Tag Archives: investing

Monitoring Insider Trading – Rain Industries and Persistent

We email the Insider Trading and Bulk Deals report every end of day to our professional members, it contains the list of companies whose insiders or other institutional investors are buying or selling the shares. Monitoring such transactions is very important for investors. As investors you can see if the promoters or other big investors are buying shares of a company. Once you see that activity you can do your due diligence about the company and buy the shares and ride the wave.

Back in April 2015, Monish Pabrai who is famous investor in the US (and now India) was buying shares of Rain Industries when its share price was between 30 Rs and 40 Rs.

Monish Pabrai Rain Industries Email Alert

The share price pretty much languished for 1 year and then slowly started rising and then shot up like rocket and reached a peak of 460 Rs in Jan 2018. A massive 1000% profit, if at that time you decide to hold the shares and not sell till today you would have seen massive fall to 95 Rs. Monish Pabrai as per his letter to investors did not sell most of his shares. He regrets that decision.

So if you are an individual investor there is no guarantee that a company’s share price will keep on going up just because a famous investor has invested in it. If you are going to copy the trades of a famous investor sometimes it makes sense to get out with a tidy profit and not get greedy.

Rain Industries Insider Buying

Persistent

Let’s jump to Persistent where if you read the Insider Trading Email you would seen the founder and chairman of Persistent Anand Deshpande and other Persistent Insiders buying the shares. The share price had crashed to around 550 Rs. It was in that range for 2 months then rose to 630Rs for couple of months then fell again to 550 Rs in Jan. We bought a small position in Oct and Jan and were waiting for the price to fall further. Unfortunately the price did not fall further it kept on rising. Let see how Persistent plays out. We will keep you posted meanwhile keep checking the Insider Trading emails.

Persistent Insider Buying

Disclosure – Long Persistent

Avoid investing in companies whose shares have been pledged by their promoters.

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When promoters pledge their shares, its a sign that the company cannot raise funds from other normal sources because banks are afraid that the company may not pay back the money, so the banks make the promoters pledge their shares to them. In simple words the promoters gives the rights to the bank to sell the shares if in case the company does not payback the loan. If during the loan tenure the share price of the company falls beyond a limit which is set by the lender, it triggers a margin call, the lender can demand that the loan be repaid or more shares to be pledged. If the promoter cannot repay or offer more shares, the bank can invoke the pledged shares aka sell those pledged shares which causes further fall in the stock price.

We always recommend that investors should avoid companies which have high debt, high debt companies not surprisingly are the ones whose promoters have to pledge their shares. Let us compare the stock price performance of some companies which have pledged their shares.

Suzlon has 20% of their shares pledged, that is a significant number.

suzlon_pledged_shares

Suzlon’s share price has not done so well over the years.

suzlon_share_price

GMR Infra have 48% shares pledged, that is huge.

gmr_infra_pledged_shares

As expected, the stock performance has been very poor.

gmr_infra_share_price

For the last example we will look at PARSVNATH Developers which has 59% shares pledged, that is just crazy.

Parsvnath_pledged_shares

Any guess how its share price performed over the years?

Parsvnath_share_price

We can give many such example but hope you get the point.

As you can see from the above charts, there is no good reason to invest in companies which have pledged their shares, these companies have a tough time paying back their interest payments because overall the company is not doing so good which ultimately reflects on the stock price. Just by looking at the shareholding chart in the Insiders Page you can make the decision in less than a minute whether to invest or not. You can save your time, money and stress by ignoring such bad companies.

What is Life Insurance Corporation of India doing with Axis Bank?

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We wrote about Axis Bank back in Sep 2013 and Jan 2014 where we said that the whole stock market specially the banking sector was undervalued. We had purchased Axis Bank and Oriental Bank of Commerce for our own portfolio, we sold Oriental Bank with good profits because we were not comfortable holding it for long term.

As you can see in the image that we missed the short sharp rally after we sold our position but that is okay since we are not greedy. Look how the stock performed after the rally, the price dropped. So our decision to sell was infact right.

Coming back to the main topic of Axis Bank. We still have not sold our position but we do monitor it every now and then. Take a look at the Insider Trading activity for Axis. You can see that institutional investors like Life Insurance Corporation Of India, United Insurance have been selling the stock in huge quantities in the month of Jan 2015 and Feb 2015. We could not figure out why they were selling since we didnt think anything fundamentally had changed with the company. So we ignored those sell transactions and held our position.

Two days back LIC bought Axis Bank shares again and we suspect they will buy more in the coming weeks. So we ask the question to our readers, do you know why LIC dumped the shares two months back and started buying again. We think LIC made a mistake in selling Axis shares, even they realized the mistake and so started buying the stock again. Axis is a good bank to invest for long term.

Axis Bank Stock Performance, note the price drop after we bought. Intelligent investors should not panic if the price drops after you buy the shares. If your analysis about the company is right, the price would rise again, slowly but surely.

How to analyse a Bank in 5 minutes – Case Study Karnataka Bank

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Most members are complaining that they are not able to find good bargains because of the current stock market rally. We disagree there are couple of bargains available right now, check out the Valuation Screener to find them. There is one stock which is available at a huge discount right now but today we are going to tell why you should definitely avoid this stock. Karnataka Bank is currently under valued as per the valuation screener. Its intrinsic fair value is more than the current market price but that does not mean that you should buy it blindly.

Does it make sense to buy Karnataka Bank just because it is cheap right now? First of all never invest in any company just because the share price is cheap. We have to look at the financial charts of the company to see if the company is fundamentally good or not.

Lets look at the Net Interest Margin chart, NIM is the most important ratio when it comes to evaluating banks. It is the difference between the interest income generated and the interest expense paid, divided by total assets. An ideal bank should have NIM above 3%. If you look at Karnataka Bank’s NIM chart for the last 9 years you will see that its NIM never went above 3%. That is not a good sign.

Karnataka Bank NIM

Next we will look at the Non Performing Assets Ratio. NPA Ratio is used to measure asset quality of the bank’s loans. NPA are those assets for which interest is overdue for more than 3 months. If you stop paying your home loan EMI for more than 3 months then your loan account is considered to be a non performing asset.

Another important thing about banks is that you have to figure out if the management at the top is good or not. Big investors like Buffett and managers of mutual funds can directly talk to the managers of the bank. Investors like us cannot. So how do you figure out if the management of the bank is good and efficient. We look at the NPA Ratio chart, it acts like a proxy for the management. If the NPA Ratio is less than 1%, it means the bank’s loan book is healthy, above 1% is not healthy. If the NPA ratio is less than 1% for the last 10 years then that is a sign of a good bank with a terrific management.

Just look at Karnataka Bank’s NPA Ratio chart. It is atrocious.

Karnataka NPA Ratio

On the other hand if you look at HDFC bank’s NPA chart, its NPA ratio has never gone above 1% in the last 10 years. That is a sign of well managed bank.

So Karnataka bank has bad NIM and a very bad NPA Ratio, its not being managed well, its not a good long term investment. You should avoid investing in Karnataka bank even if the share price is cheap.

You don’t even have to look at the Summary Page to know that its a bad investment.

Karnataka Bank Summary Report

How to make intelligent Stock decisions in 5 minutes.

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We recently added ACC to our database. When we add any new company to the database we avoid looking at the share price. We add the data and then look at the performance, growth pages and then make a decision whether it is a good company to invest or not.

If you look at the profit margins and ROE charts you will immediately see that all of them are dropping down consistently for many years. Most of members do check these charts but we have seen from our website logs that most members don’t look at the Growth page. So we just want to point out how the Growth page can help you make the decision.

The above information tells you that ACC does not have a good Revenue growth for all these years. The next two lines tell you (this is very crucial) that all the sales ACC does, it has a tough time converting those sales into profits (Net Income) and ultimately pass on those profits to the shareholders (EPS). So either ACC is operating in a bad sector or the company is not being managed properly.

To see if ACC is operating in a bad sector, let us look at another cement stock, UltraTech Cement

UltraTech Cement’s revenue growth is much better than ACC. It was able to lower its expenses which is why the Net Income growth is better than Revenue growth. The EPS growth rate lower than the Net Income growth rate because UltraTech issued new stock for an acquisition.

By comparing these figures from two companies you should be able to figure out that the cement sector is not a bad sector to invest. Its just that ACC is not being managed well. It makes sense to invest in UltraTech Cement(not at current valuation though) instead of ACC.

Now and only now you can look at the company’s stock price to see if our analysis was right and to see how the market has valued ACC historically.

If you look at ACC’s share price from 31-March 2006 till 16-Jan-2015, its compound growth rate was 8.6%, which is not good. If you look at UltraTech Cement’s stock performance for the similar period, its growth rate was 22% which is fantastic. So our analysis about ACC was correct. The market agrees with our analysis, even rest of the market thinks that ACC is not a good company to invest which is why it has given such poor returns compared to UltraTech which has given fantastic returns.

In the long run the share price performance matches the company’s performance. We hope by now our members would understand why it so crucial to look at a company’s long term growth rates. You simply cannot ignore it.

We make spectacular mistakes too.

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Since we have been talking about our own portfolio in the previous emails specially aboutAxis Bank and Oriental Bank of Commerce where we had some terrific returns some members emailed us with lots of praises for our stock picking ability. So to prove that the praise is not justified and why we are not experts when it comes to stock picking, we will talk about one of our investment which we made couple of years back.

Persistent which specializes in IT products and services off shoring listed on NSE in April 2010 at around 400 Rs. Fast forward to June 2011 most of the world stock markets were spiralling downwards, the “experts” gave the usual reasons like inflation, Quantitative Easing, problems in middle east etc. Almost all Indian stocks got hammered but Persistent took a more significant hit. It crashed to around 290 Rs because “experts” believed that it wont be able to compete with the other IT biggies like TCS, Infosys, Wipro. So most of the brokerage houses gave a SELL recommendation. When others start selling that is the time we get active.

We quickly added Persistent to our database. What we saw was that Persistent was having good profit margins with Net Profit Margin above 15%, good ROE above 15%, positive free cash flow ( old members by now should know that we are big fans of companies with positive FCF), high current ratio, no debt, net income as well as Cash flow from operations positive with CFO higher than net income (which is a sign of good management), above 30% revenue growth in the last 5 years(2009 was an exception).

There was one drawback though, the company was issuing more shares, as we have said on the website, issuing more shares can be beneficial only if the company is able to increase shareholder value in the long run, most companies are not able to do that.

The valuation models gave a fair value around 425 Rs.

A quick look at the annual report and we did not find any negatives there. So Persistent was a fundamentally good company, selling cheap. There was really no justification for the claim that it would not be able to compete with companies like Wipro, TCS in the future when it was successfully competing for the last 5 years.

So we bought the stock at around 300 Rs. in Aug 2011 and we sold it in Sep 2012 around 425 Rs, the fair value at that time was 440 Rs as per the valuation models. A return of 42% in almost one year. We were quite satisfied with the return and invested the money in some other stock. So what was our spectacular mistake. Check Persistent’s current share price, its 1333 Rs. We would have made a spectacular return if we had not sold the stock. There was really no reason to sell the stock, we sold it just because the share price was near its fair value. The company was still doing great fundamentally.

What can you learn from this, dont sell shares of good companies. Dont sell just because the share price is near the fair value and dont sell because the “experts” on TV are shouting to sell. From 2011 till 2014 you must have heard all the bad news on TV like, problems in Ukraine, problems in US, problems in middle east but you can ignore all these news if you have invested in a good company.

A quick note to all the new members, we occasionally talk about our own portfolio to educate our members, please do not email/call us for investment advice. We do not provide investment advice.

Craytheon

Fundamental Analysis and Stock Valuation Simplified