Which stocks to buy during 'Corona-virus' market correction ?

Worldwide markets are panicking, Dow Jones is down 15%.
The reason is well known - Corona virus. There is fear that world wide growth will slow down. 
Now when there is a market panic, there is very less rational thinking & usually its basket selling which takes everything down with it. Don't believe me ?

Sales of Corona Beer (#3 beer brand world-wide) have dropped even when it has nothing to do with Corona virus ! Have a look below

We would feel like laughing at this absurd behavior, but hey its our hard owned money that is getting wiped out due to this collapse.

Now the common question that each market participant gets is:

1. Should we buy more stocks ?
2. Should we sell & salvage whatever capital is left
3. Should we ignore the on-going correction & stay put ?

I belong to the school which thinks 'Never waste a market correction'. Reasons ?

1. Agreed that there will be disruption in supply chain due to China & few other major countries shutting down but there have been confirmed reports that shipments are getting back on track.
2. Though the growth will slow down, it should be temporary & we should see a V shaped recovery
3. Central banks world-wide will infuse more liquidity (which has been fueling this current bull market); there is a coordinated interest rate reduction coming up by global central banks along with a surprise asset repurchase programme.
4. Trump can't afford a big negative year for markets when election are due within 8 months (since his appointment, US markets have given excellent returns and he won't give up when he is so near to the elections )

But then the biggest mistake that fellow investors make is that they buy the most beaten down stocks assuming that they will recover the most. This thesis generally goes for a toss since at each bounce that these stocks see, there are sellers who want to liquidate at their cost price & get out. This puts pressure on rising stocks.

The principle to follow here is: 'Buy those stocks who have stood firm in this steep correction. They are the ones who lead the next rally'.

To understand what I mean by stability, first look at this chart of Nifty & see the severity of correction

Nifty

Nifty is down 10% which is very big for a front-line index

I have identified few stocks (this is purely for educational purpose & to check the validity of this thesis) which have stood tall in this correction & are fundamentally strong as well. Remember this, never venture into stocks which are not backed by good earnings growth. These are like pack of cards and go into free fall on slightest of external push.

Midhani

This stock has actually bucked the trend and increased in price; surprised ? Thats called strength.

AU Small Finance Bank

Solid as rock. Thats stability

Divis Lab

One of the beneficiary of China shutting down as it backwards integrated

Metropolis

More patients will opt for diagnostic tests ? May be, but the stock is standing tall.

Another strategy which can be adopted is to buy stocks which are at long term supports and have been giving good earnings. Few of the stocks belonging to this category are:

Info Edge (Naukri)

200 DMA has acted as support, will it work this time as well ?

Bajaj Finance

Credit access

Solara Active Pharma

It will be biggest beneficiary of Corona virus shutdown due to its API portoflio

I am not saying this is an exhaustive list; but this is an important filtering criteria. It has worked in past & good chance it will work now as well.

Another important thing to understand is that you may not have sufficient cash to deploy here. In that case the strategy to be followed is to 'Sell the losers and buy the winners'
People usually do the opposite by cutting the flowers and watering weeds. 
Identify the worst hit stocks from your portfolio, reduce them & add to your strongest ones. 

Stocks which are withstanding this correction are doing it for a reason, respect the price action & take advantage of it.

Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog

Why Gold will give excellent returns over next 3-5 years ?

'There is always a bull market in certain asset class at any given point in time'

This brings me to the favorite investment avenue for Indians viz. Gold

Why is gold poised to give excellent returns over next 3-5 years horizon ?

As we discussed in our earlier post, an asset class when it breaks previous top on upside, it goes on to rally multiple times.

As can be seen in above chart, Gold when it broke its earlier top in 2006, it rallied 3 times in next 5 years. Now we are poised for similar pattern where gold is approaching its previous high of  ~$1800 

Also it is at 5 year high in USD terms. In INR terms, it hovered in range of 32000 - 25000 for 6 years and due to depreciating INR, it has broken out to All time high.

Now whenever an asset class breaks out of such a multi year range, the rallies don't stop at 20-30%. They go on to multiply over long term. 

Reason for rally: 

• Overall there has been loss of confidence in Central government worldwide and the way the banks are maintaining negative interest rates, it leaves very less scope for government to resort to easy monetary policy
• Overall scenario of slowing growth world wide
• Developed countries are looking at an alternative to USD due to $22 trillion debt carried by US and also due to arm twisting done by US in terms of tariffs
• Central banks buying gold: China & Russia have been buying gold as an alternative to USD due to above factors
• Flight to safety due to things like trade wars, military clashes, Corona virus scare, etc.

Gold chart for India vs International:

If you see the chart below of Gold in INR terms vs that in USD terms, it has most of the times been trending upwards in India as against the price of Gold in international markets. Also it has not seen major sustained correction to the tune of 50% or so over a 5 year period in India. Why is that so ? It's because INR has been depreciating for decades. This is a major reason why Indians should have gold in their portfolio.

Ways to invest in Gold:

If you are looking at Gold from investment perspective, buying physical gold is most inefficient way to do it. There are Gold ETF's listed which you can buy and they mirror price of Gold. Kotak Gold is best of the lot. You can simply buy it with a click of a button.

Another option is to buy stocks of Gold loan companies like Manappuram Finance and Muthoot Finance. They lend money against Gold and when the price of Gold moves up, so does the value of their collateral thereby enabling them to lending more. 

In case of recession or major market correction, Gold will act as a natural hedge since there will be flight to safety from equities to Gold.

There is no reason why Gold can't see the rally it saw from 2003-2010. For the guys out there, at the end of the day your wife will also be happy that you are buying Gold !!

Disclosure: I am not a SEBI registered investment advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog

Which stocks will multiply your money ? The quest for multibagger returns

What if you get a secret to identify stocks which will multiply your money ? Sounds familiar ?

No, i'm not selling you above scheme.But have you thought what is the common trait in all the stocks that become multibagger (5x, 10x, 50x, etc.).

Here comes the secret which will make you tonnes of money if followed diligently.

Are you ready ? 

Buy stocks which exhibit below characteristics:

1. Stock price has broken out to an all time high
2. Stock price has cleared a multi year resistance
3. Above companies has been posting good results
4. During a market correction these stocks fall the least and bounce back fastest during the following up swing

Follow these 4 principles diligently and there is a good chance that you will make tonnes of money.

Don't believe me ? Here are few of the stocks which exhibit above characteristics (obviously there is lot of hindsight bias involved here, but the goal is to find patterns which work)

1. Apollo Tricoat

As can been seen in above chart, Apollo Tricoat posted excellent results in Q2 and Q3 FY20 and the stock price followed and hit all time highs. Will the rally continue ? Yes, there are chances of consolidation but backed by excellent results, the stock should continue to gain 

2. Inox Leisure

Inox is a poor cousin of PVR and market has got in a confirmation on its execution capabilities. Stock broke above 290 levels and retested it and then boom. Another all time high backed by good results

3. Abbott India

Similar to Apollo Tricoat, market has rewarded it with excellent rally followed by good earnings.

4. Reliance Industries

This is a company which everyone would know. Stock was range bound for 8 years. When it broke this range, over next 3 years stock gave 3x returns. And this is for a large company where you can invest sizeable chunk of your portfolio.

Now the obvious question is that these stocks have gone up so much and the analysis done involves lots of hind sight. Which stocks are exhibiting similar trend ? My answer will be above 4 stocks are still poised for good gains due to the growth they are showcasing & the price action they are exhibiting. But lets also look at few others which are poised in similar fashion.

1. Bharti Airtel

Doesn't the chart look familiar ? Well it looks to be another Reliance type pattern. Will Vodafone go belly up so that Airtel benefits ? More important than this is the fact that cost of mobile  plans are increasing and average revenue per user (ARPU) will go 2x over next 2 years. Why ? Because largest player Jio has lots of debt and it has almost killed all the competition and it's a duoploy now. Stock is also breaking out of a range of 10 years like Reliance did in 2016. This trigger along with improving fundamentals should help one make money

2. Credit access Grameen

This stock has appreciated 2x over last 1 year. Still I've included it here ? Why ? It recently acquired a company (Madura Microfinance), and has also done excellent branch expansion. It has broken to All time high, expect good upside over next 1 year backed by good results.

3. NAM India (erstwhile Reliance AMC)

Another stock which has hit All Time High and is just breaking out of a consolidation. This coupled by change in management should help it give good returns

4. IndiaMart

Look at the similar pattern where stock hits a level, consolidates, breaks it on upside and then moves into another orbit.

5. Granules India

By now you know the pattern right ? Its another breakout out of a 5 year range

Now go back to the start where i've listed the 4 principles to follow and have a re-look at the charts. All these have common traits. Now armed with the secret go and explore & post more stocks after studying.

P.S:

Before buying these kind of stocks, a very important factor to look at is companies which are rallying without stocks posting good results. Why is that so ? It may be a potential time bomb. The market may be factoring upcoming good results but what if the results don't come by ? 

Also it's important to ride these stocks with strict stop loss of 20% or so. There will be numerous opportunities that will come by in a rising market but the losses which you suffer holding onto losing bets will restrict your ability to ride these breakouts.

Disclosure: I am not a SEBI registered advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog

How to study a stock.. for beginners

Hope you liked the first post on how to get started with stocks. If not, please have a read here . Also please start reading the books mentioned earlier that will help you understand things better. 

Well assuming you have your demat account setup, next step will be how should one research a stock using basic free tools available and also understand what a company does. Let's go step by step. Remember this is not a text book approach, but something which is easy to adopt and helps one get a gist of a company. 

Being a firm believer of KISS (Keep It Simple Silly), I have kept this article as simple as I could. There is no point in reading 500 pages of a book on valuations just to regret later buying it. Still in case you don't understand any of the items, please feel free to comment on the blog below and I will revert. Or simply google it !!

Let's take a company whose product everyone would have used/seen.  Well almost everyone would have a cooker at their home, so the company we will study is - Hawkins cooker

What does the company do? :

I think the best source to understand this is to visit the website. Here you go: Hawkins Cooker

Look at the products. It has 2 major brands, Hawkins and Futura. These are the products which I believe everyone would have seen in their daily life. Try to think about the market for these products, who would buy them, what will help the demand to keep going. Well the answers are simple - families, hotels, eateries or anyone who has something to do with cooking would be the end customers. Since last decade govt has been helping increase adoption of gas cylinders/piped gas (free gas connections) all over India (including rural India), this coupled with culture of nuclear families will help fuel the demand. How did I arrive at it? Its just basic thinking and understanding of the developments that are happening in your surroundings. Take a moment and think about it, there is no rocket science in understanding this.

YouTube, google & investing forums:

YouTube is a great source of information to get hold of product reviews, management interviews, company ads, company videos, etc. Also various investing forums like ValuePickr can help you get detailed information about the company. Don't be boggled down by the information that is provided on these forums, remember you didn't clear your graduation on day 1. It takes time to imbibe this process; important thing is to start thinking on your own. Do spend some time here to understand the business that the company is into. Else you will just end up looking at the price of a stock and take uninformed decision. 

Growth, Future prospect and valuation:

Why do we buy a stock? Because we expect the company to grow. So unless future prospects look bright, there is no point in investing unless you see that the company is selling more products. Hawkins will keep on selling more cookers and cookware for years to come as it is a product which has not easily been disrupted for years. Think of the number of families in rural areas which still don't use cookers. So the demand seems sustainable atleast in near future. 

Look at how management gets new products each year into the market so it sells more products to same customers and more products to new customers. Also look at how the company is growing against its competition. It's taking away market share from TTK Prestige.

Check the current growth rate to understand the momentum of growth (Screener is a valuable resource for the same). See below snapshot of the growth the company has been showing.

 Checkout the metrics which I've added to understand the company's valuation, quality of growth

All this information is available for free.

Management: 

Well here comes the tricky part. I believe in a simple principle while gauging the management.. "You are a saint till you get caught". So few quick things you can do is to Google the following: “Promoter name + SEBI + case" or "promoter name + scam". Scroll few pages of Google search. In case you find something which points out that a promoter has been accused or fined for some allegations by SEBI or any other regulator, kindly stay away from them. In India barely 200 companies out of listed 7000 companies are investment worthy due to management trustworthiness. A shady promoter will give you returns in bull market but when the bear market arrives, you will be down 90% from the top. And believe me it's next to impossible to exit at the top. As Warren Buffet says: You never know who's swimming naked until the tide goes out.

Other than that you can look at are dividend payout (how much % of profits are paid as dividends), Return on Equity, whether company pays taxes, etc. (Will do a detailed post on these factors, but a simple glance can help you filter wheat from the chaff)

Hawkins management is literally a sage; in 2012 they fought a case with Punjab Pollution Control board for more than 1.5 months even though it meant taking a hit on production (few management could have taken other routes to put in under the carpet). They have excellent Return on Equity of 60% and pays out 75% of its profits as dividends. 

Reading concalls and quarterly presentation is also very important; unfortunately Hawkins doesn't do either of them, so you can plan a trip during August sometime for the AGM @ Mumbai - Churchgate. One thing you can read about the management though process is the AGM speech which helps you understand management vision 

Scuttlebutt: 

This is nothing but understanding on ground reality about the company. It means to go and talk to customers, dealers, search reviews on e-commerce websites, etc. to understand the actual on ground action. Hawkins' products are widely available in your nearby utensils store, go and check out the items on display, talk to the shop keepers, you would get to learn many things about the company like how frequently it replenishes it's stock, when it takes price hikes. Ladies in your house would also give you few important pointers about their products.

e.g.: an interesting fact I learnt about Hawkins is that usually they take price hike in April each year, hence in Feb-Mar dealers stock the company’s products, thus Q4 each year is the best quarter followed by Q2 due to festive season. Q1 is the leanest quarter due to some what muted demand from dealers post price hike. Also cost of transportation is usually high since the size of cooker is big enough though its weight may not be that much, so number of cookers which can fit into a truck increases the cost per unit. This is something no management will tell you or no business school will teach you.

Price chart:

Above analysis we did is a fundamental analysis (directed by fundamentals of the stock). There is another school of stock study called as Technical analysis which comprises of head and shoulder, necklines, trendlines, rounding bottom (not kidding at all). Well it's a different subject for study. For basic analysis you can just look at the stock trend and see if the stock is trending upwards.. Never ever invest in stock which is continuously trending down with a hope that one day it will turnaround and you will mint money. Remember, turnarounds seldom turnaround. Market is punishing it for a reason. 

Just google, Hawkins stock price & you can see it is hitting All time high on charts. In my experience in investing I consider this sign as one of the most important ones as it usually signifies that the company is doing well. 

Next steps: 

The above method of analysis is something which is pretty generic and I've taken the easiest stock to analyze to help everyone understand the same. Stay tuned to this blog to understand the process to help you get you into markets. Remember markets are a great source of creating wealth if taken seriously because it's the only place where you will get asymmetric returns.

Disclosure: I am not a SEBI registered advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog

How to invest in stock markets ?

Today Sensex is at All time high of ~42000. It has rallied 420 times from 100 in 1979 to 42k, a cool CAGR of ~16% over a span of 40 years. Still currently only 2% of Indian's invests in stocks. That's a very small number compared to developed countries. 

The probable reasons are:
1. Lack of understanding
2. Additional effort that needs to be put to track stocks
3. Impression of stock market being a gamblers den, etc. 

Leave apart the non finance folks, unfortunately I have seen many MBA-Fin who don't want to make their hands dirty in stock markets or take an effort to understand Mr. Markets. I think stock market is the best place to apply your finance knowledge/ skills, be it MBA, CA, CFA, etc. but unfortunately people consider FD's and insurance to be better investment products (Insurance is not an investment product, it's something which insures you against unforeseen events). So for a starter who has basic knowledge in finance, how to get started ?

How to approach markets: 
Each one would have his own story of how they started in markets and you can try what suits you. The way I started is by reading books on markets.  The best book to start with (and recommended by many investment gurus) is Peter Lynch's: 'One Up on Wall Street'.



This book provides you with approach on how to pick up stocks, what works and what doesn't and is easy to learn and digest for a beginner. I have personally read it 4 times & each time I learn new things I can apply to markets. 

Another one on top of my list is Basant Maheshwari's 'The Thoughtful Investor'. 
(This one is for 1500 bucks but worth every penny, you can sacrifice a Friday night drink and instead buy this one :) ) He is a role model for many and has a great command on his style of investing. (Had a chance of meeting him at Hawkins AGM in 2013). 
But does reading too many books increase chance of becoming a successful investor. No, simply reading them wouldn't make you a good investor. Why ? Simple.. you also need to apply what you have learnt. Also many of these books though have timely wisdom, Indian market is a different ball game all together as compared to a developed country like US with some many time bombs as government is focused on 98% of population who doesn't invest !!
How should one go by applying this bookish knowledge ? Simple .. burn some money. As Warren Buffet says.. 'Ship is always safe ashore, but that's not what it is meant for'

Burn some money: 
Wait, don't literally burn it. You need to put in hard cash into the market to get serious with it. People start paper trading/investing and that is the reason they don't take things seriously because paper losses don't pinch you. I have personally burnt my hands trying various things (Technical analysis, tip based trades, following so called gurus on Twitter,  Futures and options, etc.) only to realize what investing methodology suits me. It's very important to make mistakes early in your investing journey when you have smaller capital deployed (imagine going down 80% on capital of 1 lac vs on a capital of 1 cr). Over your journey in stock market, you would keep on learning new things daily... Identify what suits you the best and not blindly follow what XYZ guru is doing.. remember 'You can borrow ideas but you can't borrow conviction'.. as Thomas Phelps says 'To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them; And Patience is the rarest of the three' And with the volatile nature of stock market, you can 'sit' tightly holding onto your winner only if you your own conviction. Well then the natural question that comes to our mind is that how long we should we should keep on burning cash ?

Learn from mistakes of others: 
You need not make all the mistakes on your own to learn things. Here as well Google comes to our rescue. There are many folks who post about their own mistakes on Twitter, blogs, websites, investing forums, etc. Learn from them. The most important thing is to learn from mistakes (your own & that of others) and ensure you don't repeat the same. Always keep this in mind that each loss that you encounter is a 'Tuition fee' that you pay to Mr. Market. Your job is to ensure that you shouldn't pay the tuition fee again for the same learning. 

Follow those who have made it big: 
As in life where you have role models, you should also have roles models in market. Be humble and listen to folks who have made money in markets in the long run. Bull markets gives one a feeling that you are king of the market and you understand each and everything. Bear markets makes one humble, that's when you understand the importance of knowledge people gain across cycles. Join various investor forums, stock market blogs where experienced folks post their knowledge about stocks or markets in general. 

There is no substitute to hard work: 
You need to work hard to understand the stocks which one buys. Do as much research while buying a stock as you do while buying a cell phone or a TV or a car. As Peter Lynch says: 'There is a company behind each stock, try to understand what it does'. For starters try to invest in proven businesses (companies that you come across in your day to day life) like HDFC Bank, Bajaj Finance, Asian Paints. Investor presentation of companies is available in the Investor section on their websites (e.g. Google Bajaj Finance investor presentation or if you are too lazy check it out here). This is a great source to start understanding what the company does, how is it performing. Then there are quarterly conference call transcript/recordings available as well there which you can read. Annual reports can help you guage the long term plans of company. Then you should follow quarterly results declared by the company. Too much work is it ? Like I said earlier, don't expect to be successful in stock markets without putting in hard work.. Finally it's your hard earned money that you are putting in. Understand that it's earnings that drives stock price returns in the longer run. (btw all this information is available free of cost on BSE, NSE, company websites, Moneycontrol, etc.)

Don't follow stock prices daily: 
You would have heard stories of people who have purchased real estate and held onto for 20 yrs or more and made 100x returns. Will the same folks hold onto a stock for such a long period of time ? Very rare possibility. Why is that ? Two major reasons i believe:

1. Ease of price discovery 

2. Ease of transaction

Had real estate quoted so frequently as and it would have been so easy to transact with minimal transaction costs, chances are people would have traded intraday in real estate as well !!

One thing that you should try is not to follow stock prices daily. This will help you increase your holding period which by all chances will also increase your returns. Why ? It reduces the volatility. Look at below chart of a stock, over longer period of times, the volatility smoothens out. If you follow prices daily or intra-day, you would have panic attacks with 10-15% drops and you would have exited the position long back.

Don't bet your house on a lifetime idea:
No matter how much one says that ABC company will be the next Infosys, don't sell your house to bet on the stock. Remember.. 'Market can stay irrational longer than you can stay solvent'

Get started right away:
You may think that the market has rallied so much, what's the point entering now ? Let's wait for a fall and I will then bet 5 lakhs on the market to start off with; Believe me, it will never happen. You will wait for 10% correction and when it comes, you would wait for further 10%. This cycle goes on. Start by investing smaller amounts you can afford to loose, start getting a feel of market, you would soon fall in love with it.

Planning to do a series of blog posts on varied topics in stock market and personal finance. Would appreciate feedback and suggestions.

P.S: For single folks out there who don't have any hopes for upcoming valentine's day, open a demat account using the money that you would have used to buy gifts for the imaginary special one :). You won't regret it for life.. 

Disclosure: I am not a SEBI registered advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog