, by comparing the closing prices 10 months ago with that of today’s prices:

Sensex stocks	Price on 12.10.09	Price on 12.08.10	% Gain/ (Loss) in 10 months
ACC	796	837	5.1
BHEL	2424	2496	3.0
Bharti Airtel	351	318	(9.4)
Cipla	298	314	5.4
DLF	425	316	(25.6)
Jindal Steel and Power	619	656	6.0
HDFC	2758	2991	8.4
HDFC Bank	1700	2075	22
Hero Honda	1631	1867	14.5
Hindalco	129	167	29.5
HUL	290	266	(8.3)
ICICI Bank	893	964	7.9
Infosys	2240	2779	24.1
ITC	129	153	18.6
Jaiprakash Associates	160	119	(25.6)
Larsen and Toubro	1657	1805	8.9
Mahindra and Mahindra	458	633	38.2
Maruti Suzuki	1516	1226	(19.1)
NTPC	210	195	(7.1)
ONGC	1245	1267	1.8
Reliance Comm	248	173	(30.2)
RIL	1084	972	(10.3)
Reliance Infra	1357	1095	(19.3)
SBI	2173	2784	28.1
Sterlite	170	168	(0.01)
TCS	581	855	47.2
Tata Motors	550	1024	86.2
Tata Power	1319	1329	0.01
Tata Steel	546	520	(4.8)
Wipro	344	413	20
SENSEX	17027	18074	6.1

Only 13 stocks have outperformed the Sensex in the past 10 months. 1 stock was an equal performer. The balance 16 underperformed the Sensex. Not a very scientific experiment, but one that may give us clues for taking investment decisions.

1. The IT pack – Infosys, TCS, Wipro have outperformed

2. SBI and HDFC Bank have outperformed; HDFC and ICICI Bank have marginally outperformed the Sensex

3. Hindalco has outperformed, but Sterlite and Tata Steel have underperformed

4. Hero Honda, M&M and Tata Motors have outperformed; Maruti Suzuki has underperformed

5. Tata Power and NTPC have underperformed; Jindal Steel and Power have given equal performance with the Sensex

6. Bharti Airtel and Reliance Comm have underperformed

7. ITC has outperformed but HUL has underperformed

8. ONGC and RIL have underperformed

9. ACC, BHEL, DLF, Jaiprakash Assoc, Reliance Infra have underperformed; L&T has marginally outperformed

10. Cipla has underperformed

One school of thought says: Tend the flowers and pull out the weeds. Translated into English, it means hold the outperformers and get rid of the underperformers.

While that may be sound logic, it may not necessarily make good investment strategy. If the Sensex has to move above the trading range, the outperformers have to keep performing, but the underperformers need to pick up the baton and start running.

In other words, if you believe that the Sensex is going to move higher, a contrarian bet on the underperformers is likely to provide good gains. That is not a blanket permit to buy all the underperformers. One still has to do due diligence.

This may not be a bad time to pick up Tata Steel, RIL, Sterlite and, on dips, HUL, NTPC, BHEL. The telecomm sector is best avoided.

Is the correction in the Sensex over already?

Many small investors may be thinking about this question after the Sensex bounced up today after 5 straight down days. A simple 'yes' or 'no' answer will have 50% chance of success - but also a 50% chance of losing money if you bet on the wrong side.

In investing, one needs to tilt the odds in one's favour. The best way to do that is to keep yourself better informed and prepared. If you have made a proper investment and asset allocation plan then such ups and downs in the index should be ignored as mere 'noise'. The business channels and pink papers make a big deal out of it because it helps them to sell advertisements.

Let us look at the information available. The weekend's big news was the SEC fraud charges against Goldman Sachs. The quick denial by Goldman has not convinced any one. More such skeletons in the US banking and financial sector may come tumbling out. Asian and European indices had a sharp reaction.

The huge disruption in air traffic due to the volcanic eruption in Iceland caused discomfort and inconvenience to travellers. Import and export shipments also got badly affected. Clogged up trans-Atlantic air channels seem to be easing back to normalcy. The European markets greeted the news with good up moves.

Today, the RBI raised the repo, reverse repo and CRR rates by 25 basis points, which was along expected lines. How much it'll cool food inflation is debatable. But the market was apprehensive of a bigger 50 basis point raise. No wonder the Sensex shrugged off the rate hike.

Among Q4 results declared so far, Hero Honda came out with surprisingly strong results. Infosys and TCS have also reported good performances, though both are cautious about the outlook for this year - for two reasons. The appreciating Rupee, and the lack of big deals so far from the US and Europe markets.

The fundamentals of the Indian stock market seem to be in reasonably good shape, so there is no reason for the Sensex to drop any further. Right? I'm afraid not, because the technicals are getting a bit dodgy.

Yesterday, the FIIs were big net sellers, and the Sensex fell by 190 points. Today again, the FIIs were net sellers - but the Sensex went up by 60 points! What happened? The DIIs bought, and so did retail investors.

Yesterday, the Sensex took support at the 50 day EMA but was resisted by the falling 20 day EMA. Today, the index tried several times to move above the falling 20 day EMA, but failed. The technical indicators have also turned weak.

To cut to the chase, as long as the Sensex remains below the 20 day EMA, the correction is likely to continue. The support from the 50 day EMA was a positive, so watch the medium-term average closely. A fall below it could lead to a deeper correction.

Note: Read more about asset allocation in my FREE eBook.

Will the H1/L1 US visa restrictions 'news' affect the IT sector?

A couple of months back, I had written a post about how to use financial news. Four categories of 'news' were discussed - good, great, bad and worse. Some suggestions about how to deal with such news were given.

What if there is a fifth category? Some item that appears in the pink papers or business channels as 'news' and causes some turmoil in the stock markets - but later turns out to be a misinterpretation? It wasn't really 'news'?

It is difficult to take any action till you receive further clarifications. Or, you may have an 'insider' in the industry or sector who can separate the wheat form the chaff and go to the core issue to advise you.

The recent 'news' about the H1/L1 visa restrictions for temporary non-immigrant workers in the USA is a case in point. The business channels went to town about it, asking leading members of the IT industry how these restrictions will affect their top lines and bottom lines.

Some retail investors dumped Infosys, TCS and other IT stocks. Some even stated that the leading IT sector stocks had become 'fundamentally weak'. The 'smart money' lapped up the stocks.

Any one who has spent a few years in the IT industry and has worked in the USA would take such 'news' in their stride. Because (s)he would know that similar 'news' keeps popping up every so often only to dissolve without a trace.

Why? Because the visa restriction 'news' was only a proposal by a couple of senators - pandering to the popular misconception that most of USA's unemployment problems have been caused by jobs being outsourced to India.

It takes a very long while - some times, forever - for such restrictive proposals to become a law. The proposal needs to be tabled and passed in the US Congress and the Senate. There will be a strong Indian-American lobby that will be working against it.

Even if the proposal gets through both houses, it is likely that there will be several amendments made to the original draft proposal. Each amendment will take its own sweet time to go through.

The US President has to sign the revised proposal to turn it into a 'law'. He has the authority to turn it down, or - you guessed it - seek more amendments. Many such proposals never get to become a law. Even if it does, most of the severe restrictions are likely to get diluted.

At the end of it all, should the visa restrictions become a law, it will not take effect retrospectively. Meaning, existing H1/L1 visa holders will not be affected. Only new visa applications made after the law comes into effect will face the restrictions.

Who might get affected the most in the IT sector? It will be the small body-shoppers whose business model is to hire out programmers to different US companies.

Also affected will be large US IT companies like Microsoft, Oracle, Cisco who employ significant numbers of H1/L1 software personnel from India. They will face difficulty in finding new employees from the US job market. So they will probably be lobbying the US government to veto such a restrictive proposal.

Infosys, TCS, Wipro have globally dispersed businesses, with a large portion of the work done 'offshore' in India. They will be inconvenienced, but the effect on their top line and bottom line will be very little.