How To Buy Cheap!

In any kind of Investment, The aim is to make profit. That can be done if you buy at a low price and sell at a high price. Selling High is a speculative venture and depends on whether the price of your investment will go up or not. And that is the reason we look into a company's credentials like P/E and book value and its growth . But to buy low is one decision that is in our hands.

How to do it!There is an anecdote in financial world. "If you see a 100 rupees note lying on the road, it is probably a fallacy because if it had been a 100 rupees note, it would have been grabbed by now." That is how rare a good buying opportunity is. If a company is good, people would have stumbled on to it before you, but as it goes, though good buying opportunities are rare, they do exist. A lot of times, some companies go into oblivion not because they are not doing good, but because the investing community has not paid much attention to it. And so with less demand, less price. But gradually people come to realize about that company's good performance and the demand increases and so does the price.

Also at times when the market performs poorly some stocks fall more than others for sometime. It is because of the sentiments. But there is no place for sentiments when it comes to investing. It is all about facts. What one needs to do is look for such stocks. For example , my last pick of the week Amtek Auto and Amtek India had fallen around 6 percent in one day when the market fell by 1.5 percent. But surprisingly it had given a good growth for the december quarter. And so within a week, it came back to its original price and I had a 6 percent return in one week! though i won't sell it for that.

Now looking at Kwality dairy India limited, it used to trade at around Rupees 180 three years back, but now trades at around rupees 40. It fell during the period of recession and now has failed to take off. It has reported a consistent growth of around 20 percent. It trades at a P/E of around 6. It is only a matter of time that it picks up. When it comes to a decent price compared to its earnings compared to its peers is something that can not be predicted but it is something that can be expected.

Rule 6: Buy low. Buy during dips .Those dips should not be due to a legal case or poor profits.
Never buy a stock when it is trading within 10 percent range of its one year Highest value.

Pick of the week: Kwality Dairy India Limited. It is trading at Rupees 39.45 at NSE. It has a P/E of 6.03 and an annual growth of around 20 percent. It used to trade at around Rupees 180 three years back and has posted good profits since then.

Usher Agro: It is trading at rupees 50 at NSE with a P/E ratio of 2.16 and price to book value of 0.50. It had a high value of Rupees 150 three years back . It has shown a decent growth of 25 percent annually over this period.

In case of doubt, Go for consolidated!

Well first of all, I would begin with a small doubt that one of our follower had about how to trade. With times and technology changing, the necessity of having a broker and a separate trading account and other addendum are no longer there. All you got to do is open a demat account with a bank. I would suggest going for a reputed bank like HDFC or ICICI when you are entrusting your money with someone instead of a cheaper alternative. In he long term it won't have much difference.If you invest around one lakh, it will cost you around 300 bucks extra. That is not much for the ease and assurance that these banks provide.

Now coming to our Rule 5. When you look at the balance sheet of a stock. there are standalone numbers and there are consolidated numbers. Many large companies have some stake in their subsidiaries and depending on the percentage of claim they have in their subsidiaries, a part of profit or loss whatever that subsidiary is making as also its networth and liabilities are added to the standalone number. This gives us the value of consolidated balance sheet of the company. Now most of the trading advisory sites focus on the standalone numbers. But when you buy a stock, you are also buying a stake in their subsidiary and that should always be accounted for.Beware of a large company showing god profits in their standalone numbers and bleeding out through their subsidiaries.

The reverse case is also true. For example. go and check out Amtek Auto's last year standalone and consolidated numbers. Its consolidated EPS(earning per share) is three times its standalone number.
This brings the P/E from around 11 when we take the standalone numbers to 4 when we take consolidated values. Even the book value goes up one and a half times when we consider the consolidated value.

So,its a good practice to check the standalone numbers to see how the parent company is doing, but when there is a big discrepancy between the two, consider consolidated numbers. This is a very important factor for value investors like us, because it is generally ignored by short sighted traders looking for quick profits.

RULE 5: Between Standalone and Consolidated values, Consider Consolidated Values.

PICK OF THE WEEK: Amtek Auto. With a consolidated EPS of Rs 42 last year, It is a good buy at Rs 158.20. Also it is trading at a price significantly less than the book value. There is another important factor. It is an auto ancillary company with a significant presence in Europe and for the first time in last six years since the economic crisis, Europe has shown positive car sales growth. It is making public its December results on 12 Feb 2015. Watch out.

Amtek India also seems a good bet in this regard.It is trading at Rs 60.20 currently at BSE. Check it out yourself.

In case of any doubts on investment decisions in stock market, do write to us. we will get back to you in no time.

Interest on debt grows without rain

Debt is a very important factor while considering to buy a stock.A company might be selling at a price lower than its book value and may also have a low P/E. It may also be growing at a decent rate. But what if the company owns a lot of debt and during one year of loss, it ends up selling a lot of its assets to pay the interest.

Whenever anyone takes a loan, he needs to return not only the principal but also pay an interest of around 10-15 percent.So while buying a stock, look at the balance sheet and see the loans a company has, compare it with the networth it has and also the interest it is paying annually.

So where can you find all this information. When you look at the balance sheet of a stock, there are few terms you got to put more stress on.

Networth(Stockholders' Equity) = the value of assets the shareholders hold, which includes the equity capital which was the money when it was raised and reserves , which is the money that is subsequently added to the kitty.

Stockholders' Equity divided by total number of shares= Book value of the share (from our previous article)

Liabilities= this includes secured and unsecured loans

Liabilities and Stockholder' equity= Assets

Liabilities and stockholders' equity  is equal to the assets( land, machinery and inventory ) the company holds.
The interest the company pays annually can be seen in the profit and loan section.

Now suppose the company has a networth or equity of 100 crore and debt of 1000 crore. So its total liability and equity is 1100 crore. Its assets also should be 1100 crore. Now, suppose the company is making a profit of 200 crore every year. To pay the interest on debt. the company pays 100 crore(assuming the interest to be around 10 percent). Now one year the company does not make a profit. To pay that years' interest of 100 crore, their entire equity will be used up and all the money of shareholders' would be gone. Though the company would not do that and take some money as loan and wait for the next year to stabilize and return to profitability. But this is what i am talking about. Interest on debt grows without rain.

At the same time, if a company does not take any loan , it is letting go the opportunity it could have had by using that money to make more profits. so what is the ideal debt.

RULE 4: A company's debt should be less than half of its networth or equity.
               The annual interest it pays should be less than quarter of its PBIDT(profit before                            Interest,  Debt and Tax)

Now time for the pick of the week: Tara Jewels. It is trading at Rs 77.50 at NSE presently.
It is a decent stock which has a debt around half of its networth. it is trading at less than half of its book value. It has a P/E of around 4. Some sites may show a P/E of 6, but i am using the consolidated results for computing P/E as they are more reliable. The difference between standalone and consolidated results will be discussed in next article.


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