Contrarian approach in stock market

26 October 2013

Contrarian Approach in Stock Market

A presentation

by

Niteen S Dharmawat

at Equity Pune gathering…

1 Blog: http://dharmawat.blogspot.com/

http://dharmawat.blogspot.com/

Recap… Performance in an election year…

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Analyzed last 6 Loksabha elections spanning over 20+ years

Year % return

1991* + 27% Year % return

1996 + 22% Year % return

1998 +4% Year % return



2009 - 28%

Year % return

2014 ?

* Sensex performance of last 5 months before elections

When analyzed the Sensex was at near 18000 and market

‘experts’ predicting 12000… Now near

21000… Exceptional year. Sensex had a ‘V’

shaped recovery within next 6 months to cross the previous high.

Blog: http://dharmawat.blogspot.com/

Discussed this in May 2013 meeting… and we are dot on….


Recap… Key factors for the burst…

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We discussed Opto Circuit and Arshiya, concluded that they should burst…

Opto from 140 to now 24

Arshiya International from 130 to now 19

And they will never return to the past glory…

Obvious signs for a burst…

Consistent mismatch between NP v/s CFO

Dangerous level of Share Holding Patter ‘SHP’

Fancy business models

Acquisition led ‘growth’ to hide poor performance

High level of growth compared to CFO/NP


Discussed these in one of the last meetings… and we are dot on….

Opto Circuit

Arshiya Int.

Mismatch between Net profit and CFO over last several years (remember Enron)

Mismatch between Net profit and CFO over last several years, poor SHP (remember Enron, Satyam?)

FII holding/Celebrity Analysts/investors (e.g.: Helios Capital, IIM alumni, operating from Singapore) recommending from rooftop on CNBC

Fancy business plans and stories

NP-OCF combination with poor shareholding pattern – a disaster in making

FII holding/Celebrity Analysts recommending from the rooftop

Acquisition led growth

Significant increase in debt + Preferential allotment: Cash guzzlers


What we should look for is a contrarian approach…

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Market in year 1998-2000?

It was only IT and IT

What has happened to the FMCG , Banks, Oil & Gas, Infrastructure or other traditional core sector companies during that period?

Market in 2010 onwards?

Only FMCG and FMCG



Story of Brick & Mortar stocks…Starting 1998…

A bad start aka ‘Sholay’…

But finally became the biggest hit… ever

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The need for patience if big profits are to be

made from investment: Phil Fisher

Common Stocks and Uncommon Profits



FMCG stock… Colgate

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0

200

400

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Colgate* 8 times returns in

8 years + Dividends

* adjusted for any split/bonus

Price is the closing price at the end of the year


Still analysts take their neck out & recommend for long-term


FMCG stock… HLL/HUL

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0

100

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

HLL* 3 times returns in

6 years + Dividends






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200

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

L&T*

Engineering stock… L&T

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7 times returns in 8 years + Dividends





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200

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RIL*

Conglomerate… RIL

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8 times returns in 3 years including Stocks in 4

demerged cos + Dividends A growth of about 15% over last 12 years gives an min undervalued price of Rs. 1200…

Average price of Rs 200 and avg year is 2001.

Stagnant again… is it heading for something big???





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500

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3500

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Infy*

IT Bellwether (?)… Infy

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3.5 times returns in 6 years + Dividends

It was more than 20 times in a year… a disaster in making!!!

It was IT and IT only





Story of PVT Banks… 2013…

A Happy story…

Party started in 2002 still continues…

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“We simply attempt to be fearful when

others are greedy and to be greedy only

when others are fearful.” Warren Buffett



PVT Banks…

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They are in Chennai Express…

Everything is rosy… as if the fears of PSU Banks/economy not applicable…

They can’t go wrong feeling…

NPAs will not come… they have not disbursed any loans to Real Estate, Infrastructure - ‘Bad sectors’…



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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

HDFC*

PVT Sector banks… HDFC

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A period of too much negativity…




“It’s far better to buy a wonderful company at

a fair price than a fair company at

a wonderful price.” Warren Buffett



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200

400

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ICICI*

PVT Sector banks… ICICI

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

AXIS*

PVT Sector banks… AXIS

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

J&K Bank*

PVT Sector banks… J&K

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The story of PSU Banks… 2013…

Sorry…

They are Party-poopers… for many

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“We simply attempt to be fearful when

others are greedy and to be greedy only

when others are fearful.” Warren Buffett



Public Sector Banks…

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Seems to have caught by the fever of Ranbir Kapur aka ‘Besharam’… everything is going wrong…

Beaten down with too much of negativity about… everything… right from economy to the prospects of hung parliament…

Fear of more ‘corporate defaults’ coming out of cupboards… Fear of NPAs…

“Only when you combine sound intellect with emotional discipline do you get rational behavior.”

Warren Buffett



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500

1000

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

SBI

Public Sector Banks… SBI

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A period of stagnation. High NPAs… Too much negativity…





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1998199920002001200220032004200520062007200820092010201120122013

BOB

Public Sector Banks… BoB

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0

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140

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Dena

Public Sector Banks… Dena

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140

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Andhra

Public Sector Banks… Andhra

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Just got listed post the period of stagnation.





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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PNB

Public Sector Banks… PNB

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Allahabad

Public Sector Banks… Allahabad

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Vijaya

Public Sector Banks… Vijaya

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

BOM

Public Sector Banks… BOM

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What are the key factors today…

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Too much negativity…

Many sectors, midcap, smallcap stocks butchered… trading almost 20-30% of their peak price

How to identify the stocks/sectors which are marred with negativity but have a good chance to recover…

PSU Banks are today what FMCG/traditional companies were in year 2000… Untouchable…

“Only buy something that you’d be perfectly

happy to hold if markets shut down for 10 yrs.” Warren Buffett



Key factors to analyze a PS Bank…

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CMP Book Value PE Dividend Yield Market Capitalization v/s revenue

v/s profits Net NPA Gross NPA No of branches Net Interest Margins CASA Future investments Management discussions

Phil Fisher way: Go to five PS Banks/their vendors, ask each of them intelligent questions about

the points of strength and weakness of the other four, and

nine times out of ten a surprisingly detailed and accurate

picture of all five will emerge. Blog: http://dharmawat.blogspot.com/




Net NPAs: Red: 2.5%or more Amber: 1.5%-2.5% Green: below 1.5%

Div yield: Red below 3% Amber 3-5% Green: above 5%

Gross NPAs: Red: 3%or more. Amber: 2.5%-3% Green: below 3%

Book Value: Red:1 or more MP Amber 0.5-1 MP Green:0.5MP




Bank CMP 52wk (H/L)

Book Value

PE Div Yield Market

Cap (INR Crs)

Net NPA Gross NPA

Interest income

(INR Crs)

NP (INR Crs)

Net NPAs: Red: 2.5%+, Amber: 1.5%-2.5%, Green: below 1.5% Gross NPAs: Red: 3%+, Amber: 2.5%-3%, Green: below 3%

Div yield: Red below 3%, Amber 3-5%, Green: 5%+ Book Value: Red:1or more MP, Amber 0.5-1 MP, Green:0.5MP

Andhra Bank 54 130 – 47 150 2.67 9.01% 2500 3.27% 4.73% 12909 1289

Bank of Baroda 595 899 429 756 5.57 3.58% 20,928 1.69% 2.99% 35196 4480

Dena Bank 50 128 – 41 140 2.38 9.09% 1500 1.74% 2.70% 8899 810

PNB 496 922 – 402 884 3.66 5.46% 15000 2.98% 4.84% 41893 4747

Vijaya Bank 39 67 – 33 82 3.28 6.23% 1700 1.45% 2.42% 9051 585

SBI 1,717 2,550- 1,452

1445 8.65 2.42% 103,500 2.83% 5.56% 119657 14104

Allahabad Bank 81 190 – 64 210 3.88 7.01% 3700 3.87% 4.78% 17435 1185

BOM 39 66 – 35 70 3.05 5.64% 2470 0.80% 1.80% 9613 759


Thank you

Email: [email protected]

Mobile: 9850571857


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IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in the stocks discussed here.

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Economy & Finance

Contrarian approach in stock market