07 January 2010

Hunting Value

Efficient Market Hypothesis states that price of a stock is always quoting the just value for it and all news priced in. So if a stock has recently been beaten down 40% it means that due to fundamental reasons the company has lost 40% of its value or value generation capability. Though I am no expert in this field I always doubt this theory, and we all know prices do stretch on both sides, when liquidity and sentiments are good we see much higher participation and prices are pushed higher stretching the PE. Similarly on the way down we see panic pushing valuations much lower than the "just" value. The bottom line is that stock prices are not only value of the fundamentals but also of sentiment, liquidity and many more x factors! I always believe in my theory that you never know what is the right value, we have guidelines which give a rough idea, but that too are not dependable.

Money Managers follow a model, to buy and sell stocks, which roughly resemble something called Rotation Model, which ideally is to sell stocks that you own which have rallied and buy those which have corrected. This too has to be done in phases, so when you have decided to buy X as it has corrected and you are comfortable buying it, you buy it in 3 to 5 stages, irrespective of where the price goes as long as it is in the "range".

The current environment where stocks are being chased, and general sentiment is quite bullish; hunting value is a real tedious job for retail investors as whichever stock you look at, seems to have multiplied several times from their lows. And the fact that they have seen those lows, they are "anchored" to those prices and unwilling to buy.

Just to get rid of this psychological barrier the above "forced" technique is applied as long as the macroeconomics do not change, where they need to upgrade or degrade sectors and stocks. Lets see few of the recently degraded stocks, to see if they have corrected and consolidated enough to entice the liquidity.

RCOM, Punj LLoyd and Everest Kanto Cylinders all of them corrected between 35 to 50% from their peak in quick time due to different fundamental reasons. All of them have been moving in a small range post correction, which can be termed as consolidation. Definitely selling has been done for the time being as we can see the prices are no longer moving down. What argument can be given for prices to move higher from here... All I can think of is liquidity and the fact that they are not correcting more can force market participants to believe that they are buying at fair value and relatively closer to the bottom. Any hint of good news can force these stocks to rally hard as they are quite under-owned and the fall had been very quick, so not many people own these stocks in the steep fall region.

Buying these stocks should work for long to medium term players. A 50% recovery should be minimum target for each of them. Target for RCOM 240, Punj Lloyd 245 and EKC 180 is what it comes out to. The fact that basic assumption is rising and consolidation market, any breakdown in overall market view should be treated as sell signals.


Faisal Humayun said...

The market participants are often wrong about their perception on a Company or at times on the markets as a whole...Those are times when a contrarian goes for stocks which others are getting out of...

Such opportunities in the market come often and in the above case, If I had to take positions in the stocks according to different weightages I would do the following:

1)Everest Kanto - 40%
2)RCOM and Punj - 30% each

Fundamentally, these stocks are good and have a decent future as well...

Tarique Anwar said...

EKC moved up a bit today in a falling market, lets see if it comes into the buying radar!

Post a Comment