The Rabbit is out

The rising of the Phoenix

What do you think is mind, just a bundle of thoughts? Well…!!! My mind has been innocent of any innovative thought which made my article seemed as rare as the proverbial phoenix. So was the stock market recently rising from its own ashes like the phoenix?

The Subprime crisis

All the major indices around the world were chopped down to “Davy Jones's Locker”. Under this subprime tsunami highly prestigious Investment Bankers went as dead as Dodo. Broker community was of the view that such financial crisis happens once in lifetime, what they were silent at, was that such opportunity to invest also comes once in a lifetime. You needed the eye of an eagle to identify gold in the stock market getting sold at the cost of dust. (Please refer my earlier article circulated to you in trailing mail for Subprime crisis).

The Dust which got settled down

Every Bubble ends with a bust and the stock market acted in no way different. You will agree that everything in this world tends to move towards equilibrium. For instance, if some scrip is overvalued it must fall to reach the equilibrium i.e has to justify the right valuation and the vice versa.

When the choppy market goes hopeless and is of opinion that “ nothing can happen of this market”, or say “ market will now never rise”. This is when foundation for new Bull run is laid down. Which is based on simple premise that when people are most frustrated they sell like anything and market factors in all bad news in today’s price resulting in bottoming out? The dust settles down quietly and the right time to investment begins.

The gentleman and his promises

Like a true gentleman keeping all his promises, I followed the suit. In last article I promised I will talk on individual stock. And here it unfolds the story of Edserv.

In less than a year this scrip gave me 800% return. Let’s make it simpler what 800% stands for. If I would have kept my saving in Bank with 4% at Simple Interest, it would have taken 200 years to earn this. Mind it this is just one such stories in my kitty.

My Strategy for Edserv

The Valuation

I generally buy scrip with strong business model and where no investor is interested and in all respect can be called as undervalued scrip. I never heard of Edserv before but it simply met my parameters mentioned below:

P/E Ratio 10 means= You pay Rs 10 in order to earn one rupee. Do I need to say, Lower the ratio, better is the investment. I bought at around P/E of 7, today it is at around 70.
Book value per share= Value the shareholders would receive in liquidation. I bought almost at Book value.
D/ E ratio= At time of crisis, company with High debt gets the most hit. Besides, interest payment dips the EPS irrespective of profitability. Edserv is a debt free company.

Qualitative Analysis

Niche Market: The company is almost in niche market which means, it can demand higher profitability. It is in business of making software for educational institutions.
Education sector: Interesting sector which gets benefitted in almost all the budget for social cause. Long live the politicians.
Poor management: Share price plunged because of poor management apart from subprime crisis. The result was expected to be poor or average. This was what tempted me.
Stock Price: I knew stock price is present value of future cash flow. In this scrip, almost all future bad news seemed to be factored in today’s price. Now this involves risk which can be mitigated by analyzing that what is the probability of favourable outcome of an event to occur. The probability of downside movement in this company was limited as all bad news was already factored in but the probability of upside was tremendous.

I didn’t give a second thought. It was not about money, it was about conviction to stand by your decision. You’ll burn your fingers if you dare touching Edserv at such high valuation. It’s days are over now.
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Future is uncertain

First quarter of 2010 would be interesting. FIIs is returning in market after festive season. Q3 Results of companies are awaited and are expected to do well because of low base effect and robust advance tax collection numbers which increased by 22.72 per cent, contributed largely by automobiles, consumer goods and metal firms. 26th Feb is the expected date of Budget which will be an important determinant in setting trend. Government may withdraw stimulus package as economy is already back at growth path.

Beat the Inflation

I don’t know much about the principle of economics, what I know is that basket of goods get costlier than last year by say “x” factor. Some erudite creatures called Economist coined a term inflation for this “x” factor. Say what I bought last year at 100, because of inflation of say 5% I’ve to cough up 105 this year. While Rs 100 kept last year in Bank, became Rs105 (inclusive of 5 % interest). Real rate of return from bank after factoring in inflation would be nil.

It simply means my investment whether in Bank, Mutual Fund, Bond, Equity, Gold should give me a return at least higher than the inflation figure. For me Bank is the worst place to park my saving as it gives a return which can hardly beat inflation. In layman term Inflation erodes the purchasing power of the currency.

The tentacles of Inflation

Two important factors which will lead to inflation in near future are Liquidity and Incongruity of Demand and Supply.

Liquidity: When surplus money follows few goods it lead to inflation. Last year lot of stimulus package was given, the surplus money circulating in economy may lead to Inflation globally. In order to rein inflation, RBI or any Central Bank will be forced to suck liquidity through various measures which will result in market tumbling down. As Freidman and Anna Schwartz once said "inflation is always and everywhere a monetary phenomenon."

Incongruity of Demand and Supply: Incongruity in demand-supply leads to inflation. For instance, India’s agriculture which is poorly irrigated gets impacted due to poor or erratic monsoon. I believe the festive and marriage season will lead to shortage of key food items particularly sugar. Food prices which have higher weight age on Inflation will lead to its upward movement. Logically, Government should either import or discourage the export of sugar during these months.

Often do we hear strike of Bus, Auto, Taxi but recent strike of Trucks is little uncommon. A strike of Truck which is a cargo carrier will lead to severe gap in demand and supply and will have domino’s effect on economy as a whole. Disrupted supply will increase the price of essential goods or perishable goods leading to inflation. Similarly, an increase in price of petrol will hit pocket of common man but an increase in Diesel on which cargo industry depends will hit the economy badly. So, government is always biased in setting prices for Petrol and Diesel.

In a nutshell, I believe market is waiting for major correction and I don’t recommend buying at this level. Remember, I may go wrong as I’m no Warren Buffet.

The Rabbits

There are more rabbits lying in magician’s cap, wait for the next one to come out. Till then Happy Investing…!!!