Given the turbulence in financial markets, it is common to
frequently hear some uncomfortable questions (FA-u-Q). Overwhelmed with hope,
fear and greed, these questions are uncomfortable because we cannot answer
those questions with any degree of certainty or confidence in the
argument. Some of the questions, we are
afraid to hear are as follows:
How much more downside is left?
The potential downside in a falling market and upside in a rising
market are always daily rolling targets. Technical targets are usually
conditional (e.g., “if market falls below this level, it could go to that level
else…) and generally do not account for exceptional moves. Price targets based
on fundamental valuation and historical discounting trends are dependent on
materialization of multitude of complex forecast regarding likely revenue,
profitability, cash flows, capex, project execution, policy environment etc.
At the close of the market on 25th June 2013 we could
say that if market sustains 5530 for two days and manages to close above 5650,
we could see it going to 5780 level. Else, it would fall to 5470 and then to
5250 level. However, if 1QFY14 results disappoint or June sales figures for
auto and cement continue to remain sluggish we may see earnings downgrade and
potential market de-rating as macro indicators are likely to remain weak.
If this does not make sense, well it actually does not. We have just
tried to evade a straight answer to an uncomfortable question.
This stock is down 75% from its 3yr high. How much more it can fall?
There are about 1100 scrips which are currently trading between
75-95% below their 3yr high levels. The number is much higher if we consider
their January 2008 highs. The question is how much more these stocks could
fall?
Again there could be no straight answer to this. We can just
highlight that a company whose business model has failed is not worth buying or
holding at any price – 75% up or 75% down is irrelevant.
Remember besides these 1100 stocks, there are 180 odd stocks
which are down more than 95% since their 3yr high levels. These are the stocks
which fell 80% or more after first falling 75% from their 3year high levels
(from Rs.100 to Rs.25 and then to Rs5).
Is it time to buy midcaps?
Large cap ‑ midcap-small cap; long term ‑ short term; value
investor – speculator etc. is nothing but jargon created to unnecessarily
complicate the process of investment and compel investors to seek professional advice.
Stocks like Nestle, Idea, Hind Zinc with mkt cap close to
Rs500bn are termed midcap, while JP Associate with mkt cap of Rs115bn is a
NIFTY stock.
Value investors who bought large cap RIL, Infosys, Bharti,
L&T etc. five years back are down close to 50%. BHEL has lost 70% in past
3yrs alone. There is no visibility that these stocks will reach their January
2008 levels even in 2015.
In our view, the approximate correct answer would be buy the
companies which are relevant in today’s context, for the period they are likely
to remain relevant at today’s price.
Thought for the day
“How poor are they that have not patience! What wound did ever heal but by degrees?”
- William Shakespeare (1564-1616)
Word of the day
Palindrome(n):
A word, verse, phrase, or sentence that reads the same backward or forward.
(Source: Dictionary.com)
Shri Nārada Uvāca
Mother Nature has sought to reclaim her abode from encroachers.
The reconstruction of Uttrakhand would be blasphemous if concrete construction is allowed again in the vicinity of sacred temples or on the banks of holy rivers.
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