Pharma companies are undervalued.

The stock market is near peak bubble territory. Check the long term NSE PE Ratio chart to see what happened when the PE ratio touched 25. Of course this does not mean there will be crash soon, nobody can predict that but if you look at history then it would make sense not to invest right now.

nifty-pe-ratio
The share price of most companies is overvalued right now finding good investment opportunities has become difficult but there is hope. Look at the NSE Sectoral Performance for the last 3 months.

nse-sector-performance

Most of the sectors have given good returns except IT and Pharma. The companies in the Pharma sector have been facing tough times. Such adverse conditions are good news for patient value investors because investing in companies who have taken a beating gives enormous returns down the line. The only condition is you have to analyse which stocks to invest in that sector.

Companies like Sun Pharma, Lupin, Divis Lab, Dr Reddy’s which were once the darlings of Pharma sector have taken a significant beating. Most of Pharma companies faced the wrath of US FDA due to tighter regulations.

Despite the short term bad news, Pharma companies are not going anywhere, they have promised to fix all the regulatory issues. We believe it’s a good time to invest in the Pharma sector. Of Course there is always a possibility that the share price of Pharma companies can fall even more, if that happens you will get to buy them cheaper. You can check our charts, valuation models of the individual pharma companies to see which ones are fundamentally good or bad. If you don’t have the tenacity to do the research you can invest in a Pharma mutual fund.

So even though the market is overvalued there are some hidden gems provided you know where to find them.

Indian Stock Brokerage Account for beginners

This is just a short guide which will explain the different types of brokerage account fees and tell which you stock broker you should sign up for. As a new investor or trader you should not be paying a huge brokerage fees.

 

There are two types of brokers when it comes to stock market. the first is a full service broker and the other is a discount broker.

The full service broker has a huge offline presence all over the country and they usually give out recommendations on which stocks to buy or sell. e.g. Sharekhan, ICICI, HDFC etc.

Most of the full service brokerage rates are high, they charge upto 0.5% of the transaction.

A discount broker on the other hand does not have branches in each and every city, they typically don’t send any investment advice. Their expenses are low so their brokerage rate is low too around 0.2% of the transaction.

 

Brokerage account fees

Account Opening – This can range from 0 Rs to 750 Rs.

Annual Fee – Most brokerage accounts don’t charge an annual fee

Demat Account  Fee – This can range from 300 Rs to 500 Rs, per annum, this goes to CDSL, NSDL.

Brokerage – 0% to 0.5% of the transaction for delivery and .1% for intraday.

Taxes – STT and Transaction charges, it is 0.1% of the transaction.

 

A sample transaction

Let say you buy a single share for 1000 Rs you will pay

1000 + 5 (.05% brokerage) + 1.03 (STT, transaction) + 0.75 (service tax 15% on brokerage)

1006.78 is the amount you will actually pay.

So the brokerage can add up when you are investing big amounts.

 

When you open a trading account with the stock broker, the broker also opens a depository account with CDSL or NSDL in your name. Your shares are actually stored in the depository account not your trading account. When you buy or sell shares in your trading account , the actual shares are taken or go to your depository account.

Which stock broker should I go for, our recommendation is Zerodha. No we are not being paid by Zerodha to make this recommendation, their brokerage is 0, their interface is miles ahead of competition. You won’t go wrong with Zerodha.

If you still want to go with some other broker then just remember the brokerage rates are not set in stone, you can easily negotiate them. Just tell the account manager that some other broker is giving you a lower rate and convince him that you will generate lot of trades. Once they hear that they will agree to lower your brokerage. Just make sure they write down the rates in the contract before you sign the contract.

Any questions, ask them in the comments.

The NPA crisis of 2016

Our last blog was 1 year back that is way too long in the world of internet. Last year in Jan and Feb share prices were dropping down specially in the banking sector because of the NPA crisis. RBI had made the banks to be more transparent and declare the non performing assets on their books. When the banks started doing that, the market panicked.

We said last year in our blog that there are some good companies which are undervalued and it’s a good time to buy them. Let’s talk about that.

We send an email to all our Professional members end of day which gives a list of stocks which are undervalued compared to their intrinsic value.

indian_banks_undervalued

As you can see in the above image there were many banks which were undervalued. All banking stocks had seen huge drops in their share price because of all the negative news about Non Performing Assets on their books. Smart investors should patiently wait for such crisis and buy stocks in fundamentally good companies.

Let’s start with ICICI Bank which was selling at 51% discount. Now if you read our company analysis then you would know that we are not big fans of ICICI Bank because of their aggressive lending policies but it was selling at such a huge discount we had to buy it. In Feb 2017 the stock is up 45%.

The two more banks we bought were Axis Bank and HDFC Bank, if you look at Valuation Screener Email you would see that both of them were available for around 21% discount. If you read our company analysis we like both of them. Both the stocks are up 40%.

There are two more banks in the undervalued list, SBI which is up 60% and Bank of Baroda which is up 20% compared to last year. We have already mentioned in our company analysis about the two banks that investors should be cautious in investing in those two stocks because of Govt meddling and high NPA ratios. We did not invest in them.

One year later you get these fantastic returns of 40 to 45% but are they really good, to check that you should compare your returns with Nifty, if you returns are below Nifty then you did a terrible job. Nifty returns for the same time period were 25% so investors who bought the shares of those 3 banks in Feb 2016 definetly got terrific returns.

That is all you have to do, you patiently have to wait for such opportunities and grab them when they arrive. Last year’s NPA crisis in the banking sector was one such example.

As always please do not call or email us for stock tips or advice.

The stock market is going down, is it a good time to buy

So the market is falling down again, is it a good time to buy right now or wait for it to fall further. This time we have new problems like Chinese Economy not doing well, Oil price crash. It’s the classic old wine in a new bottle. The Indian/Global economy will always have problems from time to time. What matters is how you take advantage of it. Coming back to the original question of whether it’s a good or bad time to buy or not, well the answer is yes it is a good time to buy.

There are some good companies which are currently undervalued as per the Valuation screener, there many bad ones as well which are selling cheap. We have been buying shares of quite a few companies. (Long term members can easily guess the names of two of those companies). Some of the companies we are buying are in Banking, IT, Pharma and Auto Ancillaries sectors.  We stay away from Infra and real estate sectors.

The follow up question is always will the market fall down further and to be honest with you, we don’t know but what we do know is that the companies which we are buying right now at undervalued valuations we will get a good return long term.

So what should you do, if you have the tenacity then start looking at the financial charts and valuation models and start buying the good ones. If you want the easy way out just buy the Nifty Bees ETF or a good mutual fund.

If you think that you should wait because you “know” that the market will go down in the next few weeks then you are free to wait but then just remember you are speculating not investing.

 

PS – Please do not call/email us for personal financial advice or stock tips.

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

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.

Oriental bank stock price

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

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

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

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

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 Summar Report

Karnataka Bank Summary Report

How to make intelligent Stock decisions in 5 minutes.

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.

ACC_Cement_Growth_Rate

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

Ultra_Tech_Cement_Growth_Rate

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.