Why Law of Average does not work at all times?

We always tend not to book loses on any investment even if the investment has eroded our substantial capital and even if the company is no longer an attractive investment. We always tend to average out on falls in order to find an opportunity to exit out of the stock without any loses.

Is averaging stock price always good enough?

Today we will talk about two big US financial firms which have been a star performer for more than 2 decades now, Fannie Mae and Freddie Mac and the fate of top investment firm holding positions on to this securities.

Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends.

Given that both Fannie and Freddie have posted billions of dollars in losses during the past year, and that billions more are expected while house prices continue their historic decline, it's not likely that the market will accord much value to shares that give holders no right to select board members or otherwise oversee management.

Bill Miller, the Legg Mason mutual fund manager, was Freddie Mac's largest shareholder as of July 31, with 12% of the company's stock.

The government intervention comes just over a month after Legg Mason's Miller reported a sizeable purchase of Freddie shares. Miller came to fame with a 15-year run of beating the S&P 500. But that streak ended in 2006, and since then his Legg Mason Value Trust has lagged far behind the market.

Miller's run of poor results hasn't made him any less aggressive, however. He has owned Freddie shares for some time but has been doubling down on the company as its shares plunged over the past year. Legg Mason owned 15 million shares at the end of 2007, when Freddie stock was fetching $34 a share in the market. He then boosted that figure to 50 million in the first quarter, as shares dropped into the teens in the wake of the collapse of Bear Stearns, and 80 million at July 31, when the price was below $10.

Freddie Mac and Fannie Mae shares at the time of writing this article is trading at around 1$ each. The fate of investors who have taken position couple of months back when it was trading at around $40 is unknown at this point in time. If this is a case with a multi billion dollar firm think of Indian investors who try to average out positions in small and mid cap stocks. Investors should always experiment caution and do a detailed analysis on the prospects of the company growth before re-investing in the stock at lower levels. It is always good to investigate the reason for the fall in stock price before adding on the shares to the existing portfolio.

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Stocks for Nuclear India

“Don’t let the perfect be the enemy of the good” is a catch-phrase often used by negotiators trying to conclude a deal and it applies to this week’s agreement signed in New Delhi by President Bush and Indian Prime Minister Manmohan Singh.

Now, the question is: is "good" good enough?

The pact will open India's civilian nuclear program to international inspection and safeguards and "remove a basic irritant" in U.S.-Indian relations over the past 30 years.

American businesses stand to reap huge profits from the expected sale of equipment, nuclear technology and nuclear fuel as India expands its civilian nuclear program to help fill its demand for more power to meet the needs of its expanding population and economy.

According to the agreement, Only 14 of India’s 22 nuclear reactors will come under international safeguards, allowing India to pursue the military side of its nuclear program without scrutiny.

The momentous outcome has energised Indian trade and industry bodies as an eventual ratification of the deal by the US Congress could see the country attracting as much as $40 billion in foreign investment over the next 10-15 years. This, primarily because the private sector may be allowed to enter the nuclear power sector in a big way by the government.

The go-ahead to the nuclear deal will signal the building of scores of nuclear plants in India on assured fuel supply. This will trigger the participation of 200 firms with capabilities to operate, and maintain nuclear plants.

Nuclear development will provide opportunity for Indian manufacturers to supply spares and components to the global manufacturers of nuclear power plants besides providing business opportunities for Indian power plant construction companies.

This definitely is going to provide a positive impact on the Indian Stock Market on the opening bell tomorrow. The market outlook still looks bearish with a certainty of the US and other major economies falling into a recession. Below are five stocks which are set to be benefited with the nuclear deal. Investor with a long term view can look at accumulating the stocks at current level

1) Hindustan Construction Company (HCC) - CMP Rs. 97/-
2) Larsen & Toubro (L&T) - CMP Rs. 2616/-
3) National Thermal Power Corporation Limited (NTPC) - CMP Rs. 173/-
4) Bharat Heavy Electricals Limited (BHEL) - CMP Rs. 1731/-
5) Power Grid Corporation of India Limited - CMP Rs. 92/-

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Indian Equity Markets - Outlook and Stock Recommendation

Equity markets were unsettled during the second quarter as investors faced two challenges: a deflationary crisis in global credit markets and the inflationary thrust of soaring food and energy prices around the world. Neither challenge has been ‘resolved’ and the implications of each are likely to set the tone of financial markets during the second half of the year.

Mounting inflation threatens to complicate an already challenging situation by constraining consumers’ spending power, eroding corporate profit margins and encumbering the operations of the world’s central banks. Pricing pressures should abate as economies slow.

There is every prospect of a period of sluggish economic activity as the end of the ‘cheap money’ era coincides with an escalation in the global prices of energy and food. However, the long suffering investor should persevere. Threats are obvious but, as sentiment in markets deteriorates, changes in economic and financial landscapes are likely to present attractive opportunities for investment.

It is nearing a year we have been asking our investors to book money out from markets and sit on cash (Our Nov'07 article asking investors to book profit from the market: http://profitfromshortterm.blogspot.com/2007/11/what-to-do-this-diwali.html). We are one of the few market analyst who predicted the market fall at the beginning of the credit crisis. Our recommendation portfolio during this period has delivered a positive growth of 2% as compared to a negative 23% return by the sensex. Neyveli Lignite, Orchid Chemicals, Novartis India, Rallis India, TNPL, Chennai Petroleum have been the star portfolio performer beating the sensex return.

Is it a right time to re-enter stock markets?

Further credit market crisis cannot be ruled out and this converging into a full blown recession looks a high probability. Albeit to this with the recent correction seen in Indian markets quiet a good number of stocks looks undervalued. We are advising our investors to sit on partial cash and invest in frontline stocks with a long term outlook. We also have picked five stocks from the small and Mid cap space that has a potential to deliver extra ordinary returns over the course of next 3
years.

Large Cap Picks

1) Mahindra and Mahindra Ltd (CMP Rs. 572/-)
2) Jaiprakash Associates (CMP Rs. 156/-)
3) Indian Oil Corporation -IOC - (CMP Rs. 396/-)
4) Sterlite Industries (CMP Rs. 618/-)
5) HDFC Bank (CMP Rs. 1215/-)

Mid Cap Picks

1) Chennai Petroleum (CMP Rs. 254/-)
2) Ruchi Soya (CMP Rs. 78/-)
3) Shriram Transport (CMP Rs. 335/-)
4) Gujarat Mineral Development Corporation Ltd - GMDC - (CMP Rs. 247/-)
5) Hindustan Construction - HCC - (CMP Rs. 91/-)

Small Cap Picks

1) Abhishek Industries (CMP Rs. 14/-)
2) Tata Metalinks (CMP Rs. 138/-)
3) Novartis India (CMP Rs. 294/-)
4) Deepak Fertilizers (CMP Rs. 91/-)
5) Hitachi Home & Life Solutions (CMP Rs. 110/-)

A Question of Answers - Mail replies

I am holding SAIL at Rs. 230/- and Gujarat Ambuja Cement at Rs. 118/-. Do you see any recovery in short term?

With cooling commodity prices, I would stay away from metal stocks in the current market. Cement inspite of predicted decrease in Infrastructure growth looks positive.
Investors can take fresh long position in sugar stocks with surging sugar prices. Stocks like Sakthi Sugars and Triveni Engineering looks good.
With falling prices of zinc and lead one can look for fresh investments in battery manufactures like Eveready and Amara Raja.

Are you taking any fresh look into your earlier recommended stocks?

Yes. We are positive on Tamil Nadu Newsprint Limited (TNPL), JK Lakshmi Cement, Rallis India and Orchid Chemicals from our earlier recommendation.

With Neyveli Lignite almost available in half the price from it's peak is it advisable to take a fresh position into this stock?

New power additions are not progressing satisfactorily. Also the current quarter results are way below expectation. Will wait and watch for couple of more quarters.

I have brought Alembic at Rs. 42/-. Is it a worth hold for long term?

Seems to me yes. Pharma sector looks to be a good bet in the current market. Alembic looks good with strong presence in domestic market. We are also positive on Orchid Chemicals and Novartis India.

I have huge position in textile stocks like Arvind mills and Alok Industries? Can I book losses or hold it?

I am not sure about Arvind mills. Alok seems to me a good bet from a longer term. I think government control on curbing cotton exports is set to benefit domestic textile firms.

Can I buy Teledata Informatics, Phoenix Mills at current level?

Sorry I am not tracking both of these companies.

A portfolio for your retirement savings

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria". Legendary investor John Templeton one of the contrarians believed that the best bargains are available when the investing public is fearful. Not to mention another contrarian investor Warren Buffet whose key to investment success is to be greedy when others are fearful and fearful when others are greedy.

The current financial year saw Indian markets bull run coming to a halt and the financial markets correcting almost 40% from it's peak. Lot of pessimism is surrounding the market regaining it's lost glory with crude oil trading way above the three digit mark and the inflation number touching 2 digit mark. People are surprised to see bank deposits giving two digit return after a gap of almost 7 years. High inflation weakens investor sentiments as it slow downs industrial growth and also brings down the mega expansion plan the Indian corporate world is undertaking.

Taking a optimistic view of tomorrow we have selected 10 stocks which is set to benefit from the India growth story. We have picked these companies with strong balance sheet, corporate governance, business model, Good dividend yield and it's market position. Investors with a horizon of 3 to 5 years can consider investment in to the below stocks.

1) Shipping Corporation of India (SCI) - CMP Rs. 230/-
2) Indian Oil Corporation (IOC) - CMP Rs. 400/-
3) Hindustan Construction Company (HCC) - CMP Rs. 87/-
4) Ashok Leyland - CMP Rs. 28/-
5) Bharti Airtel - CMP Rs. 799/-
6) Bharat Heavy Electrical Limited (BHEL) - CMP Rs. 1679/-
7) Tata Steel - CMP Rs. 630/-
8) Rural Electrification Corporation Ltd (RECL) - CMP Rs. 87/-
9) Oil and Natural Gas Corporation (ONGC) - CMP Rs. 996/-
10) LIC Housing Finance - CMP Rs. 321/-

Detailed recommendation to follow for the above stocks. Due to time constraint we were not able to post recommendations regularly. We have lot of unanswered e-mails from our subscribers which we are trying to attend at the earliest convenience. We will try to clear the e-mail backlog soon.

Ruchi Soya - An Healthy Investment

Ruchi Soya is one of the largest agribusiness companies in India. Ruchi is one of the largest producers and suppliers of vegetable oil and Soya food in India. Ruchi is also the highest exporter of soya meal and lecithin from India and it's brand Nutrela being the largest selling Soya food brand in the country. Ruchi currently has capacities of 2 MTPA of refining and over 2.6 MTPA of crushing spread over 12 strategic locations.

Ruchi Soya distribution reach covers around 5,83,000 retail outlets which includes strong brand portfolio such as Nutrela, Ruchi Gold, Ruchi Star, Mahakosh, Sunrich. As of Dec' 07 edible oil accounts for 72% of the revenue, Followed by Soya products 17% and vanaspati 9%. Ruchi currently accounts for 19% market share of edible oil business in India. Currently branded portfolio accounts for 29% of the business.

The company is the highest exporter of Oil meals from India with it's export presence in most of the south east Asian countries, Middle East and Europe.

Positives

1) Ruchi has entered into national tie-ups with celebrated players like Pantaloon retail, Subhiksha, Reliance Retail, Aditya Birla Group for sale of it's product through the growing modern retail outlet in India.

2) Soya being one of the best source of Vitamins and Proteins, Ruchi is well positioned in growing wellness and health food products. The company is planing to introduce Soya based flours like multi blend flour and also 100% soya flour. Ruchi is also diversifying into mustard products.

3) The company recent venture in to protein drink N'rich is expected to add on to the topline going forward. Apart from the branded products the company is also a manufacturer for pantaloon's private label - Fresh and Pure.

Risks

1) Government current measure to curb inflation by cutting import duty on edible oil.

2) Falling Oil prices in the international market.

At the current market price of Rs. 91/- the stocks trades at around 8 times it's FY09E EPS of 11. The earnings are considerate of the government recent impact to cut import duty. Investor with medium to high risk profile can consider investment into this stock with a horizon of 12 months and a target of Rs. 130/-. Ruchi currently operates in a low margin segment and any further duty cut by government can severely impacts it's margin unless they are able to procure raw materials at a lower cost. This remains a key risk to our recommendation.

West Coast Paper Mills Ltd

West Coast Paper Mills manufacturers writing, printing, wrapping and packing papers. West Coast paper division currently has an installed capacity of 1,63,750 MTPA. FY2006-07 the production at their capacities were running over 100%. West Coast also has a telecom cable manufacturing plant which produces armoured and aerial typed of Optical fiber cables and JFTC cables used in telecommunication network. Currently paper constitutes 96% of the revenue and the remaining by the cable division.

West Coast Paper Mills currently enjoys 7% market share in the domestic paper market. The telecom division of West Coast enjoys 4% market share. Some of the major clients for the cabling division includes BSNL, Reliance, VSNL, CATV among others.

The company currently exports 7 to 8% of its paper products to around 25 countries mainly to middle eastern and african countries. The export order book for the cabling division stands at Rs. 5 crores for FY08.

Positives

1) West Coast is investing around Rs. 1,100 crores in Expansion whereby it is increasing its pulp and paper capacity from 1,63,750 MTPA to 3,20,000 MTPA. The benefits of this project is expected to be realized in FY2009-10.

2) Over a period of 5 years, the company contrives to have 18,000 acres under management for its raw material supply. These initiatives are expected to meet about 25% of its raw material requirement.

3) West coast is leader in production of MICR/Non-MICR cheque paper and Ledger Paper.

4) Step down of excise on paper and its products in the 2008-09 budget.

Negatives

1) High debt leverage for the ongoing expansion program to impact the bottomline due to high interest cost.

2) Paper consumption is directly tied to the GDP growth. Any deterioration in GDP growth can dent the performance of the company.

3) Any further increase in raw material prices which the company is not able to pass on to the end customer. This can happen due to the inflation control program launched by the government.

At the current market price of Rs. 65/- the stock trades at around 4 times it's FY08E EPS of 16. Investor with medium risk profile can consider investment into this stock with a horizon of 18 months and a target of Rs. 118/-. With the government primary thrust to education and the booming textiles and manufacturing exports the demand for paper products is expected to remain strong. With rising raw material prices we expect the topline of the company to be flat until the expected capacity expansion is in place. At the same time with the operation efficiency initiatives taken by west coast we expect the Operating margins to remain robust and deliver a bottomline growth of 20% y-o-y.