Why do liquor company stocks do well in bear markets ?

Because investors who have lost money need to drown their sorrows :-)

Bunch of overpaid jokers

Why do these so called equity analysts and fund managers have jobs? They are employed using our money to tell us when is the best time to enter or exit the market or make such calls on our behalf. AMCs charge a whopping 2+% per annum in management fees for equity mutual funds which go into the salaries and perks of these characters.

And what do they do to earn this money? Parrot the line that everyone in the market who is worth their salt knows anyway. Recommend infrastructure stocks when they are at PEs of 20-30 and paanwaalas and their aunties have already bought them. Say that the market is strong and will do well in 2008 when the subprime crisis was looming in global markets. Put out research reports on over-researched companies like L&T and NTPC. Do they deserve the money they are gobbling up?

Medium term strategy

There is unlikely to be any spectacular recovery in the markets. On every bit of bad news, there is likely to be severe correction which might take the Sensex down to 12000 or below levels. However, volumes are thin and it means that shares are moving from weaker to stronger hands.

The strategy for the long term investor is to identify a list of good stocks (might be some from the existing portfolio which are beaten down) and buy in small quantities on major falls in the market. My sense is that this phase will last atleast till July and post that, we could see some signs of recovery.

Budget headlines

So the FM has presented a partly populist budget as some quarters feared. The populist fare dished out on the agricultural loan waiver was viewed as a big negative and also its effect on the bottomlines of PSU banks. However the budget says that it has provided for the write off so this might mean that PSU banks do not get impacted. The fine print will have to be studied.

On the positive front, the FM changed the individual income tax slabs to give a considerable tax break. The take home pay of India's middle class has gone up and this should increase consumption and savings as well. Good news for industry and the financial sector as well (though the short term capital gains tax increase put a dampener on celebrations - my view is that is will curb speculation and encourage investment, which is good).

The reduction in excise duty on things like small and hybrid cars also spells good news for the middle class and the automobile segment. In addition, a whole list of consumer products from footwear to plasma televisions have got cheaper. All this should aid the consumption story which should drive production and eventually the capital goods industry as well.

How to choose a mutual fund

Objective : A step by step guide to choosing a mutual fund for long term investment
Assumption: Investor understands basically how mutual funds work and that they carry market risk, that past performance is no guarantee of future returns and that there is no guarantee of returns blah blah :-)

If you want basic info on funds, please post comments here and I will try and do that in the next post.

Step1. Go to the Mutual Fund section on http://www.valueresearchonline.com/ (or any other finance site you like, this has a great MF section)

Step2. Use the search to find Equity Diversified funds (if you want to look at more specific sectors, factor in that risk and ask yourself if you know enough about the prospects of that sector) by different performance periods (5 yr, 3 yr, 1 yr, 6 months, 3 months, 1 month). In each period, make a list of the top funds.

Step3. Select the funds that have consistently good returns. i.e. figure in most of the top lists from step 2.

Step4. Look for how they performed when the markets crashed i.e. over the last 1 month if one is doing this today. All will most likely be negative, so the ones with least losses are probably good :-)

Step5. Remove the ones that do not figure in 1 yr top performers AND 3 yr top performers since it indicates they do not have long term performance. One can also consider 5 year returns as a factor if you want to look for really long term good performers.

Step6. This is optional and useful only if you have some idea about stocks. Open the portfolios for each of the shortlisted MFs and see if they have stocks you generally like. This is no use for ppl who dont know A stock from B stock .

You should now be able to decide which ones you want to invest in :-)

I would also suggest buying directly from the mutual fund house rather than from a broker or online banker as you can save the upfront load of approx 2%.

Reliance power continues to baffle

After managing to get people to pay multiple times the cost of comparable companies for its shares in IPO, Reliance Power now wants to issue bonus shares to "effectively reduce the cost of the company's shares".

Where do these people come from ? Do they get manufactured in a lab which has a sign outside that says "leave all metal objects here and also your brains"?

Lets list all the reasons why this is stupid.
1. Bonus shares expand the equity capital by capitalizing the reserves.
2. Bonus shares effectively reduce the market price of the shares by a proportionate amount since the number of shares in the market will increase, reducing the resulting EPS (in R Power, there is no EPS to speak of anyway, since there are no earnings :P, but lets not worry our brains about that now)
3. Bonus shares are normally issued when the book value per share is really high and promoters want to indicate to shareholders that the business is doing well and a capital expansion through of bonus can be supported by future earnings growth. Why in the world would R Power want to do this when there is zilch earnings, leave alone growth ?
4. Issuing a bonus will bring down the market price as mentioned in point 2. So lets assume the bonus ratio is 1:1 (for every share you hold, you get one bonus share). The market price is Rs 385. The market price is effectively based on some future earnings figure divided by the number of outstanding shares. Since number of outstanding shares will double, the market price should come down by half. So now I will have 200 shares, priced at Rs 192.50. Big deal !

Rather than creating more paperwork with additional shares (after all, its an admin hassle and money will be spent on the issuance), R Power should concentrate on putting up their projects on time or sooner to deliver value to shareholders.

Disclaimer : I do not hold R Power shares.
Suggestion : NTPC seems a much better pick in the same sector.

Where were these morons during the IPO ?

Excerpt from an interview with Devem Choksi from K R Choksey.

Q: How would you approach Reliance Power now?

Deven Choksi: I think if you look at the comparable space, then you find a probable answer to that.

Reliance Power with about 5500 mw of capacity in 2012 would be comparatively lower to Tata Power’s 10,000-mw capacity and NTPC’s 15,000 mw capacity in 2012.

If you extrapolate these numbers and further calculate the enterprise value, if per mw issue is calculated, then in case of Tata Power, the enterprise value comes out somewhere around Rs 2.75 crore per mw and in case of NTPC, it is at around Rs 3.4 crore per mw. In case of Reliance Power, it is around Rs 50.5 crore per mw. So from these numbers, it’s clearly established that Reliance Power is an expensive stock even from that point of view and even in 2012.

If one has to look at the near term and then look at the long-term - in the near term, NTPC offers a better opportunity if one has to invest in power space because at FY09 earnings estimate of Rs 11.5 per share, you would probably find NTPC available at close to Rs 16 versus Tata Power’s relative valuations of around Rs 22.

So in my viewpoint, NTPC would be a safer bet and Reliance Power would be far off as far as this calculation goes. So, clearly the choice would be NTPC if one has to go into power space or generation space, which is expected to grow around 15%-20% in next two to three years on a CAGR basis.