Ashish Chugh - Hidden Gems

Chugh is a chor to Many people. Please keep that in mind before reading his views

March 12, 2007

Market View

Though March- early April look to be a good month to BUY; a further short term correction from these levels is not totally ruled out.

The markets have been badly battered in the last one to two months - it has been a across the board fall - be it large, mid or small caps -infact small and mid caps have been the worst hit with many of them loosing 30-50% of their values.

We feel the markets will consolidate over the next few days with increased volatility. The short term bias of the markets looks negative. With fear and uncertainty engulfing minds of investors & March being a month for tax planning and a time when brokerages try to reduce leverage to clients, a further drop from the current levels is not totally ruled out. However, the drop will provide an opportunity to accumulate.

What could trigger a rise :-

¬ Corporate Result Announcements - Announcement of good numbers from corporates and guidance would be a key for lifting the sentiment.

¬ The second and the more important trigger would be indications from the government regarding reigning in inflation & indications on end to high interest rate regime by announcement of appropriate monetary policies. Even a small drop of 25 basis points in interest rates would have a huge positive impact on the market sentiment, since it would signal an end to the uncertainty regarding a continuing high interest rate scenario.

¬ Global Liquidity/ Global Markets- We had seen a selloff in the Indian markets as a part of selloff in markets globally. Improvement in global sentiment would be a trigger for the Indian markets.

What to Do ?

The month of March looks like a good month to make investment and I am sure you will not regret if you look back after a few months - however there could be some more short term pain. Investors can therefore choose to stagger their purchases buying on dips/ on bad days. A short term correction from these levels looks likely and we believe a worst case short term scenario could be a sensex level of around 12000.

For the benefit of our new subscribers, we are giving here the nuances of investing in small and mid cap stocks and a few handy tips for the investors investing in such stocks :-

(Our old subscribers would have read this on earlier occasions too)

Investing in Mid & Small Cap Stocks



A number of our subscribers who have enrolled for Hidden Gems are first time entrants to the world of Equity Investing.

With the volatility being witnessed in the markets currently, many of them get swayed by the sentiment, getting in at the top and then selling out in panic, since everyone on the street starts giving bear market call, making a loss on their investment in the process.

Investors should realize that investing in Small & Mid-sized companies carries greater risk compared to the Large Caps.

Company Risk

Investing in Small & Mid Caps is based on the premise that these companies will increase their earnings and grow into larger, more valuable companies. However, as with all equity investing, there is the risk that a company will not achieve its expected earnings results, or that an unexpected change in the market or within the company will occur, both of which may adversely affect investment results.

Volatilty

Historically, small & mid-cap stocks have experienced greater volatility than other equity asset classes, and they may be less liquid than larger cap stocks. Thus, relative to larger, more liquid stocks, investing in mid-cap stocks involves potentially greater volatility and risk. The biggest risk of equity investing is that returns can fluctuate and investors can lose money.

Liquidity risk

Midcap stocks in general, trade in lower volumes than large-cap stocks, and this would render them more illiquid. Especially in the event of the market turning bearish, investors find the Small & Mid caps difficult to sell due to the absence of buyers. This may result in the stock price coming down substantially even on slight selling.

Besides, the other factors that increase risk are -

(a) Lack of Information on what's happening in the companies - since in most cases , the information disemmination platform for most companies is the Annual Report. Further, the disadvantage of small & mid caps over large caps is that the media actively covers the large caps.

(b) Earnings Volatility - Owing to their relatively small size, volatile growth/de-growth patterns are almost immediately reflected in their stock prices and valuations of Small/ Mid Caps.

(c) Management Concerns - Incase of many small & Mid-cap companies, the management concern may be a major factor in the minds of shareholders since very less is known & written about them.

A few Handy Tips for the Investors :-

¬ Donot invest in Equities with borrowed funds.

¬ Donot invest with funds which you may require for monthly household expenses or for other important financial commitment over a shorter time period say - daughter's wedding after a few months, child's education, buying a house etc...

¬ Diversify your portfolio, - as they say Do not put all your eggs in one basket.

¬ Keep booking profits on a regular basis.

¬ Contrary to the popular belief, investing in IPO also carries risk - Many investors tend to think that investing in IPO's is totally risk free with the perception that the stock once it starts trading cannot go below the IPO price. Some IPO investors also go to the extent of leveraging their position by putting in a margin towards IPO application with the rest being funded by the bank. The strategy may make good money for them depending upon at what levels the Stock Price opens and the ratio of allotment to the shares applied, however investors have to realise that in the event of the stock price moving down and the ratio of allotment being low, the investor may end up paying a substantial amount to the bank towards interest cost, thereby loosing heavily in the process, in some cases a substantial portion of the capital invested by him. So, with so many IPOs being planned and the promoters becoming greedy wanting the maximum possible premium for their shares, INVESTORS BEWARE.

Profit Booking - The only way to take money back home

Profit booking on a regular basis is a strategy will will take away a lot of pain in the event of a market fall/ correction. We would advise profit booking if the gains come in pretty much pretty soon. There are many cases on stocks recommended to our investors which have appreciated significantly - one can choose to book atleast part profit/ full profit depending upon one's temperament/ risk profile etc. Take for example- Vijay Shanthi Builders, which was recommended at Rs.25-30 & went to a high of Rs.185 only to fall back to Rs.75-80 levels Or Country Club which was recommended at Rs.80 and went on to touch Rs.450 to fall to Rs.250. Or Confidence Petroleum which went up from Rs.2 to Rs.9 to fall back to Rs.5. One could have atleast booked part profits in such stocks. As a thumb rule, we would advise investors to sell atleast 50% of the holdings if the stock appreciates by 75-100% so that there is less pain in case of a market fall. And incase the stock appreciates significantly even from your sale levels, you still can enjoy profits on your balance holdings