Reliance – costliest Oil company

With the run up in price of Reliance stock, which nearly doubled in three months, post the pandemic lockdowns. Reliance has become the costliest Oil company on the planet.

Market cap of Reliance has moved past 12 lakh crores, where the stock PE is at 40. On the business side, both sales and profits are down substantially when compared to last year.

This is not a COVID impact, Reliance business on Oil could have taken a hit as consumption dropped in the lockdown period. Even this for the March 2020 quarter, should not have declined as the lockdown was only for 10 days in the month of March.

Once market became jittery about the debt that Reliance carried, promoters got into fear mode and began selling rampantly. Now, the whole world has a share in the company. Google, Facebook & Microsoft kind of ownership. Also with ARAMCO, now the promoters hands are tied on future dreams.

They will not be allowed to blow money and kill competition. One very good blessing in disguise for the competitors.

With so much cash in their kitty, it cannot be kept idle. After clearing debts the future profits of Reliance, the parent of the telecom venture will get moved to some other activities, not into Oil business for sure.

They are now planning to sell stake in Retail too, looks like, apart from the stakes they will hold in the Oil, Tech & Retail, this company will become a bigger financial services firm which will invest into new technologies through the start-up ecosystem.

The next big challenge is for the PE & Venture capital firms globally, as Reliance will compete in bidding to acquire stakes globally into new businesses.

How good their dictatorship mindset will play in the totally competitive space that they are venturing will get known in a couple of years.

Reliance stock is not a favourite among institutions. All the holdings that Mutual Funds hold in the company are process based. Very few fund managers have a liking to this stock because of all kinds of clueless decisions that the management makes.

All of these views expressed are our beliefs, which can differ largely against others.

Bajaj Finance – India’s cash machine

Yet another thumping result from Bajaj Finance which has been the darling of Indian stock markets for more than a decade now. 43% growth in profits over the Sep18 results. This comes at a time when the country is crying of slowdown. Expectation over delivered.

2 years back Bajaj Finance had 300 crores of profits per quarter, last year it was 800 crores, now it is 1375 crores. This company is growing money like nobody’s business. Stock has delivered 250% returns in the last 3 years. 8000% in the last 10 years. Very few investors would have made all of this gains because, there was some bumpy ride which would have triggered exit for many of the early entrants. Yet in every season this stock delivers best returns to its investors.

Our experience with this stock was a 300% in 2014 to 15 and currently holding with 35% gains.

Can we invest now in this stock or add it to a stock portfolio?

Probably not at this level. It requires some correction. Management comments on the results was kind of pessimistic, giving warnings of future earnings. The same had come in the last quarter too and the stock has delivered even bigger numbers than last quarter. At the same time the tide cannot continue for ever, whereas there is still more steam left in this stock. Currently Bajaj Finance is available at 50 times its earnings, too high a price though the stock is a gold mine. It will become attractive if price drops to 3000 levels, which mostly does not happen in this stock.

It only comes to such mid values when the whole market goes to big pain. One can keep the stock in his/her radar or watchlist, if price reaches 3000, without second thought add the stock to your portfolio. The next expected target for the stock is 4800 levels.

HDFC Bank exposure in Mutual Funds

We have had a good correction in stock prices of Mid & Small cap segments in the last 2 years. When Small cap saw 40% drop in prices and Mid cap had a near 30% drop, Large cap segment which kept the markets up in most part of 2018 have not participated in the weakness. Even now, after more than 20 months of broad correction in our markets, Large cap indices like SENSEX and NIFTY have given back only about 4 to 6%, which is not at all a correction in prices of those stocks.

The present patterns in the indices and the stocks that kept them at high’s are showing signs of weakness. When the turn comes, most of the stocks that lead the rally will give way to weakness in prices. This will have a big downside move, on the funds that hold these giant large cap caps.

Stocks like HDFC Bank have maximum exposure in many Mutual Fund Schemes. 14.41% of the Bank’s Equity is held by Mutual Funds present across 395 schemes, most of them holding it to the max permissible limits.

Fundamentally HDFC Bank is one of the biggest contributor to stock market wealth creation in the last 2 decades. Along with its parent, HDFC, which was having a 500 Crores market cap when it was listed in the early 90’s, current value of both these companies along with their subsidiaries have crossed 13 plus lakh crores.

HDFC Bank had been growing at 30% per annum for a very long period, in the recent past for a couple of years its growth has tapered to below 20s. Even the September quarter results is expected to hold the 18 to 20% growth range.

On the technical side, HDFC Bank’s chart seems to be getting close to bearish divergences, which is an indication that it is getting saturated at the top. Post the results, if the price moves are not pretty strong, it will give way to the bears.

Two possible outcomes is likely in this stock.

  1. It succumbs to bear power and goes down, which will become a very good opportunity for long term investors to add this stock to their legacy holdings or
  2. Lose momentum, will hold to the current range to build strength for the next rally.

In the present condition, later is most likely to happen. Though the stock might not see a steep fall, as it has formed a range of 1050-1250 on its prices, this range should hold and then have an up side breakout. When this consolidation plays out, all of the mutual fund schemes that hold this stock will go through the same pattern of consolidation because of the large exposure this stock has in all the portfolios. Today 14.41% of the Bank’s Equity is held by mutual funds, which is present across 395 mutual fund schemes.

Like HDFC Bank we have many such Giant Large Cap stocks which are having similar patterns both on their profit numbers and technical patterns. This raises concern on the near future performance of funds holding exposure into these stocks. This also coincides with the thought of non-participation of large cap in the correction. Now with the developments that are expected, we will see good amount participation, which will mean that we have to brace for another bout of weakness for our markets.

Since it is the big businesses of our country that will go through this change of correcting themselves, it might not be a big drop in values.

After the mid and small cap value correction, now it is time for the big stocks to correct. Since the last 2 years, we have had investors complaining about non-performance of their portfolios where very few of them still had some positive growth in their investments. This was due to the over stretching of the Giant Large Caps in our country. Thanks to the current developments, soon this non-correlation will come to an end.

All of these developments are bringing new opportunities too, since the large cap space is going to correct now. It will be good to take exit from your existing investments, move the funds to liquid and have the same get back into the same large cap scheme in a staggered manner through STP. This will help you book available profits, not take the hit when NAV drops and also get in with an average NAV to participate in the next rally.

Those of you who have exposure to schemes which are in the large cap space, which has completed their exist load period. Mainly having stocks that are likely to turn negative can take this unique opportunity to add more returns to your investments.

Large, Mid, Small Caps, where to invest?

When it comes to mutual fund investing, Investors are generally confused as to where they should invest their money, some times large caps are doing well, some times Mid-caps are beating large and Small caps giving very high returns.

When you invest in Large cap, Mid & Small caps do well, while you are there, it goes opposite. Then, you decide to have all of them, the whole market goes down.

How to overcome this confusion & where to invest.

If we can get a better understanding of what to expect from each category, that will help us make a wise decision.

Let’s go from large Cap segment.

Large cap consists of big companies of our country, the top 100 by the stock’s market valuation. They are well established in their businesses and have consistent performance. On hearing this, your mind will say, ideally this is where we have to be invested.

Yes, It is a very wise thought. Every investor should have some exposure in large cap, because they form the back bone of the economy. Owning them will help you grow your savings as the economy grows.

AS they are well established and consistent in growth, can I have all my investments in Large cap?

No, you will miss the actual potential of Mutual Fund or stock market investing.

Large business are steady yet slow in growth. So are their stock prices too, they don’t give big returns.

Average growth is at 7-10%

Why large cap stock prices don’t have big gains?

Stock prices go up based on the growth in profits the companies make. These big companies have grown so big that, from wherever they are, having say a 100% growth in a year is not going to be possible.

For example let’s take ITC. It is a company  that is more than a century old now. It’s annual sales is 42K crores and it makes a profit of around 12K crores.

Almost all of us will be consuming at least one product that ITC manufactures, in our daily life, yet what is the possibility that ITC’s profits will double in the next one year. That is from 12K crores to 24K crores in 1 year. It is practically impossible to double in one year, while it has all the possibility to double in 6 -7 years’ time, & so will be the stock price, it will double too in the same period.

Being big makes them trusted names, while their growth will have a slow & gradual increase.

Investors in Large Cap fund can be confident of having 7 to 10% returns and they will deliver.

Now, what is different in Mid & Small caps?

They are fairly small businesses,

Bring in some new innovation,

Can adopt faster to market dynamics with their products

Management is lean, which helps in faster decision making, which is also a disadvantage is the decision backfires. The company will go up in air.

Whereas when everything clicks, their space for growth is phenomenal.

Example: Jockey, how many of us used jockey 10 years back. Not many right? Because it was a luxury those days. As our country grew in income, so did the populations taste for branded products. Today, at least 50% of population know of this brand and there is a large percentage who are using it too. Else the company which had 650 crores sales in 2011 could not have grown to have 3000 crores of sales in 2018. Profits, which was at 85 crores in Mar 11, now grown to  411 crores. Near 5 times growth in 7 years.

Where ITC grew 100% in  7 years, Jockey grew 500% in same period.

What happened to Jokey share?

It grew even faster, 1200% in 7 years.

How do you like it?

Profit growth was fast, stock price grew even faster. That is the power of Mid & Small caps.

Jockey had space to grow and had the product that quenched the thirst of a growing population. Will Jockey repeat the same run in the next 7 years, for sure it will not.

Funds having this stock in their portfolio have to ideally reduce exposure to the stock and look for the next similar stock for their portfolio.

Now the next question that will ring in our mind.

If Mid & Small cap funds can give such high growth, why should we invest into any other segment and have lesser growth, why not invest only in Mid & Small caps?

You can do, only that, you need immense patience and tonnes of belief on the fund manager because, when the funds go through bad phase, you should still stay invested, only then you will be able to reap such big gains. When the tide turns valuations just trip and prices fall like 9 pins. It will get back and run again, which can take good long time. This is the period where investors lose patience and take wrong decisions.

So, ideally having a mix of both is the best choice and for that we have the Multicap funds which have all the segments in their holdings.

These are funds which invest into a mix of all the segments, helping investors get a better return than Large cap yet safe as the spread is mixed.

Now the next question will be, here is a fund which has all the qualities, one can invest and just be with it, money will have best growth. Yet, why are people still not making big gains?

Large cap funds give 10%, Mid & Small caps give 20%, Multi caps give 15%. When you hear this mind will fork out a question, where did I have such returns? All these are only numbers, just spoken, doesn’t come in reality.

True, I agree on your thought. Not all investors get to have these growth numbers which we saw here. That is because of concerns that people have in their minds. They don’t stay invested for a long period. The moment they see a small dip in their account, the next thought is how to stop it and first action is to withdraw and keep money safe before big damage happens.

Almost all of us would have known about the 2008 fall. SENSEX was at 21K, dropped to 9K. Today it is joyfully nearing 40K. In 10 years index has doubled. This price move did not happen in a smooth slope. It had 2 instances of 2 year long steep drops in price and 3 years of doing nothing. Impatient investors would have moved out and ended up having made nothing.

This is the reason why very few make big gains from the stock market investments.

Now coming to the question of where to invest?

Have a mix of all three large, Mid & Small, along with a multicap. Follow these 5 steps –

  1. Select the best fund, which has history of consistency.
  2. Be committed to stay invested for a long period
  3. Don’t watch news, it will force you to react.
  4. Have a goal with a period and target only for that, nothing else.
  5. Once a year review the investment to check if it is doing better than the markets. If not move out to a better fund, while have a discipline, not to withdraw funds in the thought to get back later. It almost always never happens.

One small tip to make a little extra profit

When Small caps index drops more than 30%, add a little more money  into your small cap allocation.

You can reduce large cap exposure and increase in Small cap.

Don’t invest in one go, use STP for a 6 or 9 month period.

In the next rally, your investment will be right at the spot to gain big & help you reach your goal earlier.

 

Buying opportunity when stocks hit new lows

When stocks reach for a new low, investors dump it, fearing that the price will reach even lower. And that is what happens in reality. When a stock reaches for a new high, it continues to reach for newer highs till there are no more buyers to push the stock upwards. This condition is a bull market. Same when the stocks reach for new lows and more stocks follow, it is called bear market.  When more stocks follow in the same direction, fear escalates into a bigger sell off.

As the market reaches its extremes, there comes a very good buying opportunity. That is, when a large percentage of stocks reach for a new low,  the whole market slides downwards. Taking along with it even some of the good stocks. These good stocks become attractive and give opportunity to buy for big gains that will come up almost immediately.

How to identify such opportunities?

Plotting the New High – New Low index for the market will help us get the picture of when there is opportunity to buy or sell. This index is the total number of stocks that hit a new high for the day and number of stocks that hit a new low for the day. The total of highs is subtracted with the total of lows, we get the New High – New Low index. Which is also called the NH-NL index. More detailed study on the NH-NL index can be had from Dr. Alex Elder’s book on New High – New Low.

Having the data plotted takes a little effort, we have been plotting the same for about 850 stocks that we track. From the daily values, we sum the values for the last 5 sessions to make it a weekly value and have it plotted.

These values are taken for 3 time periods to get a better understanding. Along with 52 week High low, we also collect data for 90 days and 30 days. This chart here shows all three values as a plot. We can observe that when 30 day NH-NL reaches past 1000 (Orange line in the chart), market gives a reversal. The sections highlights with yellow are the reversals.

An even more powerful buy signal comes when there is a divergence on the NH-NL index. Points marked with Green arrows indicate where there were strong reversals.

When we have the 30 Day NH-NL move past 1000, you can begin checking charts for stocks that show strength on their prices, like having a bullish divergence on the histogram or the MACD lines. Get ready to buy when the down side move is completed. When they reverse their direction in few days they give very good profits.

As we are writing here, there is one such reversal that is in progress. And in the last 1 years we have had 9 such opportunities. Can we expect the same to repeat every year, ideally not. NH-NL nails bear market bottoms, where after a weakness, market recovers for a short period before going down again. Using NH-NL, we can identify such short term reversals and profit from it.

IN a bull market, we can use the divergences to exit our long positions before the markets slide and take away most of our gains. Regions marked in Blue on the chart were conditions where NF-NL had a divergence to the price movement. As price reached for a higher high, NH-NL reached for a lower high, giving us first signs of weakness and alert to tighten stops on long positions.

Therefore, when market reaches for the low and many stocks are giving new lows. It gives a good buying opportunity. We are not doing bottom fishing here, we are identifying strong stocks in a weak market which will help us make some quick gains.

Where can you get NH-NL charts?

We will have it published on our website by mid-march, which will be live on daily data.

Shifting of Crude Oil pain

In early October this year the emerging economies predominantly India was worried about crude
increasing rapidly on its price. Many of analyst expectations that it will not go beyond $63 went wrong, it moved past $80 and there were pessimists in the forefront talking that it will soon cross $100 and will bring big challenges for India on its CAD, the government on its elections, inflation etc. Oil going up continuously even defying its own weakness on technical made many who thought that pain of oil price to the world is behind us were also made to believe that it will have some more damage done to the growth of developing economies.

For the Oil producing countries, there seemed that they were the lords of the world, dictating terms
on price front threatening of production cuts to jack up price. At times it felt like they were enjoying
the pain that the emerging world was undergoing.

Within 40 days the story turned upside down. On 5th October, oil was at $84, it is overvalued on the
charts. On 21st November, it was $63, going straight to undervalued zone. Now the talks of the global media also have changed. So far, it was a concern that the emerging world is at pain. Now, thoughts of global slowdown has come.

Mercy thoughts are flowing in support of the oil producers. Saudi wants price to be above $73, to meet its budget plans. Russia says $70 is ok for us and we cannot stop our companies from producing as it will bring pressure to their capital. US says even $68 is ok for them.

Emerging countries are in party mood. In India, pressure on the Government to bring down taxes on
oil when price kept moving higher has now brought double benefits to the users. Oil price is down
and along with that lower taxes, it is big savings for the consumers and in a election year, there will
be no increase of taxes so, it is time now to enjoy lower pump prices.

So much in just 2 months. What took more than a year for the bulls to move up oil prices only took
40 days for the bears to damage. This is why it is said that, Bulls climb by the stairs and Bears jump
out of window.

In a couple of years from now the importance to Crude Oil as a product will be history. For immediate periods, Crude will try to move up in price, while it will find resistance on every upside rally and bears will bring prices down. At least 2 such events of lower price penetration will be there before we have any significant upward movement in prices of Oil.

Inside Our Portfolio – 1

This video talks about stocks that are at advantage in our portfolio from the current result season. Intellect Design Arena, L&T Technologies, Sterline Technologies stocks in big rally mode. Trading positions in Himadri Speciality Chemicals. Top technology growth stocks in our portfolio helps us outperform the SENSEX by more than 3% this week even with 50% exposure.