In this post I am going to
discuss the basics of fundamental analysis and the following eleven stocks:
Orient paper
Inventure Growth
ABG Infralogist
Zicom
Acropetal Tech
Cosmo Films
PSL
Zylog Systems
Rajkumar Forge
Sakthi Paper
Micro Tech
Most of the stocks are
relatively unknown and low priced, low market capitalization stocks. I know a
little about Cosmo films, Zicom and Micro Tech the other eight stocks I know
virtually nothing about. I have selected the stocks from a list of High
Dividend yield stocks I found at:
http://www.moneycontrol.com/stocks/marketstats/bsetopdiv/
http://www.moneycontrol.com/stocks/marketstats/bsetopdiv/
I have put the link at
the end also of the blog for your reference. The only stock I have not picked
up from the list is Zicom, because I like the industry it is in. I will discuss
each stock in detail and in each case conclude whether I will invest in it or
not. I am doing the exercise because I am actually going to invest in any or
all companies, which are investable. However, before I go on to discuss the
stocks I want to write about how easy it is to pick winning stocks and what
method I follow. I must caution you however, that equity investment is very
high risk.
Investing in the stock
markets.
I stopped investing in
the stock market about 10 years ago. I have been thinking for the past few
years to start investing once again. I say investing and not trading; because I
believe that the two are quite different. As an investor in the market (any
market). You would spend some time researching whatever it is that you plan to
invest in. You understand the pros and cons of your investment and most
importantly you are going to stick with the investment for the long term. Investing
is what I believe in, and have made substantial gains between 1992 and 2003. Trading
is a different ball game all-together. First
of all I do not understand what a traders’ mindset is. Secondly, I do not
believe you can sit behind a terminal every day and make money by buying in the
morning and selling in the evening. This certainly is a recipe for disaster. As
a trader you take very high risk, spend too much time and on an average make
less or no money, over say a period of one or 2 years, as compared to an
investor. I very strongly believe that stock trading is more risky than
gambling in a casino.
Fundamental analysis:
When I invest I look
at the following parameters of any company I am going to invest in. The items
are: Book Value, Earning per Share (EPS), Dividend (at least for the past five
years), face value, Price to earnings ratio, Dividend yield (not very important
in case of good companies) and price to book value ratio.
In case of good companies with excellent
management and blue chip companies, it may not be really worthwhile looking at
dividend yield and price to book value ratio. However, this time around I
decided to try and pick some cheap, multi-bagger stocks. If you invest in good
and very good companies your risk is much lower but the upside is relatively
limited. A Tata Motors, ICICI Bank or Hindustan Uniliver, may give you a return
of 20% in 12 months, but a smaller lesser known company on a growth path could
double or triple in the same period. However, if you decide to invest in lesser
known companies with new managements, be prepared to lose everything you put
in. If you are looking for a safe investment I suggest the safest is a bank
term deposit, but it does not even cover inflation. Your second choice could be
gold. If you have a large sum of money, invest in real estate. Last of all relatively
safe would be blue chip companies like, Mahindra and Mahindra, Tata Motors, Lupin, Reliance Industries Ltd, Infosys Technologies Ltd, Bharti Airtel Ltd,
Larsen & Toubro Ltd. Investing in such companies you could still lose money
but even in the worst markets you will still be left with a substantial
something, never for a moment forget that equity investment is and will always
be high risk, no matter how good a company you invest in.
To see a list of top 50 companies listed on
the National Stock Exchange (NSE) follow this link: http://www.moneyworks4me.com/best-index/nse-stocks/nifty-50-companies. I have put this link at the end of this post so you can visit it
later.
It takes some effort and time to research the
stocks you are going to buy. However, timing the markets according to me is
impossible. So once you find the stocks you want to put your money in, just
start buying. The best option you have is to spread your investment over a
period of time, instead of buying everything in one go. The second option could
be to buy at a time when the future of the market looks dark, and everyone is
negative about the market. Sell, which is the most difficult decision to act
upon, when the markets are on a roll and there seems to be no end in sight. Markets
follow a definite pattern of reaching unreal highs and unreal lows, which are
difficult to explain when it is happening. Most market experts will give you a
very accurate explanation post facto, but when it is happening there never is
any explanation.
Why is selling the most difficult?
You will need a lot of discipline and will
power to be able to execute a sell. You need to predefine a sell price and a
stop loss before you buy a stock. Once you do that when a stock closes below
your stop loss for say 2 or 3 successive trading sessions you must cut your
loss by executing a sale, even if you decide later to re-purchase the stock. On
the other hand the moment you find a stock has crossed your predefined level on
the upside you must execute a sell, even if you re-purchase it later, after
proper deliberation. Most people lose money because they cannot sell because of
the loss or because fear of a notional loss. By notional loss I mean, you would
have made a bigger profit if you had not sold when it is that you sold the
stock.
Hold, sell or buy.
I personally do not believe in what is known
as a “hold” recommendation. For me a stock is either a buy(able) stock or a
sell(able) stock at any given point in time. If it is buyable I will ideally
buy more of it and “hold” what I already have. If a stock is sellable it should
be sold irrespective of whether you are making a loss or profit. Never hold a
stock to make more profit or to recoup any loss you are sitting on. Also never
get emotionally attached to any stock. Always remember, you bought it in the
first place to make a profit, so if you are making a good profit, book it. You
are in the market because of your “greed” for lack of a better word. Greed is
good that is what makes the markets work, but too much of it is not good. So make
a reasonable profit, never look at what you have lost because you sold too
early. Always look at what you made, and find new opportunities to re-deploy
the money you make. I have already said “timing the market” is virtually
impossible. However, there is an exceptional situation. When your barber or the
taxi driver or just about everyone around is recommending stocks, it is time,
my friend, to exit the markets; lock, stock, and barrel. On the other hand when
everyone is telling you to stay away it is time to buy. In both cases, it may
seem like a wrong decision in the short run, but it will pay off if you are
confident of your decision and stick with it. If you are weak hearted, put your
money in the bank and earn interest, do not even think about the stock market.
Investment in equity Vs. Mutual Funds
I can tell you my view in one simple line.
Investing in stocks thru a mutual fund is giving your money to an expert to
lose it for you. Mutual funds are exposed to the same risks as any individual
stock is. If you want to invest, do your own research and make your own profit
or loss. Most mutual fund managers do not beat the market, and they charge a
fee, for what I consider not a very good job. I have seen some small Individual
investors manage their portfolios better. Also, when you invest thru a mutual fund
you are eventually investing in individual stocks. Choosing a mutual fund,
today is as difficult as choosing a good stock because there are hundreds of
them around. So my recommendation to anyone interested in the stock market is,
invest directly and invest in sectors you know something about. Picking good
companies to invest in is not really rocket science.
Stock markets can be
very profitable for some and a disaster for others. Many people make money in
the stock market and an equal or larger number lose all they’ve got. The
question is who makes money in these markets? What you need is a lot of
discipline, some analytical skill and ability to look at a loss and know when
to book it. But first of all picking the right stock is most important.
Information about
stocks is all around us. The value of a stock depends on the potential of a
company to make money. Let us say company X is in the business of making
detergents and most of its revenue comes from this one product. You are someone
who is using detergent manufactured by company Y. One day you realize that a
lot of people you know are talking about the product of company X. So you give
it a try and find that the detergent is cheaper, cleans better and in every way
beats the detergent of company Y. Now this should be a good signal for you to
look at the stock of the company, and evaluate it for investment. Now let us
assume that in your research you find; the company (X) has been around for 10
years; it has been paying dividend for the past 5 years; it’s earning per share
(EPS) is good; it’s price/earnings multiple is under 10 and its book value is
at the least above par. The price has been stable or rising for the last 3 to
12 months. The company’s sales and profits are on the rise. When I invest these
are usually the parameters I evaluate. For an unknown and small company I look
at the price to book value also. In case you do not understand any of these
terms, please stop learn more about stock research and then start investing. Don’t
start putting your money based on “tips” brokers are sending you by text
message or recommendations you read in the newspapers or learn from your
friends or whatever. If you intend to make money in this market, you need to
know the basics. Now let us look at a few specific examples and why I am going
to invest in them or have decided to hold back.
Zicom
Zicom is an electronic
security products manufacturer. It manufactures stuff like CCTV Surveillance
systems, Video door phones, Recorders, Jammers, mobile signal boosters and
more… I picked this company 3 years ago. But never got to buying it till now
because my trading account was closed and I never got down to reviving it. But
I am re-evaluating the company because now if it still holds promise I will be
able to invest in it.
Now let’s get back to
the company: I like the industry, it has a healthy growth rate. Spending in
this sector will continue even if the economy is in a bad state. Government is
spending a lot in this sector. In short it is a great Industry to invest in.
I came across Zicom at a
price of around Rs 35. It had paid a dividend of Rs 5 per share. So the
dividend yield for that year was 14.29%. I never looked at other factors then,
because I was not being able to buy. However, now the price is 2.5 times higher at
Rs. 86 and the dividend payout in the past 2 years has been 10%. But the
industry is still excellent. I cannot buy the stock for dividend; the yield is
only 1.16%. Book value is excellent at Rs 100, and EPS is fair at Rs 4.1 per
share. But the stock looks fully priced at P/E at 21. I usually do not invest
in a stock with a P/E over 14. But it depends on a number of other factors. I
have put it on my watch list. The AGM of the company is on the 17th
of May that is when we will get the latest EPS figure and Dividend payout
number, with other data. If the EPS and/or dividend go up it becomes buyable. But
I am not buying right away.
All the stocks discussed below have been taken from the list of high
yield stocks as the starting point of this analysis the list is available at:
Zylog Systems
The stock is priced at Rs 54.85 On 17-05-2013, up from 49.5 a few days
ago when I first shortlisted the stock. That is appreciation of 10.8% in less
than 15 days. The stock has paid dividend consistently for the past 5 years
between 30% and 100%. So, its dividend yield is 9.12%. The book value of the
stock is at a brilliant Rs 256; therefore, price to book value ratio is
fantastic 0.214 times. The EPS is good at Rs 45, so the price to earnings ratio
is at 1.2 times. The results were last declared on September 25, 2012, so it
could take some time for this year’s numbers to come out. The stock is a
definite buy for me. In a company like this with such numbers, it really does
not matter whether I buy at Rs40 or Rs 60. It looks like a good long term bet. It
is best to buy slowly over a stretched period of time, even if it means paying
a little more. I never try to time the market, because I believe it is a waste
of time, and humanly impossible.
Acropetal Tech:
The price of the stock is Rs 6.45. I usually avoid such low priced
stocks because only one out of a hundred will perform in the long run. However
in the short term you can sometimes get excellent returns from such stocks. But
it is still important to look at all the fundamentals. The company has paid
dividend for at least 5 years 7% and 12%, in September 2012 it paid 12%. So the
dividend yield is 18.6%. Last year’s EPS is Rs 3.30, so the P/E multiple is
1.9. In other words the price of the stock is less than 2 times its net profit.
It is however not in a very exciting business and there is too much
competition. It does some very low end technology services business, taking
advantage of labour arbitrage. In short I do not like the business. However,
the book value is Rs72, thus the price to book value ratio is 0.09%. In other
words the price of the stock is 9% its book value. The stock closed below its
30 day support level of Rs 6.64, so there may be more downside. The stock price
will get good support at around Rs5.9; if it falls below that there will be
more downside. There will also be resistance at around Rs 7; however, if it
breaks out above that there may be a good upside. The two numbers Rs5.9 and Rs7
are technical analysis numbers, which is beyond the scope of this post. I will talk
about technical analysis in another post. The stock is not a very exciting
proposition, but it is not worth leaving altogether. So I have decided to buy a
small chunk. But I am prepared to lose it all, because the money may double or
triple in a very short time. So this stock is not really an investment but like
buying a lottery ticket, or just a little better. I would say either I will
triple my investment in 6 to 12 months or will lose everything.
Orient paper:
The price of the stock is Rs 8.05. It has consistently given dividend at
least for the last 5 years, which rose from 120% in 2008 to 200% in 2012. So
the dividend yield on the latest dividend is 24.84%. The dividend yield on the
dividend paid by the company in 2008 is also good at 14.91%. The book value is
at Rs21, so the price to book value ratio is 2.6 times, which is fair. The EPS
is Rs 1.6 per share thus the price to earnings ratio is 5.1 times. The stock
has good technical support below Rs7, so the downside, if any is not much. Based
on this information the stock looks like a good pick. However, the company made
a loss of Rs 87.77 crore (or 877.7 million). This is a cause for concern, so it
will be good to see what the company does in the next couple of quarters and
the dividend it pays this year. So I will not invest in it for now. In the same
industry Shakti Paper may be a better bet.
Sakthi Paper:
The price of the stock as on 16-05-2013 is Rs 21.25. It has paid
dividend between 15% and 21%, in the last five years. So the dividend yield is
9.9%. Book value is at Rs22. Thus, it is quoting at about the same price as its
book value. The EPS is Rs 3.8, so the Price to earnings (P/E) ratio is 5.5
times. The last AGM was on May 24, 2012, so we may get the latest results and
dividend data around that time in a few days. The stock looks investable, but I
will look at the latest data before investing. If the market mood becomes
upbeat I may start buying anyway. There does not seem to be much downside to
the stock and looks like better investment than Orient Paper in the same
industry.
PSL Ltd
Everything looked fine till December 2012. But the company has made a
loss in the fourth quarter of the previous financial ending March 31, 2013. So
I am not getting into analysing the stock, and have decided not to invest. The
price of the share is Rs 31.25 and book value has dropped from Rs171 to Rs142.
Cosmo Films
I am not really excited about the Industry, Packaging material and BOPP
films. However, I have owned the stock before and am sure the company is
strong, with a good management. The stock is quoting at Rs 68 and has an EPS of
Rs 11.5, so the price is about 6 times its profits. It has consistently paid a
dividend of 50% for the past five years. The dividend yield is at 7.35%, so you
cannot really buy it for dividend, bit other numbers look good. The book Value
is at Rs 184, thus the price is a little over one third the real value of the
business. The board of directors will meet on May 27, 2013 and I will wait for
the latest numbers including dividend to be declared before investing.
Rajkumar Forge
I put the stock on my shortlist at Rs 14.85. The stock has appreciated 13%,
and was priced at Rs 16.80 at market close on May 17, 2013. The company has
been paying a dividend between 8.5% and 15% in the past 4 years. It did not pay
any dividend in 2008. So the dividend now stands at 8.9%. I have conflicting
figures of EPS and Book value, from different sources. The EPS figures I have
are Rs 4.7 and Rs 5.75, and the book value figures I have are Rs 18 per share
and Rs 23.21 per share. For this analysis I am taking the lower figures. Based
on the lower figures the Price to Earnings ratio is 3.6 and the price to book
value ratio is 0.93 times. Last AGM the company had was in 2011. The stock does
not look very exciting. However I would wait for the latest data before I put
my money in this company.
Micro Tech
The stock is priced at Rs 8.20 as on May 17, 2013. The company has paid
dividend between 10% and 20% between 2008 and 2012. So Dividend yield to last
year’s dividend (10%) is at 12.2%. The book value is at a healthy Rs 200, but
the latest EPS figure is a disappointing Rs0.44 per share. I lost some data but
I think the company made a loss of around 43 crore in the quarter ended March,
2013. So, for now the stock is not a buy for me.
ABG Infralogist
The stock is quoting at Rs 47.90. The book value of the stock is at Rs
198 per share. The company has paid dividend between 40% and 100% in the last 5
years. So the dividend yield on last year’s dividend of 50% is 10.44% which is
good. However the company made a loss and the EPS figure available is Rs -14
per share. Considering the book value and the dividend history I would take a
small gamble in the company. However, a serious investment should be considered
only when the latest Dividend and results are available. The last AGM was held
in June, so hopefully we will have the latest numbers in hand in about a month.
Inventure Growth
The stock is priced at Rs 5.60. The company has paid dividend 10%
dividend in the past 4 years and once it paid 30%. So dividend yield for 2012
is an impressive 17.86%. But that is where the story ends. The EPS is at a
measly Rs0.15 and book value is at Rs 18. So there is seems no reason really to
look any further. I will not invest in this company.
I will write about more companies and the prospects of investing in
their equity as I start investing and do more research and find more stories.
From now on I will only write about companies I decide to invest in.
High Dividend yield
stock list
Top 50 companies listed on the National Stock
Exchange (NSE):
