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August 9 - September 4, 2017
Liquidity, average daily volume, massive market capitalization are major considerations. On top of these quantitative factors, few qualitative factor like transparent management, listing compliance, effectively addressing shareholder grievances are taken into account. It is also kept in mind to construct the index to represent the entire market instead of couple of industrial sectors.
During the trading hours of the market, the index is calculated every 15 seconds.
Market capitalization used in SENSEX computation is not the actual total market cap of the companies that form the index. Instead they use Free-float market capitalization.
The act of issuing its shares to the public for the first time is known an Initial Public Offer (IPO).
The process of coming down from the highest price to discover the practically suitable price is known as Dutch auction.
After analysing the performance the company, prospects of the industry it belongs to and qualities of the management, one should develop a conviction. Such conviction should endorse the company’s future business prosperity. If the company does well, its value would augment and share price naturally would follow suite. These are the ground rules for an investor.
Any one falling short of this requirement is not a real investor. If someone buys shares with an anticipation of selling it someone else at a higher price rather than focusing on its future business bounty, he is a speculator.
For long term investors ‘buy & hold’ is the suitable strategy. Trader find stop-loss technique as handy tool. Predicting the future price on the basis of chart trends is technical analysis. ‘Stop-loss’ is an important ingredient of technical analysis. “If the price fall to 95 from 100, it is susceptible to slide further till 85. So sell it at 95 to reduce your loss” is what it advocates and advises traders. The predicted stop-loss level is 95.
“I don’t trade stocks very often and brokers don’t love us” said Warren.
After all the questions, we will conclude what you really are. Do you know the kind of products your company manufactures? Or at least in what industry/business it operates? Can you tell the sales and profit that company generates with at least plus or minus 50 per cent accuracy? Have you ever analysed its quarterly, annual results with balance sheet and profit & loss statement? Do you have an estimate of how much or at what rate your investment would appreciate in the future? Have you tried to weight that estimate with other non-equity investment options? Have you ever tried to realize how
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More the inflation higher would be the interest rate. If inflation goes down, interest rates would also soften. This is the rule of the game.
Risk = (probability of an even occurring ) X (damage caused by that event)
Warren Buffet gave a simple and blunt definition of risk. “Risk comes from not knowing what we do”.
Value of an organization is the sum of present values of all of its future earning until the business (or the world whichever comes first) perishes.
The ratio between EBIT and sales amount is referred as operating margin(OPM).
Earnings after tax (EAT) is the total earnings of the company. By dividing this amount by the number of shares, we can figure out what was earned by one single share. This is Earning per share, popularly known as EPS.
PE ratio = Price of a single share / profit of one share = CMP / EPS = 120/8 = 15
It is a generally believed that a company with small PE ratio is safer than another company trading at higher ratios.
When we are able to spot an extraordinary business trading at decent PE ratio – that is calculated with its normal/average earning – our chances of doing well by purchasing that stock are highly probable. This alone does not guarantee greater success and pouring profits. However, chances of peril can be considerably brought down by following this approach.
(also known as Employee stock option – ESOP).
OPM is an important stock selection criterion on the paper as well as in practice. It can be regarded as an acid test for managerial ability and operational efficiency. It explains how effectively resources were handled in generating business or sales.
We need to carefully and consistently monitor their debt/equity ratios. A ratio below 0.5 is generally regarded as safe and conservative. Anything between 0.5 and 1.0 is also tolerable. The moment it breaches 1.0 (more debts than the equity) investors have to be on their toes. Business uncertainties will magnify their adverse effects and eventually burn a hole in shareholders’ pocket.
A conservative investors can always tilt towards low P/BV stocks the same way they prefer low PE stocks. There is a catch though. This formula based on book value does not apply to the fast growing next generation businesses that require very little investment. We shall elaborate those things and some other perspectives of P/BV tool in the coming chapters wherever it becomes necessary.
Growth investors are risk lovers and they always aim for more than average returns. Value investors are attributed for their risk aversion mentality. Still they try to manage a profit not worse than the average market return.
Higher valuation, bulging P/BV, exciting OPM are some of the common characteristics of growth stocks. But
Boston Matrix Before getting into the details of ITC and characteristics of growth stocks, a small introduction about Boston matrix might be handy. Depending on the industry they operate in and estimated life span of their products, we can classify almost all the companies into any one of the four quadrants . This approach does not apply exclusively to selected few companies alone. It governs the entire range of industrial sectors and their products.
Question mark This is the nascent stage of the products. Lot of researches, developments and subsequent redesigns are some of the traits of these industries or products. This quadrant is filled with few visionaries and lot of day dreamers. Plausible success for the business is highly uncertain at this stage and hence the name question mark.
Star Most of companies or products wither away while at question mark quadrant. Few of them move on to this ‘star’ quadrant. Businesses would have realized that their product or service is highly profitable. The whole (new) sectors itself is entering into a high growth trajectory. When comparing with question mark stage, the future will appear brighter at this stage. Fresh products and ideas are to be pushed into the market and this will require very huge investment to penetrate – and even expand – the market. Operating margin will be very attractive due to lack of competition. The industry
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Cow High growth business tends to mature over the years. This quadrant can be said as worriless stage for well established companies. Widespread customers, massive sales volume are some of the qualities to notice. Many companies would have vanished due to the competition and consolidation. Only a selected few would have continued to exist. Competition, even if there is any, will be limited. Consumer loyalty and brand acceptance is almost constant because the people in general continue to buy the same products again and again. Steady income stream is assured. However, growth won’t be as
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Dog In this stage, market for the product and its demand start declining. Margin won’t be great. The ship is already sinking. Even the best captain will not be able to save a sinking ship. At best he can delay the eventuality. The only rational option for the management is to get out of the ailing business by gradually liquidating assets.
PEG = PE/G where, PE – Price Earning ratio and G – growth rate in % in our case PEG = 20 / 25 = 0.80 An investors can choose an appropriate PEG depending on his risk assuming capacity.
Lower PEG is better. Even for a high risk enterprising investor, a value in excess of 1.0 is not recommended, unless he is 100 per cent absolutely convinced about what he doing. Another school of thought disapproves any PEG value above 0.66. Our ability to identify a small PEG stock in effect means that we are buying the expected future earnings of that stock for relatively inexpensive
PEG is merely a tool to perform a reality check and promptly warn us from the peril of accepting excessively high valuations. Other than that, we can say there is no great use from this tool.
We denote.. P- Price E – Earning P/E – PE ratio PEG – PEG ratio P/E = ‘PEG’ X ‘growth’ P = ‘PEG’ X ‘Growth’ X ‘E’ All these companies are yielding one rupee EPS today.
Vast majority of them don’t end up following the ideal route from question mark > star > cow > dog.
It is the trait of value investing to look for cheaper stocks irrespective of the factors or formulae under study. Low PE, strong balance sheet to support, high dividend yield are some of the factors they always expect. At least one of these factors should substantially support their decision. Otherwise, they tend to stay away.
You should exclude all permanent – mostly immovable – assets and select only current assets. Then, you should subtract total liability of the company from this current assets. The result is to be divided by number of stocks to arrive at net current asset per share. Then, you should select the stock for investment only if it is available at two third – or even lesser - of this net current asset. The highlight of this approach is a twin advantage. One merit is getting current assets at 33.33 per cent discount. On top of this all permanent assets are acquired for free.
Here is a checklist for you to decide if a company is a growth oriented one or not. Does it have a honest management that is beyond doubts and questions? Does the same management that loudly boasts good news, shares the bad news also with equal transparency? What is going to be the growth of the industry that this particular company belongs to? Is the management prepared to invent/embrace new technologies and introduce innovative products in the market? Is the research and development division doing something creative or it is simply wasting the allocated budget in the name of research? Does
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Your attitude and action should tell that you are a true investor. Value or growth hardly matters, because I humbly believe, ‘growth is also a part of value’.
Dividend yield = (Dividend / Share price ) X 100 = (48 / 2,400) X 100 = 2 per cent
Dividend yield yardstick is an excellent amour for defensive investors. High yield is an obvious proof to indicate that the management intends to share benefits with its shareholders instead of hoarding major portion itself. Also, consistent and high dividend yield is a sign of financial stability of the organization.
If a value investor can find a stock with qualities such as attractive low PE ratio, 3-4 per cent annual dividend yield, ability to constantly achieve inflation adjusted capital appreciation etc., then his gain over a period of 20-30 year horizon will be much higher than those ‘flavour of the season’ illusionary growth stocks. If you
Investors who prefer capital appreciation do not need to pay too much attention towards dividend.
Arbitrage is one of his most important weapons.
What is an arbitrage? When one particular commodity is traded in two different marketplaces at different prices, then the act of buying that commodity in one market and selling it on the other is defined as arbitrage.
Let us consider some of the commonly employed suppositions.
Sales or top-line
OPM improvement
Number of shares
This is where margin of safety is to be inserted. In order to account for unfavourable changes in our variables, we can fix a cut-off PE at 12 times for our screening. This would help us handle any downward surprise in the future earning up to 20 per cent.
