RIL: Is it an opportunity now?

Reliance Industries has long been in passive mode. I have been watching this stock since 980 level. I did not buy it then for it has invested in very risky assets. Telecom business, Shale gas in the US and what not. Shale gas by the way is very difficult to extract and a slight mismanagement would bring RIL to shambles. The US will not take 26 years to declare useless verdicts.

Still recent deregulation on fuels will directly benefit RIL. It has had many dysfunctional petrol pumps for now. Unless prices have been deregulated, RIL would never use its petrol pumps. From this perspective I see RIL is at a bargain prince currently.

Disclosure: I have a small exposure in RIL

ABCIL : Why is it so undervalued?

I have been observing this particular stock ABCIL since quite some time. While most of the companies in to the chemical industry hover at 10-20 PE, ABCIL has been at 3-4 PE for quite sometime.

Positives and negatives about the company:

1. It is Aditya Birla group company. I have no qualms about its management.
2. Topline growth has been okay since 2005. 2005-2006 3%, 2006-2007 28%, 2007-2008 21%,2008-2009 17%, 2009-2010 10% with standard deviation 9
   
3. Net profit has seen ups and downs. 2005-2006 -1%, 2006-2007 29%, 2007-2008 45%,2008-2009 -6%, 2009-2010 31% with standard deviation of 22.
4. Book value as been increasing considerably.
   
5. EPS has not shown consistent up turn. 2005-2006 0%, 2006-2007 29%, 2007-2008 46%,2008-2009 -6%, 2009-2010 31% with standard deviation 22
6. Cash flow has not been increasing, this is alarming for me.
   

More to come...

Disclaimer: I have started a very small position in this stock. It will be my benefit if you invest in it.

How stock prices move : A primer on PE

I have always been puzzled by the sudden changes in stock prices. I have always been puzzled about gap ups and gap downs. The question to brood over is, suppose the price of some odd scrip A is 100 today and stock market is closed for 10 days; when the market opens after 10 days, what will be the price of scrip A? Will it start from same level?

Law of supply and demand somehow doesn't appeal to me in such case. For I strongly believe that in stock market, supply is always equal to the demand. There is no 'stock' inventory lying in the NSE/BSE warehouses.

We can take a cue from PE ratio and propose a plausible explanation. Certainly there are many much complexity is involved, but for the simplicity sake we can start with the PE ratio. What is the meaning of PE ratio 10. Well it means that if a companies earnings remain same and it pays all its earnings as dividends, it will take us 10 years to break even. This also means that the money invested will work like an FD with simple interest of 10%.

Now this is what may happen:

• Some people think that they can manage with 8% of simple interest and start bidding high for a Rs 100 stock. To get Rs 100 in 10 years with 8% simple interest they would have to pay 125 for Rs 100 stock. This change happen smoothly and we see gradually PE ratio. In this case it will be 12.5. But earnings of a company are hardly constant. A business will always try to run a direction where it can increase its earnings. If we assume that earnings may increase with the constant rate of 10%, we will get return of Rs 100 within 7 years. This too will take the prices higher due to those who would be satisfied with returns in 8 years or 9 years or more. If suddenly there is some revelation the companies earnings are going to drop, people think that their 8 years may now extend to 12 or more years. They start selling; Since they cannot sell a costly asset for the same price, they will reduce price and those who are willing to go ahead with that kind of risk will be happy to buy.
  

Earnings is dependent on many things such as the business a company in, the growth potential a company has, the management, debt on the balance sheet and the kinds of investments company is making.

Taking all those factors in to account, the valuations made by people decides the price of a stock.

Ever wondered why M&M is shooting up? People are happy due to its venture into electric car and think that the earnings will shoot up some day as green technology is the future.

Start the value investing now

Like many of us, who got carried away by zooming Sensex of 2007, I too thought to start on minting money in stock market. I thought to play intelligent investor and kept watching the market for 3 months (from Nov-2007 to Jan 2008). In the mid Jan 2008 I started pouring on my savings to stock markets in the hope that it touches 25000 by March 2008. Everyone on the street was talking same those days. How could I be so foolish to not to cash in the advantage. Well, to my amazement, I never saw green color! Stock market plummeted; I thought probably my entry in the market has not been so good but patience should make me a winner. I was determined that I will not do a panic selling. Soon I found my hard earned money to its 50% level. And when market tanked to 8000 level I was at 80% loss.

I then paused and brooded over the mistakes I have committed in my investment decisions.

1. I realized that I spent more time on buying Rs 14 per kg potato than on Rs 1000 stock of ONGC
   
2. I believed a lot on analysts' reports, technicals and tips. Most of the tips are not even worth the paper they are written on.
   
3. I thought I could chase a rising stock and catch a falling one. I got messed up in both of them.
4. I didn't understand the patience part correctly. There is no point in keeping a stock patiently which is not even worth a penny for times to come.
   
5. I thought I could ride the stock about which there is some rumor in the market. I could never time the market.
6. I thought if a stock has seen 1000 price and currently is at 100, it will some day come to 1000 level again. There is no such guarantee!
7. I thought if a stock has fallen steep, it is time to grab it. But again not everyone can catch a falling knife.
8. I thought I could cut my losses if I average all my holdings. It did work for a few good stocks but I am yet to recover a good portion of my money till date.

After learning these lessons, I took a pause from the stock market, invested in some good mutual funds and kept the learning process on. Time to time I have invested a small portion my hard earned money to see if my learnings are in the right direction. In the posts to come I shall post my currently loss making portfolio and its monthly updates. My aim from now onwards is to beat the Sensex at least by 10%. Lets see where do I land up.