These were introductory comments in the previous post on Great Eastern Shipping 7 years ago: "Fundamentally strong, with very good profit margins, strong cash flows from operations, low P/E ratio, regular dividends - all the hallmarks of a stock that should adorn any long-term portfolio."
The shipping sector has been facing a pressure on freight rates for quite some time due to an excess supply of vessels - compounded by a slowdown in the Chinese economy and low oil prices that have affected offshore drilling business.
In spite of such headwinds, India's largest private sector shipping company has produced stellar results. Consolidated net profit of Rs 1039 Crores with NPM of 25.5%; diluted EPS of 68.8 giving a P/E ratio of 5.3; net cash flow from operations of a massive Rs 2047 Crores; debt/equity ratio at a manageable 0.55; dividend yield of 3.7% on CMP.
Yet, the chart below shows the stock price has been in a 2 years long down trend (marked by blue down trend line). Is this a value investing opportunity, or what?
The stock price had touched a 2 years high of 460 on Sep 15 '14 only to drop into a long correction-cum-consolidation phase. After forming a 'rounding bottom' reversal pattern, the stock rose to touch a high of 399 on Aug 13 '15 but retreated after facing strong resistance from the blue down trend line.
Continuing with the consolidation within a 'rounding bottom' pattern, the stock price breached the down trend line and touched a high of 420 on Nov 10 '15, but formed a 'reversal day' pattern (higher high, lower close) that triggered a sharp correction below its three EMAs into bear territory.
The stock price formed a small 'double bottom' reversal pattern at 275 on Mar 2 '16 and rallied past its 20 day and 50 day EMAs, but failed to overcome strong resistance from its 200 day EMA. Another correction-cum-consolidation ensued.
After forming another 'rounding bottom' reversal pattern (clearly visible on the 20 day and 50 day EMAs), the stock price rallied past its 200 day EMA into bull territory and has breached the blue down trend line once again.
Daily technical indicators are looking overbought. That means the upside may be limited in the near term. Those who understand the nitty-gritty of the shipping business may consider gradual accumulation.
FIIs were net buyers of equity worth Rs 2800 Crores during the first trading week of Aug '16. DIIs were net sellers of equity worth Rs 1500 Crores, as per provisional figures, but were net buyers on Fri. Aug 5 - enabling both Sensex and Nifty to close with small weekly gains.
The expected passing of the GST constitutional amendment bill in the Rajya Sabha had already been discounted by the stock market. A lot of administrative steps are required after the Lok Sabha and at least 16 of the states ratify the bill, and a GST Council is set up.
Analysts are falling over each other in trying to explain the likely effects of GST on various business sectors. Investors should wait for the GST Council to be set up and decide on the various slab rates. Despite all the publicity, there will not be a single GST rate, as luxury items may attract a higher rate and some items will be exempted or have lower rates.
BSE Sensex index chart pattern
The following comments appeared in the previous post on the daily bar chart pattern of Sensex: "The index looks poised for a correction. FIIs may buy the dip and prevent a big fall."
The index touched an 11 months high of 28285 on Aug 1, but formed a 'reversal day' bar (higher high, lower close) that triggered a correction down to the support level of 27600.
Combined buying by FIIs and DIIs on Fri. Aug 5 led to an upward bounce, with a small gain of 26 points on a weekly closing basis. The index has been consolidating sideways within a 650 points range for the past 4 weeks.
Daily technical indicators are turning bullish. MACD is below its signal line in positive zone, but has stopped falling. ROC has re-entered positive zone and crossed above its 10 day MA. RSI has crossed above its 50% level after a brief drop below it. Slow stochastic dropped close to the edge of its oversold zone, but is turning up.
The index needs to move above its Aug 1 top of 28285 to prevent the formation of a bearish 'head and shoulders' pattern. Any breach of the 27600 level can lead to a test of support from the rising 50 day EMA.
Sensex is trading above its three EMAs in a bull market. If DIIs join the bull party - like they did on Fri. - resistance from the 28600 level will be overcome easily.
Remain cautiously optimistic, and stay invested. (Sensex P/E is at 20.8 - higher than the long-term average value.)
NSE Nifty index chart pattern
The following comments appeared in last week's post on the weekly bar chart pattern of Nifty: "All four weekly technical indicators are looking overbought. That doesn't mean Nifty can't move even higher."
The index touched a new high of 8711, only to drop below the 'rising wedge' pattern to a low of 8518, but bounced up to close above the resistance level of 8650 with a weekly gain of 0.5%.
Nifty has closed within the bearish 'rising wedge' pattern for 11 weeks in a row. Only a convincing move above the upper edge of the wedge will negate the pattern.
Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are rising inside their overbought zones. However, ROC has corrected down from the edge of its overbought zone and crossed below its 10 week MA.
Nifty's TTM P/E is at 23.74 - much higher than its long-term average value. The index touched a new 52 week closing high, but was backed by lower volumes. Downside risk is increasing by the week.
Stay invested, but maintain a trailing stop-loss.
Bottomline? Sensex and Nifty charts show that bulls are refusing to allow bears to dominate. Index valuations on a TTM basis continue to look expensive, increasing downside risk. A dovish RBI policy announcement next week may trigger a rally to test lifetime highs.
In his well known investment book "The Intelligent Investor", Benjamin Graham has explained several investment principles that have withstood the test of time.
If you haven't heard of Graham, he is considered the 'guru' of value investing and was a teacher of Warren Buffett. Graham's book is recommended reading for all small investors.
To appreciate and understand Graham's value investing principles, here are three time-tested ones:
1) Margin of Safety
It means buying a stock at a price below its intrinsic value. What is intrinsic value? Investopedia.com defines it as the true value of a company's stock based on all aspects of the company's business, including qualitative and quantitative factors. That means putting a value to the company's reputation, business model, competitive advantage, as well as calculating its financial ratios to assess profitability, sustainability, financial prudence.
A DCF (Discounted Cash Flow) method that takes into account a company's free cash flow and weighted average cost of capital is often used to calculate intrinsic value. But even such a calculation is subjective, as it requires certain assumptions to be made about future earnings that may or may not turn out to be accurate.
Is there an easy way to figure out 'Margin of Safety'? One way is to compare the average 'earnings yield' of a company (inverse of the P/E ratio) over a period of 5 to 10 years with the fixed deposit rates of banks. If the average E/P is more than the current FD rate, you have some 'Margin of Safety'. (Otherwise, you may be better off investing in a bank FD.)
Note that higher E/P means lower P/E, which usually happens in bear markets or when a company is not performing well. A company with strong fundamentals in a bull market is likely to have a high P/E ratio and hence low E/P - not leaving much 'Margin of Safety'.
'Margin of Safety' can also be thought of as 'buy low and sell high'.
2) Profit from Volatility
A young investor had once asked John Pierpont Morgan, the famous American financier, banker and art collector, what the stock market will do on that particular day. Morgan had responded: It will fluctuate.
Warren Buffett had said: Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
Volatility is an integral part of stock market movements. Sometimes a market fluctuates so rapidly and wildly that it scares off most investors. But irrational market movements can be your friend, because it allows you to avail of sudden extremes of low or high prices.
If you are a long-term investor and not a day trader, there can be a couple of ways you can benefit from market fluctuations. First is 'Rupee Cost Averaging' (or, SIP), where you invest a fixed amount of money at regular intervals, which smooths out day-to-day fluctuations. Second is investing in a balanced fund, which has a mix of stocks and fixed income instruments; stock price fluctuations are 'balanced' by steady returns of fixed income instruments.
For novice investors, or, for those who don't have the time or inclination for detailed fundamental and technical analysis before buying a stock, regular investment of monthly savings in a good balanced fund is an excellent way to build wealth for the long-term without much effort.
3) Know Thyself
You know yourself better than anyone else. At least, you definitely should. Your investment style and strategy should depend on your personality. Otherwise your market returns will not be up to the mark.
Are you an active and enterprising investor, who loves nothing better than to dig out less-known small-cap or mid-cap companies and then do detailed analysis of their annual reports for selecting future multibaggers? Or, do you prefer to be a passive and defensive investor, who hates bothering about the economy, inflation rate, currency fluctuations, price chart patterns?
Do you enjoy the adrenaline rush of picking an unknown stock based on a friend's recommendation and seeing it rise into the stratosphere, or, would you rather make a detailed financial plan and asset allocation plan and then regularly invest according to your plans to achieve your investment goals?
Only you have answers to such questions. And there are no right or wrong answers. The bottomline is that your personality should match your investment strategy.
However, remember that wealth can not be built by constant activity of buying and selling. It is built by buying with a 'Margin of Safety', using volatility to book part profits and re-entering at lower levels, and holding on for the long-term to get the benefit of dividends, rights issues, bonus issues and stock splits.
Read more about the three timeless principles.
Related Post
Net buying in equities by FIIs has crossed Rs 1840 Crores during the first three days of Aug '16, as per provisional figures. DIIs have been net sellers of equity worth almost Rs 1600 Crores.
Nifty touched a new 52 week high of 8711 on Aug 1 - gaining a huge 1885 points (~28%) from its Feb 29 low of 6826. It has been in corrective mode since then, closing just below the 8550 level.
Indian factory activity grew at its fastest pace in 4 months, as indicated by Nikkei/Markit Manufacturing PMI of 51.8 in Jul '16, against 51.7 in Jun '16. A figure above 50 indicates growth.
The daily bar chart pattern of Nifty received good support from its 20 day EMA, and is trading above its three rising EMAs in a bull market. That means corrective dips can be used to add/enter.
Daily technical indicators have corrected overbought conditions. MACD has crossed below its signal line and slipped down from its overbought zone. RSI and Slow stochastic are above their 50% levels, but showing strong downward momentum.
Nifty's TTM P/E is still quite high at 23.36. The breadth indicator NSE TRIN (not shown) has risen sharply from its overbought zone - hinting at some more correction.
If the index falls below its 20 day EMA, it can drop quickly to the support zone between 8300-8400. Can Nifty fall even lower? Sure it can, but a couple of technical reasons may prevent a fall below 8300.
The first is of course continued buying by FIIs on every dip. The second is a 54 points upward 'gap' between 8353-8407 formed on Jul 11. The 'gap' area can act as a support zone.
Even if the 'gap' gets partly or completely filled by price action, the index is likely to resume its up move thereafter. (Note what happened to the 55 points upward 'gap' between 7717-7772 formed on Apr 13.)
Remember that technical analysis is not a science, but based on similar price patterns that have occurred before on many technical charts. If FIIs suddenly turn sellers, all analysis can go haywire in a flood of outflow.
Such a situation is quite unlikely - unless a war breaks out in South China Sea (one has been brewing for a while). Not trying to be a scaremonger - just making readers aware that a wholistic view of the market is important in making investment decisions.
For a long-term investor, it shouldn't matter whether you buy when the index is at 8550 or 8350. When Nifty scales 10000 or 15000 (it will, if India's growth engine keeps chugging along), you will look back and think 8550 was a great buying opportunity.
Gold chart pattern
The following remarks were made in the previous post on the daily bar chart pattern of Gold: "BrExit concerns have receded. That doesn't mean gold's price can't move even higher. It may take a little time."
Gold's price slipped below its 20 day EMA, but received good support from the 1310 level and bounced up to the 1360 level. A new 52 week high is just about 20 points away.
All three EMAs are rising, and gold's price is trading above them in a bull market. Daily technical indicators are in bullish zones, but MACD is yet to cross above its signal line and the upward momentum of RSI has stalled.
Volumes are a bit of a concern. They need to pick up for the rally to sustain. Otherwise, gold's price can see some consolidation.
On longer term weekly chart (not shown), gold’s price closed above its three weekly EMAs in long-term bull territory for the 8th week in a row. The 20 week EMA has crossed above the 200 week EMA. The 'golden cross' of the 50 week EMA above the 200 week EMA, which will signal a return to a long-term bull market, is awaited. Weekly technical indicators are looking overbought.
Silver chart pattern
The following remarks were made in the previous post on the daily bar chart pattern of Silver: "The possibility of a downward break out from the triangle can't be ruled out. Should that happen, it will be a good buying opportunity."
Note that silver's price did break down below the triangle, only to pullback to the bottom of the triangle and then fall again. On both occasions, the rising 20 day EMA provided downside support.
Usually, a breakdown from a triangle - and any subsequent pullback - should be a selling opportunity. So, why was it suggested as a buying opportunity? Because of the rapidly rising EMAs indicating strong bullish sentiment.
Can silver's price face a correction? Sliding volumes during the past 4 days seem to suggest as much. Daily technical indicators are in bullish zones, but only Slow stochastic is showing good upward momentum.
On longer term weekly chart (not shown), silver’s price closed above its 200 week EMA in long-term bull territory for the 5th straight week. All three weekly technical indicators are looking overbought and hinting at some consolidation or correction.
S&P 500 index chart pattern
The following remarks appeared in last week's post on the daily bar chart pattern of S&P 500: "Some more consolidation - or a correction - is likely. Booking part profits may be a good idea."
The index continued its sideways consolidation for the 2nd week - touching a low of 2159 and a new high of 2177 - but closing slightly lower for the week.
All three EMAs are rising, and the index is trading above them in a bull market. An upward break out from the consolidation zone is likely.
However, MACD and Slow stochastic have formed 'rounding top' patterns inside their overbought zones. RSI is moving sideways below its overbought zone. Some more consolidation or a correction can't be ruled out.
On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 21st week in a row, but formed a 'reversal' bar (higher high, slightly lower close). Weekly technical indicators are looking overbought.
FTSE 100 index chart pattern
The daily bar chart pattern of FTSE 100 continued to consolidate sideways for the 2nd week, closing marginally lower for the week.
All three EMAs are rising, and the index is trading above them in a bull market. That means the index should resume its up move soon.
However, daily technical indicators are hinting at a correction. MACD has formed a 'rounding top' pattern and crossed below its signal line inside overbought zone. RSI is moving sideways below its overbought zone. Slow stochastic has dropped down from its overbought zone.
An index can remain overbought for long periods during a bull market. So, there is no reason to panic and sell off. Partial profit booking may be a better idea.
On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 5th week in a row but formed a 'reversal' bar (higher high, slightly lower close). All three EMAs have converged, hinting at a sharp move. Weekly technical indicators are looking overbought and signalling a correction.
FIIs were net buyers of equity during Jul '16. Their net buying for the month totalled Rs 10,100 Crores, which exceeded their combined net buying during Apr-Jun '16. DIIs were net sellers of equity worth Rs 6050 Crores, as per provisional figures.
Sensex gained 3.9% and Nifty gained 4.2% for the month. The gains may seem small. But in absolute numbers, Sensex gained 1052 points and Nifty gained 350 points over 20 trading sessions.
Q1 (Jun '16) results have more or less been as per expectations, with a handful of positive surprises. The GST bill is going to be placed in the Rajya Sabha for approval after the government and opposition came to an understanding.
After two years of near drought, monsoon is wreaking havoc across the country. Deforestation and unplanned urbanisation due to lack of environmental awareness is undoing India's economic and technical progress.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex continued its sideways consolidation with a slight upward bias inside the long-term 'support-resistance' zone (marked by blue dotted lines) between 27600 and 28600.
All three EMAs are rising and the index is trading above them in a bull market. The index touched an 11 months high of 28240 on Jul 28. However, the rally from the BrExit low of 25911 - touched on Jun 24 '16 - is looking a bit 'tired'.
All four technical indicators are showing negative divergences by failing to touch new highs with the index (marked by small arrows). The index looks poised for a correction. FIIs may buy the dip and prevent a big fall.
If you are sitting on profits, it may be a good idea to take some of it off the table. Alternatively, keep a trailing stop-loss and continue to enjoy the bull ride.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty has now spent 10 weeks inside a 'rising wedge' pattern. The expected breakout from the pattern is downwards.
The index is facing resistance from the long-term resistance level of 8650. Rising volume bars indicate that there is no dearth of buying support - mainly from FIIs.
All four weekly technical indicators are looking overbought. That doesn't mean Nifty can't move even higher. An index can remain overbought for long periods during bull rallies.
The breadth indicator NSE TRIN (not shown) has emerged from its overbought zone - hinting at some more upside for the index.
Stay invested, but avoid fresh buying unless you find compelling value in individual stocks.
Bottomline? Sensex and Nifty charts show that bulls are continuing to outmanoeuver bears. Index valuations on a TTM basis are looking expensive. Passing of the GST bill and RBI policy announcement next week may be triggers for bulls to make an attempt to test lifetime highs.
