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Mon,31Aug,20156:58PMIndianMarketsareclosed

BustingStockMarketMyths
ByShoaibZamanandRahulOberoi|IndiaTodayGroupWed2Apr,20146:04PMIST

Howmanytimeshaveyoubeentoldabout'thenextbigstock'byabroker,afriendoracolleague?Thestock,youaretold,
hasallthemakingsofthenextblockbuster.
Theargumentispersuasive,eitherintheformofanecdotesorbackedbydata.Maybeaninvestmentguruhasmade
millionsonthestock.Or,thereisachartshowingthestock'spastreturnsor,maybe,astudylistingreasonswhyitwill
bringyouenormousriches.
However,onceyouinvest,thestockstopsperforming,orbeginswellandthenstartstofalter.Youaredisappointedand
decidenevertoinvestinanystock.
Ifthissoundsfamiliar,takeheart,foryouhavecompany.AswathDamodaran,ProfessoratNewYorkUniversity,inhis
book'InvestmentFables,'capturestheessenceofthesestories."Whiletherearehundredsofschemestobeatthemarket,
theyallarevariantsofaboutadozenbasicthemesthathavebeenaroundforaslongastherehavebeenstockstobuyand
sell.Thesebroadthemesaremodified,givennewnamesandmarketedasnewstrategies,"saysDamodaran.
Weidentifysomeofthesestrategiesthatappealtostockinvestorsandseeiftheyareworkableor,asDamodaransays,just
fables.
MYTH:BUYINGDIVIDENDPAYINGCOMPANIESISASSAFEASINVESTINGINDEBT.ANDA
COMPANYTHATHASANNOUNCEDTHATITWILLPAYHIGHDIVIDENDTHISYEARISAGOODBET.
Reality:Investorswithlittleriskappetitepreferthesafetyofgovernmentbondsorbankfixeddepositsratherthanstocks.
Thebeliefisthattheseareriskfree.Suchinvestorsaretoldthatadividendgivingstockofferssafety,regularincome,plus
scopeforcapitalappreciation.Butwhatisnotmentionedisthatdividendpaymentscanneverbepredicted,abigminus
foranyinvestorlookingforregularincome.
TakeBajajFinance.ItsstockwentupfromRs400on2January2006toRs1,318on31December2012.Thecompany
paiddividendineachofthesesixyears.In200506,itpaidRs4pershare.In200809,itpaidjustRs2.Somesaythisis
because200809wasayearofeconomiccrisis.Butthisargumentdoesnotholdmuchwaterasoutofnearly4,000
companieslistedontheBombayStockExchange,orBSE,662havepaiddividendeveryyearforthelast10years.Oneof
themisBajajFinance.Ofthese,100havebeenincreasingthepayoutormaintainingitatthepreviousyear'slevel.
VikasGupta,executivevicepresident,AlphaL50(India),ArthvedaFundManagement,saysUSpensionfundsand
investmenttrustsusedtoinvestinonlytopdividendpayingcompanies.Thisforcedbigcompanies,especiallythemarket
leaders,topaydividendsregularlysothattheycouldqualifyforinvestmentfromthesebiginvestors.Someevenborrowed
moneytopaydividends.
ButinIndiathestoryisdifferent."Here,thedividendyieldofthehighestdividendpayersisapproximatelyhalftherisk
freerate.Therefore,itisnotpossibletoimplementthestrategyinentirety,"saysGupta.Dividendyieldshowshowmuch
acompanypaysindividendseachyearrelativetoitsstockprice.
Butifyoustillwanttogoforhighdividendpayers,youmustaskthefollowingquestions.Howconsistentlyhasthe
companybeenpayingdividends?Istheindustrycyclicalandhasthecompanybeenpayingdividendsduringtoughtimes
aswell?And,ofcourse,howdoesitgetthemoneytopaydividendsregularly?
DipenShah,whoheadsprivateclientgroupresearchatKotakSecurities,saysinvestorsmustneverlosesightofthe
company'sfundamentalswhilechoosingastock."Oneshouldlookatdataforthelastthreeyearstoseeifthecompany
hasbeenpayingdividends,"hesays.
RupeshPatel,fundmanager,TataAssetManagement,saysthreetypesofcompaniespayhighdividends.First,those
whichhavestrongbusinessmodelsandalotoffreecashflow.Second,thosewhichhavesparecashtopayinvestorseven
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afterinvestingforfuturegrowth.Third,thosewhichhavedon'thavemanyavenuestoinvestforgrowth.Thethird
categoryisproblematic,sayexperts,asitdoesn'tgiveinvestorstheadvantageoffastgrowth.
Buttherearemanywhovouchforthesafetyofcompaniesthatpayhighdividends.AnindyaBera,aretailinvestorfrom
Kolkata,says,"Iprefersafetyoverrisk.Highdividendyieldcompaniesaresaferinanotherwiseriskyinvestment
landscape.Mosttendtobematurecompanieswithstablerevenues.Thisgivescomfort."
KiranKavikondala,directorWealthRays,says,"Wehavebeenrecommendingstocksthathavealonghistoryofearning
dividends.Butwesticktolargecompaniesinthiscategory."
ButAyushMittal,aresidentofLucknow,saysit'snotnecessarytosticktolargecapcompaniesinthecategory.After
rigorousresearch,heboughtsharesofMayurUniquotersandMPSLtd,whichhadalongrecordofpayingdividendsand
strongearningsgrowth.Hemadesubstantialprofits."Ratherthanlookingatjustthedividendpercentage,investorsmust
lookatthedividendpayoutpercentage(ofnetprofit)beingdistributed(agooddividendpayoutforamanufacturing
companyisgreaterthan25%ofnetprofit),"hesays.Thisreinforcestheviewthatfocusingonresearchtofindcompanies
withstrongfundamentalsisimportant.
"Ourexperienceisthatinvestorsinthe45+agegrouppreferpublicsectorcompaniesoverprivatesectorones,"says
KavikondalaofWealthRays.
"Butthereisnoevidencethatpublicsectorcompaniespayhigherdividendsthantheprivatesectorones.Investors
followingthedividendstrategyneednotskewtheirportfoliotowardspublicsectorcompanies."
Onwhichgroupofinvestorsshouldnotbetondividendearningstocks,Kavikondalasays,"Iftheaimiscapital
appreciation,thisisperhapsnotthebestapproach."Investorsshouldunderstandthatthestrategymaydeliverlower
returnsinbullmarkets.Thisisbecauseinvestorsfocusoncapitalappreciationinbullmarketsandstabilityofearningsin
bearmarkets.
MYTH:FASTGROWINGCOMPANIESWHOSEEARNINGSPERSHARE,OREPS,ISRISINGBY30%OR
MOREAYEARAREGOODINVESTMENTSATANYPRICELEVELASTHEYWILLKEEPGROWING.
Reality:Apresentmarketleaderwouldhavebeenafastgrowerinearlystages.Therearemanywaystodefineafast
growingcompany.ThemostcommonislookingatEPS,revenueorsalesgrowth.Forretailinvestors,thebestwayisto
lookattheannualEPSgrowthoverthelastfiveyears.
Whenitcomestoinvesting,thereisabeliefthatonecanpayanypriceforafastgrowingcompany.Forexample,ifan
investorwouldhavespottedPageIndustriestowardstheendof2009,hewouldhavefoundthatitsEPShadgrownfrom
Rs5.41(in2004)toRs28.36,agrowthrateof39%ayear.ThestockwasatRs874on31December2009andtouchedRs
5,878on28February2014theEPSgrewtoRs100duringtheperiod.Atthisstage,theannualEPSgrowthrateforthe
lastfiveyearswas36%.
Thereare21companiesthatgrewatmorethan30%ayearin200611,200712and200813.
Allthissoundsgreat.Buttheinvestor,whohastheunenviabletaskofpredictingthefuture,shouldaskifthisruncan
continue.Pastgrowth,asweallknow,maynotalwaysbereplicated.AnexcellentexampleofthisisICSA,whoseEPS
grewfromRs0.15in2004toRs26.31(growthof191%ayear).Afterthat,theEPSstartedfalling.In2012and2013,it
reportednegativeEPS(Rs36.99andRs171.06,respectively).Intheworldofinvestment,pastperformancetellslittle
aboutthefuture.
"Thepitfallofusingthisparameteristhatonewillenduplookingatjustrevenueorearningsgrowth.Acompanycan
alwaysboostitsearningsbyborrowingmoreandtheninvestingthatmoney,"saysGuptaofArthveda.Hesaysaleveraged
companynotgrowingaccordingtoplanisatariskofdefaultingondebt.
Hence,investorswhowanttofollowthisstrategyshouldlookatcompaniesthataregrowingfastbutwithouttakingon
toomuchdebt.Itisbesttolookforcompaniesthataregrowingthroughinternalaccruals.
AsDamodaranwritesinInvestmentFables:"Ifyouputyourmoneyintocompanieswithhighestearningsgrowth,youare
playingthesegmentthatismostlikelytohaveanexponentialpayofformeltdown."
MYTH:STOCKSTRADINGATLOWEARNINGSMULTIPLESAREGOODASTHEYAREBOTHCHEAP
ANDSAFE
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Reality:BenjaminGrahamisoftennamedastheproponentofbuyingstockstradingatlowpricetoearnings,orPE,
multiples.Inhisbook,'SecurityAnalysis',GrahamsaysthataPEratioof16"isashighapriceascanbepaidinan
investmentpurchaseincommonstock."Onthelowerside,hesays,aPEofeightsuggeststhatthemarketisnotfactoring
ingrowth,makingitasafebet.
ButwhatisoftenmissedbythosewhofollowthelowP/EstrategyisthatGrahamsuggestedthisasoneoftheparameters
alongwithdebttoequityratio,pricetobookvalueandmarketcap.
AmongtheBSElisted4,000stocks,239wereatPEratiosofbetween8and16onFebruary28.
"ThestrategybaseduponbuyingstockswithlowPEratiosiscalledvalueinvesting.Itisbasedontheassumptionthat
sharesofcomparablecompaniesshouldtradeatalmostthesamePEmultiples.Ifsharesofacompanyaretradingata
lowerPEthanthatofothersinthepeergroup,theyareconsideredundervalued.Theaimofvalueinvestingistobuythese
sharesandexpectthattheirpriceswillrisetolevelsatwhattheirpeersaretrading,"saysYashpalGupta,executivevice
president,IDBICapital.
Buttherealchallengeisfindingoutthelevelatwhichyoucancallastockcheap.Forinstance,foracompanyinthefast
movingconsumer,orFMCG,sector,aPEof20isconsideredreasonable.Thereasonsarestabilityofearningsandlow
debt.Fortheoppositereasons,foraninfrastructurecompany,thefigureis10.
"Therefore,oneshouldalwayslookatPEsofcompaniesinthesameindustry,plustheoverallindustryPE,"saysPatelof
TataAMC.
TheeffortshouldbetounderstandwhythecompanyistradingatalowPEratio.Thereasonscouldbeindustryspecificor
companyspecific.Ifitisthelatter,investorsmusttreadwithcaution.
LowPEisjustanindicator.YoushouldsiftthroughlowPEstocksandchooseyourinvestmentsonthebasisof
fundamentals.However,somecompanieswillalwaystradeatlowerPEratioswhileotherswillbevaluedhigherbecause
ofthenatureoftheirbusinessesormanagementrelatedissues,etc.So,itisimperativetounderstandthereasonforthe
lowPEratiobeforeinvesting.
ShahofKotakSecuritiessays,"Ifmyviewisthatthemarketwillremainsubdued,IshouldnotbelookingatlowPEasthe
criteria.Butwhenasectorisnotdoingbadlybutitsstocksaredownduetonegativenews,IshouldlookatlowPEstocks."
MYTH:MULTINATIONALCOMPANIES,ORMNCs,THATARELIKELYTODELISTWILLPAY
INVESTORSAGOODPREMIUMOVERTHEMARKETPRICEAND,SECOND,MNCsHAVEHIGH
GOVERNANCESTANDARDSANDLOOKAFTERTHEINTERESTSOFSHAREHOLDERS.
Reality:MNCswhichhavepresenceinIndiaarehighlyregarded.Buttherearetwotypesofstoriesthatinvestorsmustbe
cautiousabout.
ThefirstisthatMNCswillpayanypricetobuybacksharesanddelistfromtheIndianmarket.Thisbeliefhastakenhold
eversincetheSecuritiesandExchangeBoardofIndia,orSebi,themarketregulator,saidtwoyearsagothatalllisted
companiesmustensurethatatleast25%sharesarefloatingontheexchange.
AstrazenecaPharmaIndiasharesroseaftertheSebiannouncementasthepromoterowned90%ofthecompanyandthe
marketexpectedthatitwoulddelistratherthancomplywiththenewshareholdingnorm.However,thestockfell30%
afterthecompanytoldtheBSEthatitwilldilutepromoterholdingto75%inaspanof45daysbetweenMarchandApril
2013."Usingdelistingasastrategyisspeculation.Onecanonlyguesswhenacompanywilldelist,"saysPatelofTata
AMC.
Expertssaydelistingcanatbestworkasaspeculativestrategy.Thereareotherstrategiesthatonecanemploywhile
keepingMNCsasthebaserequirement.
"Investorscanconsiderthebuybackstrategyaswhetheracompanywilldelistornotissomethingonecanonlyguess,"
saysKavikondalaofWealthRays.Hesaysinabuyback,onemustlookatwhetherthecompanyhasopportunitiesto
expand.Ifnot,oneshouldseeifthemanagementwouldliketoreducethenumberofsharesinthemarket,asthiswould
raisethepossibilityofbuyback.Butamidallthis,it'simportantnottoforgettheprospectsofthecompany.Hesaysan
aggressiveinvestorcanusethisstrategybutshouldnotcommitmorethan1520%fundstoit.
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ThesecondstoryoftennarratedtoinvestorsisthatMNCshavehighcorporategovernancestandards,strongbrands,use
capitalefficientlyandareinIndiaforthelongterm.
ThesefactorsseemtobeworkingwellforinvestorsinMNCs.Forinstance,theCNXMNCindex,comprising15
companies,hasbeenoutperformingtheNiftyoverthelastfewyears.
DeepakLadha,executivedirector,LadderupCorporateAdvisory,says,"ThereareMNCswhicharenotfastgrowingbut
payregulardividends.Somedonotgivedividendsbutgrowfast.TherearemanyexamplesofMNCstrategythathave
worked,forinstance,GlaxoPharmaceutical,HULandSiemens."
Butonegreyarea,saysPatelofTataAMC,iswhollyownedsubsidiariessetupbysomeMNCs."Thismeansonemaynot
getaclearpictureofwhichcostsarebeingchargedtothelistedentityandwhicharebeingchargedtothewhollyowned
subsidiary."Attimes,thesesubsidiariesmaystartoperatinginthesamelineofbusinessasthelistedentity,harmingthe
interestsofthelatter'ssmallshareholders.
Also,thelocallistedentitycandecidetoincreaseroyaltypaymentstotheparent.Thisisnotinthebestinterestof
shareholders."Dividendsarefineastheybenefitsmallinvestorsalso,butnotroyaltypayments,"saysGuptaofArthveda.
InvestorsshouldlookatthesectortheMNCinquestionoperatesandunderstandtheindustrysituationtoseeifthebet
willwork."Forexample,Siemensisintheengineeringsectorandwill,therefore,benefitfromastablegovernmentand
pickupininfrastructureactivity,whereasifyoutakeGlaxoPharmaceuticals,itisaperpetualstory,aspharmaceuticals
willcontinuetogrowatacertainrate."
MYTH:FOLLOWINGANEXPERT'SPORTFOLIOISREWARDING.
Reality:Copycatinvestinginvolvesfollowinganexpert.Thisiscommonindevelopedcountries.Itisalsocalledtail
coatingorsidecarinvesting.
In2008,ProfGeraldMartinandJohnPuthenpurackalpublishedapapertitled,"ImitationIstheSincerestFormof
Flattery".TheycreatedaportfoliothatmimickedtheinvestmentsofWarrenBuffett'sBerkshireHathway.The
hypotheticalportfolioboughtstocksatthestartofthemonthafterBerkshire'sdisclosureofitsstockpositions.Despitethe
delayedinvestment,theportfolioearnedareturnof10.75%overthatgivenbytheS&P500index.Thestudysupported
thecopycatstrategy.
InIndia,themostrenownedstockinvestorisRakeshJhunjhunwala.Sowetriedtogetdatatoseecompaniesinwhichhe
hasastakeofmorethan1%(itismandatoryforcompaniestodisclosethenamesofallinvestorswhoholdmorethan1%
shares).ThisprovedtrickyasthereweremanypermutationcombinationsrangingfromRakeshJhunjhunwalatoRakesh
RadheshyamJhunjhunwalaandsomeshareswereinthenameofhiswifeRekhaJhunjhunwala.Insomecases,boththeir
nameswerecombinedasRakeshRekhaJhunjhunwala.So,wetooknameswherewehadconfidencethatitwouldbe
RakeshJhunjhunwala.
Throughout2013,JhunjhunwalareducedinvestmentinA2ZMaintenance&EngineeringServices.Thestockfell80%
fromRs56toRs10duringtheperiod.HesoldAgroTechFoodssharesbetweenJanuary2013andJune2013andbought
thesamebetweenJune2013andDecember2013whenthepricewasbetweenRs450andRs580.Butwedon'tknowthe
priceatwhichhemadehisinvestments.
Asthisshows,onechallengetheinvestorwhowantstofollowthecopycatstrategyfacesisthedeploymenttimeframe.
GuptaofArthvedasays,"ThereisnoproperwaytodocopycatinvestinginIndia.Onehurdleisthatyouwillneverknow
whentheinvestoryouarefollowinghassoldhisinvestments.Youmaynotevenknowwhenheboughtit."
"IntheIndianscenario,copycatinvestingcanworkonlyinundervaluedcompaniesorwhenyouarefollowingsomeone
whofollowsacontrarianstyle.Thecontrarianapproachtakesalongtimetoworkout.Youneedpatience."Heexplains
thatinUS,thereasonwhythestrategyworksisthe13Ffiling.13Fisaquarterlyfilingbyinstitutionalinvestment
managerswithover$100millioninassets.Itisdoneattheendofeachquarterwithin45days.Anotherbenefitofthe13F
filingisthatitisnotrestrictedto1%shareholding.Hence,yougettoseethefullportfolioofthemanager.
Therefore,theperennialquestionforaninvestorfollowingacopycatstrategyis:Whydidthebiginvestorboughtit?And,
ofcourse,howlongdoesheplantohold?
Thosewhowanttousethestrategyshouldunderstandthetemperamentofthepeopletheyplantocopy.Thisisbecausea
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personinterestedinshorttermtradingcannevermakemoneybyfollowingabiginvestorsuchasBuffettwhoseholding
periodisverylong.
MYTH:IFFOREIGNINSTITUTIONALINVESTORS,ORFIIs,ORDOMESTICINSTITUTIONAL
INVESTORS,ORDIIs,AREBUYINGASTOCK,ITMUSTBEVERYGOOD.
Reality:Themarketcantakeastockinanydirection.IntheBSE100index,thereare26companiesinwhichFIIshave
beenincreasingtheirstakesinceMarch2013.Ofthese,ninegavenegativereturnsbetweenApril2013andFebruary2014.
Similarly,inMarchDecember2012,therewere34companiesinwhichFIIsincreasedtheirstake.Ofthese,13gave
negativereturnsin201213.
Forinstance,FIIsincreasedstakeinTataPowerCompanyfrom24.54%inthequarterendedMarch2013to24.78%,
25.05%and26.03%inquartersendedJune,SeptemberandDecember2013.However,onaccountofmutedcashflow,
thestockplunged17%fromRs95.8onApril1lastyeartoRs79.45onFebruary26thisyear.
Likewise,concernsoverhighdebtandsoaringinterestcostsarekeepingJaiprakashAssociatesunderpressure.Thestock
fell38%toRs41.90between1April2013andFebruary28thisyear.ThiswasdespiteFIIsincreasingstakefrom22.77%
inMarch2013to27.41inDecember2013.
WhatretailinvestorsforgetisthatFIIsandDIIshavetheirownparametersfortakinginvestmentdecisions.Pankaj
Pandey,headofresearch,ICICIdirect,says,"IfFIIsarefacingaliquiditycrunchtheymaysellevengoodstockstoraise
money.Inthiscase,aretailinvestorwhofollowsFIIs/DIIsandsellsthestockwillmissthechancetomakemoney."
"Theriskappetite,theinvestmenthorizonaswellastheholdingpowerofretailinvestorsaredifferentfromthatof
institutionalinvestors.Hence,ifaninvestorbuysastockthatFIIsarebuyinganditfallsinthenearormediumterm,
retailinvestorswithoutdeeppocketswilltendtoexit,losingmoney."However,institutions,whichhavedeeppockets,
maybeabletowaitforlongertogetoutoftheinvestment.
VikramDhawan,director,EquentisCapital,saysthestrategysuitslongterminvestorswhohavethedisciplineand
resolvetoaccumulatestocksateverysizeablecorrectionorshorttermtraderswhohavefixedprofitandlosstargets.
"OnealsoneedstounderstandthatwhatmaylooklikeahugestakemaybeaminusculeportionoftheFII'sportfolio.So,
theycandumpafewstocksanytimewithoutabigimpactontheiroverallportfolio,"saysPatelofTataAssetManagement.
MYTH:THESTOCKWILLRISEWHENEVERPROMOTERSSHOWCONFIDENCEINTHECOMPANYBY
RAISINGTHEIRSTAKE.
Reality:Thereisnodirectcorrelationbetweenthetwo.IntheBSE500index,thereare270stocksinwhichpromoters
havebeenincreasingormaintainingtheirstakeforthepastfivequarterstillDecember2013.Ofthese,140gavenegative
returnsduringtheperiod.
PareshShah,managingdirector,equities,CentrumBroking,says,"Astockcanfallduetothecompanyreportinglower
earningsgrowthvisavisothersinspiteofpromotersshowingconfidenceinthecompany.Otherreasonscouldbefear
overfutureearnings,exitoffinancialinstitutionsduetopledgedsharesandawidespreadselloffindomesticandglobal
markets."
TakeReiAgro,RuchiSoyaIndustries,ParsvnathDevelopers,JBFIndustriesandFutureRetail.Thesestocksfellover30%
thisyeartillMarch3despitepromotersincreasingtheirstakesinceDecember2012.
RajeshSharma,director,CapriGlobalCapital,says,"Followingpromotersisperhapsoneofthebestpossiblewaysof
investing.Butitrequiresalotofhardwork."
Beforefollowingthestrategy,hesays,onemustlookatdisclosuresaboutthepromoterandthemanagement.The
company,ifitistoqualifyasaninvestment,shouldhavemanageabledebtandgoodbrandsandproducts.Also,onemust
seehowthemanagementandthestockhavebeenperformingindownturns."FollowingpromoterslikeAjayPiramaland
Mahindrashasbeenrewardingforinvestors.Butifyoudon'tunderstandthecompanyanditsbusinessmodelandhave
notdoneproperduediligenceaboutpromotersandtheirbusinessassociates,youruntheriskofsufferinglosses."
MYTH:MOSTPEOPLETHINKTHATCOMPANIESTHATAREGOINGPUBLICAREFLOURISHING.
SECOND,THEISSUEPRICEISTHEFAIRVALUEOFTHESTOCKANDONECANNOTLOSEMONEYBY
INVESTINGATTHATPRICE,ANDLASTLY,IFTHEISSUEISOVERSUBSCRIBED,THESTOCKISA
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'MUSTBUY'.
Reality:Somecompaniesgopublicataveryearlystage,beforeprovingtheirfinancialfeasibility.Therefore,itis
importanttoknowwhetherthecompanyisraisingmoneyforexpansionorclearingdebt.Youmaywanttoavoidtheissue
inthelattercaseunlessyouareconvincedaboutthefeasibilityofthebusinessmodelandotheraspectsofthebusiness.
Manybelievethatinitialpublicoffer,orIPO,pricesarefairandsobuyingatthisstageisthesafestwaytomakemoney.
ChethanShenoy,vicepresident,investmentproducts,AnandRathiPrivateWealthManagement,saysthisisnottrueasa
company'sfairvaluecanbecalculatedonlyaftertakingintoaccountvariousfinancialparametersandtheoverall
economicenvironment.Therearemanygoodandpopularcompanieswhoseshareslistedbelowpricesatwhichtheywere
allottedinIPOs.
Listinggainscanbeexpectedonlyinbullmarketsorwhenthemarketsentimentispositive.Forexample,in2007,when
themarketswerebullish,100companiescameoutwithIPOs.Quiteafewgeneratedtripledigitreturnsonlisting.The
examplesareEveronnSystems(241%),Alliedcomputers(214%),ReligareEnterprises(182%)andMundraPort(118%).
Similarly,inthebearmarketsof2008&2011,TreeHouse,ReliancePowerandOmkarSpecialityshareslistedbelowtheir
issueprices.In2008,nearly50%IPOsgavenegativereturnsonlisting,whereasinthebullmarketof2005just12%IPOs
gavenegativereturnsonlisting.In2005,theSensexhadrisen42%.In2008and2011,itfell110%and25%,respectively.
Shenoysaysoversubscriptiondoesnotguaranteehighreturnseither.Misreadingtheinitialdemandforapublicissuecan
havedamagingconsequences.Thisisbecauseoversubscriptioninitselfdoesnotprovethatthesharesarefairlyvalued.
WhilethereareenoughinstancesofIPOinvestingworkingforsmallinvestors,thereisnoshortageofcaseswherethey
havedisappointed.
Forinstance,CAREannounceditsIPOinDecember2012atRs750pershare.Theissuewassubscribed40.98times.The
stockendedthelistingdayatRs923.95,around23%higherthantheissueprice.Similarly,ICRAannounceditsIPOin
March2007atRs330pershare.Theissuewassubscribed75times.ThestockendedthelistingdayatRs797.6,over
140%higherthantheissueprice.
However,therehavebeensomebigflopstoo.ReliancePowerannounceditsIPOinFebruary2008atRs450ashare.The
issuewassubscribed73times.However,thestockfell17%onthelistingday.
ExpertssayIPOsshouldbeapproachedjustlikeanyotherformofequityinvesting.Assuch,investorsshouldfirstanalyse
ifthepriceatwhichthesharesarebeingofferedisright.Forthis,theycanlookatthePEratio,thepricetobookvalue,or
P/BV,ratio,earningsgrowthandprospectsvisavispeerstocheckiftheissueisundervalued,fairlyvaluedorovervalued.
SRanganathan,headofresearch,LKPSecurities,says,"AnIPOinvestorshouldalsostudythepromoterbackground,
competitivepositioning,pricingpowerandvaluationsothatheisbetterpreparedtotakeacallonlisting."
GuptaofArthvedasaystheIPOstrategydoesnotworkanymore.Thisisbecausetheissuesareoverpricedascompanies'
soleaimistoraiseasmuchmoneyfromthepublicaspossible,hesays.
MYTH:SOMEINVESTORSSELLSTOCKSWHICHAREABOVETHEIRPREVIOUS52WEEKHIGHON
EXPECTATIONOFACORRECTIONANDBUYTHOSEBELOW52WEEKLOWS.
Reality:Contrarianinvestorstrytobringthepriceofsecuritiesbacktotheirfairvaluebyadoptingstrategieslike"winners
arepunished"and"losersandpurchased".Accordingtomarketexperts,theinvestorwhoalwayssellsstockswhenthey
areabovetheir52weekhighsistakingahighriskinabullmarket,goodstockswillmovefirstandpoorqualitystocks
willfollow.Iftheinvestordoesnotknowthecorrectvalueofthestockbutwantstocreateashortposition,hemayend
withhugelosses.
However,inabearmarket,fundamentallypoorstockswilltouchnewlowseveryday.Buyingthesecanerodewealthas
thereisnowayonecanknowwhenthefallwillstop.Agoodexampleofthisisinfrastructurestocks,whichfell3075%in
thefouryearstoDecember2013.
SahilKapoor,chieftechnicalstrategist,retailcapitalmarkets,EdelweissFinancialServices,says,"Technicalanalysisis
baseduponthebeliefinbuyingstrengthandsellingweakness.Hence,ifastockhasmadeanew52weekhigh,itmeansit
hasstrongrelativestrengthcomparedtoothers.A52weekhighbreakoutafterconsolidationhasevenmoresignificance
asthereisarangeexpansionandthestockisreadyforastrongandasustainabletrend."
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Marketsgenerallypreferqualitystocksandthosewhichremainabove52weekhighsalwaysfinddedicatedbuyers.Stocks
whicharebatteredandunabletobouncefromlowsaregenerallynotfavoured.
"Animportantreasontoavoidbottomfishingin52weeklowstocksisthedifficultyofspottingwinners.Theprobability
oflosingmoneyishigher.Ifyouweretobuystocksmakingnewhighs,theprobabilitythatyouwillpickmorewinners
thanlosersishigher,"saysKapoor.
VarunGoel,head,portfoliomanagementservice,KarvyStockBroking,says,"Fundamentally,thereisnoreasonto
buy/sellastockifitisata52weekhigh/low.Sometechnicalanalystsdolookatthesefiguresbutjusttounderstandthe
momentuminthestock.Ifapersonisbuyingastockjustbecauseitisata52weeklow,hecouldfallintoavaluetrap."
Forexample,HindustanUnilever(HUL)madeanew52weekhighinSeptember2010bycrossingRs300after10years.
Investorswouldhaveearnedhandsomereturnseveniftheyhadboughtthestockattheselevels.Thestockrosemorethan
100%afterthattotouchanewhighofRs718.90inJuly2013.InMarch,itwasatRs555.
Similarly,IVRCLmadeanew52weeklowin2010bybreakingtheRs140level.OnMarch4,itwastradingatRs11.06.
"Investorsshouldmaintaina57%stoplossonceastocktouchesa52weekhigh.Ifthestrengthandrangeexpansion
persist,thereisahighprobabilitythatthestockwillgive20%plusreturnsinthemediumterm.Onlythosewhohave
tradingskillsanddisciplineshouldusetheabovestyle,"saysKapoorofEdelweissFinancialServices.
MYTH:PENNYSTOCKSARESOCHEAPTHATTHEYCANMAKEAPERSONRICHOVERNIGHT.
Reality:Thereareanumberofpennystockswhichhavemadeinvestorsrich.Forexample,CoreEducation&
Technologies,whichwastradingatRs12paiseon1March2004,rose122timesin10yearsittouchedRs14.44onMarch
3thisyear.
Ontheotherhand,SMSTechsoft(India)hasfallenover76%inthepast10years,andwasatRs0.09onMarch3this
year.NuTechCorporationServicesfellover66%duringtheperiod.
Apennystocknormallytradesataverylowprice,usuallybelowRs10,orisissuedbyacompanywhosemarket
capitalisationislessthanRs100crore.
"Pennystocksarerisky.Chancesofhugeprofitsusuallycomewithevenbiggerchancesofsufferinglosses.Hence,itis
bestfortheriskaversetoavoidthesestocks.However,iftheinvestorhastheriskappetite,hemusttakepainsto
understandthecompany'sfinancialsandtherisksinvolvedanddecidethehorizonforwhichhewishestoholdthestock.
Pennystocksmayyieldgoodreturnsduetochangesinbusinessfortuneormanagement,favourablepolicychangesor
takeoverbyagoodcompany,"saysYashpalGuptaofIDBICapitalMarketServices.
Accordingtoexperts,pennystocksarenotgreatoptionsifoneislookingforawaytogetrichquickly.Whenoneinvestsin
pennystocks,ahugeprofitisn'tguaranteed.Justbecauseastockischeapdoesnotmeanthatitisagoodbargain.Hence,
investorsmustdothoroughresearchandbereadytoholdsuchstocksforlongperiods.
Theotherreasonforbuyingthesestocksisthattheseareavailableatlowpricesandcanbeboughtinhugenumberswith
asmallcapital.Peopleperceivethesestockstobe'cheap'andawaytoovernightfortunes.
RakeshGoyal,seniorvicepresident,BonanzaPortfolio,says,"Stockscannotbetaggedascheaporexpensivesolelyonthe
basisoftheirmarketprice.Stocksarevaluedonthebasisoftheirfundamentalstheirnetworth,businesspotential,
incomegrowth,etc.So,ifastockistradingatalowprice,itisprimarilybecausemarketsdonotvalueitmuchinterms
networthorgrowth.Thus,everypennystockmaynotbeabargain.Peoplealsobuypennystocksinthebeliefthatasmall
additiontothepricecanbringinhugeprofits."
Forexample,ifsomeonespendsRs10,000tobuyastockvaluedatRs2ashareandifthesharepricereachesRs3,hewill
earnaprofitofRs5,000onaninvestmentofRs10,000.However,forthestocktogiveareturnofRe1,itwillhaveto
moveby50%inaparticularperiod.
Incaseyouarekeentobuyapennystock,itisadvisablethatyoustartonlyafterreadingthecompany'sfinancial
statementsanddoingproperresearchaboutbusinessplansandstrategy.
"Oneshouldstopinvestinginthestockwhenthecompanyisnotperformingwell.Further,ifthereisnegligiblepossibility
ofacompanyturningaround,thenalsooneshouldstopinvestinginsuchstocks,"saysYashpalGuptaofIDBICapital
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