Monday, June 23, 2008

Should you invest in Mutual Funds?

I will give you an idea of underperformance of several mutual funds over the last two years compared to their benchmark indices. The NAV of the mutual funds have been taken on 20 June. Sensex was at 14571.29 and BSE500 was at 5747.63 on 20 June.

SchemeLaunch DateMutual Fund ReturnSensex ReturnBSE 500 Return
UTI Contra Fund22 March 2006-0.016%10905.2 33.62%4355.5 31.96%
Reliance Equity Fund RP(G)7 March 200624.7%10735.36 35.73%4286.73 34.08%
UTI Leadership Equity Fund30 Jan 200625.2%9919.89 46.89%3982.17 44.33%
ICICI Pru Fusion Fund27 Feb 200610282.09 41.71%4113.14 39.74%
SBI Blue Chip Fund20 Jan 200612.1%9520.96 53.04%3892.38 47.66%
Franklin India Smaller Companies Fund14 Dec 2005-0.013%9241.76 57.67%3745.57 53.45%
HDFC Long Term Equity Fund27 Jan 200610%9870.79 47.62%4005.33 43.5%

The schemes cover from all the different mutual fund houses, ICICI, HDFC, Franklin, SBI and UTI. Nobody has been able to outperform the indices over the last 2 - 2.5 years. Is it a better idea then to invest in Index funds?
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Thursday, June 19, 2008

What can bear market do to stock prices

I want to highlight in this post the severity of bearish phase of 2001-2003 on the Indian stock market. I will explain with two examples.

The first one is CRISIL. The company had an earnings of around INR 16, 20.17, 20.84 and 15.59 in 1997, 1998, 1999 and 2000 respectively. The stock price reached a high of INR 825 in December 1999, that comes to be a P/E of 40. In the brutal IT bust, the stock price went down to 96, a P/E of less than 5 and it remained below 150 for the rest of 2001. Today it is trading at 3500. The consolidated earnings have increased to 117.8. In 7 years, the company made more earnings than what its market capitalization. A person who would have bought the stock at 200 at a P/E of 10 would have seen his capital eroded by 50% in 2001-2002.

The second one is Blue Star. The company had earnings of around INR 8.21, 8.62, 9.04 and 12.92 in 1997, 1998, 1999 and 2000 respectively. The stock price reached a high of INR 233 in January 2000, that comes to be a P/E of 20. In the bust, the stock price went down to 18.7, a P/E of less than 2 and it remained below 40 for the rest of 2001 and most of 2002. The company paid INR 4.5 and 5.5 as dividend in 2000 and 2001. In two years you would have got 50% of your capital back. Today after a 5:1 split, the stock is at 400. Company made 5 times profit this year than what its market capitalization was in 2001. A person who would have bought this stock at a P/E of 10 at a price of 100 would have seen his capital eroded by 80% in 2000-2001. Even Benjamin Graham and Warren Buffet would have got scared and sold these stocks.

Both this examples say only one thing:
Stop seeing the ticker on CNBC-TV18/NDTV-Profit/Zee Business. You may commit a mistake of selling a future Blue Star or CRISIL.

Those people who would like to compare these stocks with L&T, GMR and JP Associate today should see that even after the correction of 50%, they are not even below P/E of 30. JP associate at a price of 160 is trading at a P/E of 40 even after 70% correction from peak of 525. GMR at 100 is trading at a P/E of 80 even after correcting 60% from a peak of 250.
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Wednesday, June 18, 2008

What happens when a stock lose investor interest

Benjamin Graham had seen a long history of US stock markets, almost 35 years, before he published the first version of Intelligent Investor. He had put a big emphasis on never paying more than 20 times last year's earnings for a company and 25 times average last seven years' earnings. This seemed to be a severe restriction for Indian markets since, excluding commodity companies like steel,cement,oil&gas etc., all the other companies in Sensex were trading much above a P/E of 20 after October 2005. That P/E has still not come down below 20 in June 2008, a period of almost 32 months. But if you see outside the Sensex, you will be able to find a lot of companies trading above a P/E of 20-25, now trading at a P/E of single digit. For example

Automotive Axles touched a P/E of 28.5 (at a price of 820) in March 2006 and now trading at a P/E of 7.6 (at a price of 275)
ZF Steering Gear touched a P/E of 19.9 (at a price of 900) in August 2005 and now trading at a P/E of 5.2 (at a price of 160 after 1:1 bonus)
Gateway Distriparks touched a P/E of 64 (at a price of 300) in November 2005 and now trading at a P/E of 11 (at a price of 92 after 1:4 bonus)

Automotive Axles pays dividend of INR 12.5 giving a yield of around 5%, ZF Steering Gear pays dividend of INR 8 again a yield of 5%, gateway distriparks pays dividend of INR 3 giving a yield of 3.25%.

These stocks were not a buy in 2005/2006 but I think today they are all worth taking a risk. There is a big question of oil prices looming large over auto and logistics industry. But it seems that it is priced into the stock prices. Remember that the companies have increased their profits by almost 30%(for automotive and zf) to 130% (for gateway) during this time frame. So it's not just the contraction in prices, it is also increase in profits that have brought down the valuations.
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