Managing a Stock Portfolio

In an earlier post, I had recommended Wockhardt Ltd (WOCKPHARM.NS) - an India Pharma-Biotech company as my share pick at Rs380. While this is definitely a good stock to invest, I got the timing wrong. The market went into a minor correction last Friday - December 8th to December 13th 2006. During this correction, the stock fell to Rs 330.

Since my recommendation is for long term - one can ignore minor corrections and continue to hold or take some reactive steps to lower the cost of acquisition.

The first step to do when buying a stock is to place a stop order if the stock falls by 1-2% from the acquisition price. In this case, have a stop order at Rs 375. After the sell order is executed, watch the stock and the market index and the sector stocks carefully. Once if the stock price stops falling and starts to raise - jump into a buy immediately ( buy with another stop order in place).

This Buy-sell-buy routine will lower the cost of acquisition of the shares - even when including the transaction cost of Rs 20 per trade. In this case lets see the Buy-sell-Buy routine and valuate the effective cost of acquisition. (decimal values are ignored for simplicity of calculations)

Buy 10 shares at Rs. 380 = Rs. 3820 cash outflow (Rs. 20 is transaction fee)
Sell 10 shares at Rs. 375 = Rs. 3730 cash inflow (Rs. 20 is transaction fee) - A loss of Rs 90.
Buy 10 shares at Rs. 330 = Rs. 3320 cash outflow.

This results in a net acquisition price of Rs 341. Vs an earlier acquisition price of Rs 380.20!

Another very important piece of Advise: Never invest in a stock - based solely on someone’s recommendations. Do your research. Read the company’s financial reports for last 3 years, news reports, and do some financial analysis before investing in any stocks.

Banking Stocks to Invest - ICICI Bank & HDFC Bank

In my earlier post, I had mentioned the hot sectors to invest. Among them, Banking sector was the top performing sector in Indian stock market. Naturally one would like to know which individual stocks to invest in banking sector.


Here my picks are ICICI bank (ICICIBANK.NS) and HDFC Bank (HDFCBANK.NS) are my one & two picks. Given the recent correction, the price of ICICI Bank & HDFC Bank has fallen a bit - making it an ideal time to invest.

The two year history for both the stocks show that these two stocks have performed equally well. Among the two, ICICI Bank is poised for a rapid growth into Indian rural banking segment, while HDFC will concentrate on urban areas. ICICI bank’s global expansion will also enable it to tap into another very profitable segment - NRI remittances. ICICI offers a lower cost of fund transfer to India from abroad when compared to Western Union. ICICI now has branches in USA, UK, Russia, Singapore, Hong Kong, Canada, Dubai, South Africa - in all 17 countries.

As Indian economy continues to grow at a healthy pace, Banking sector will do well - and so will the investors in this sectors.

RBI Hikes CRR by 50 basis Points

On Friday, RBI increased the mandatory Cash Reserve Ratio (CRR) of the banks by 50 basis points. This implies that banks should increase their cash holdings by a tune of Rs 13,500 crores. This will imply that less money will be available for loan disbursement by the banks - thus reducing liquidity in the market. The move is aimed to lower inflation rates to below 5% target. Current inflation in India is around 5.3% - which is above the government mandated target of 5%.

Impact on investors
Banks are likely to offer higher interests on deposits by 0.5% and there will be corresponding increase on interest rates charged on the loans. Also the net amount of money given out as loans for the subsequent periods will reduce - thus forcing banks to avoid lending to sub-prime borrowers.

An increase at this juncture will have a direct impact on real estate prices. With the interest rate increasing, the increase in the asset value will slow down.

Hot Sectors to Invest

Indian stock markets are seeing a bull run for the 4th year in a row. (this implies that a major correction is just around the corner) This bull run has been mainly driven by foreign institutional investors (FII). FII’s have invested more than $8 Billion in this year alone, and there is a lot more money coming in. With a lot more money chasing few stocks, the valuations on the existing good stocks have sky rocketed - the current average PE ratios of 22.57 are too high for Indian standards. ( this is nothing when compared to NASDAQ in the Dot.com boom days where the average PE ratio was ~35) Nevertheless, high valuations are a concern.

Of the top performing sectors in BSE sensex, only three sectors have outperformed the Sensex: Banking, Media/entertainment & telecom, and IT. Even the famed Biotech/Pharma stocks have under performed the stock index in 2006. In my thumb rule of investments, any investment that has returned more than 24% is worth investing in - mainly to diversify the portfolio. Even among these sectors, I would invest only in the top performer in each category. So the sectors to invest in are:

1. Banks 74.1%
2. Telecom/Media 69.9%
3. IT 66.4%
4. Capital Goods 49.9%
5 Oil & Gas 38.8%
6 Metal 31.8%
7 Consumer Durables 31.4%
8 Health care 29.6%
9 Automobiles 28.7%
10 Consumer goods 24.9%

When compared to BSE Sensex has provided a return of 50.4% since June 2006.

Given the steady growth of the Indian Economy, all the above sectors are poised for strong growth. So investing in select companies in 6-7 of the above sectors will result in a balanced growth oriented investment portfolio.

Eight Indian mutual funds in world's top 10

http://timesofindia.indiatimes.com/articleshow/482135.cms

Eight Indian mutual funds in world's top 10

1 Reliance Growth Fund(Ind) 35.21%
2 HDFC Equity Fund(Ind) 34.29%
3 Franklin India Bluechip(Ind) 32.18%
4 Principal Personal Tax Saver(Ind) 32.1%
5 Birla Sunlife India Advantage(Ind) 31.88%
6 Franklin India Prima Plus(Ind) 31.8%
7 Russian Prosperity(Russia & CIS) 31.8%
8 HSBC GIF Indian(Luxemberg)(Ind) 31.42%
9 Reliance Vision Fund Growth(Ind) 30.46%
10 Hermitage(HSBC Mgmt Ltd)(Rus & CIS) 28.2%

In the medium to long term, Indian mutual funds have rewarded their investors better than any other fund in the world. Whether we look at a time period of 10 years, five or three years, the majority of the ten best performing equity-oriented funds in the world are from India. Over a 10-year period, Indian funds have grabbed 8 of the top 10 ranks. Over the last five years, they account for 7 of the top 10 and six over a 3-year period. MF data back India story Russian MFs are the only non-Indian funds to figure in the list of top 10 performers over 10-year or 5-year periods, a report by Lipper, a leading market research agency, said.

In the list of top funds in the 3-year category, however, they had to make way for funds from Korea and Norway. If one takes a short-term view, there is no Indian fund among the top 10 global performers over the last year (November 1, 2005 to October 31, 2006). Interestingly, the period was among the best periods ever for the Indian markets, with the sensex rising by 64.2%. The best performer over the five- and ten-year periods is Reliance Growth Fund, which had given a compounded annual return of 71.38% and 35.21% in the last 5 and 10 years respectively against the sensex's 34.10% and 15.14% respectively. All returns have been calculated in dollar terms.

In rupee terms, this means that if you had invested Rs 1 lakh in Reliance Growth Fund as on October 31, 1996, your investment would have increased by over 20 times to Rs 20.42 lakh. And, if you had invested the same amount in 2001, the amount would have increased by around 15 times to Rs 14.79 lakh. The other top seven Indian funds in 10 years have also given compounded annual returns of over 30%. In the 5-year period, the returns remained in the range of 57-70%. In the back drop of around 34% and 15% returns from sensex during the 5- and 10-year period, the returns given by Indian mutual funds could be seen as very good, said a merchant banker.

However, according to Morgan Stanley Capital International (MSCI) index, over the 10-year period, the Russian market has performed better. While Russia's MSCI index improved by 22.29% in the last 10 years, the Indian index went up by 18.65% per annum compounded annually.

How Much Cash should One Keep in the Bank

Often in an investment plan, one fails to allocate enough cash resources in the investment mix. The amount of cash one needs to have in the bank should be based on: both short term needs - such as upcoming travel expenses, medical expenses, holidays, parties, family/religious functions etc. (note that I am writing this in an Indian/Asian context) and long term needs to be considered are - down payment on the house, weddings, buying a car, buying consumer durable (TV, Fridge, furniture, etc.,) and annual religious festivals.

Having sufficient cash reserves is the surest way of preventing expensive borrowings on the credit card. Most people borrow from credit card only because they do not have enough cash reserves. Note that credit card borrowings are the most expensive - with an average interest rate of 21%. The interest rate charged by the credit cards are much higher than the average returns on investing in stocks.

As a rule of thumb, the most prudent financial planning calls for maintaining at least three months of income as cash reserve in the bank.

Wockhardt is my pick in Pharma-Biotechnology space

Wockhardt Ltd (WOCKPHARM.NS) - an India Pharma-Biotech company is my share pick. The company has shown considerable growth in the last two years, and given the last quarterly results, the company is poised for a growth rate of over 20% for the financial year 2006.

Given the current share prices at ~ Rs 380, it is an attractive buy for long term investments. The current problems associated with Wosulin will be a temporary one. See chart.



Company has a global mindset with a well distributed revenue stream - from Europe, US & India. R&D centric approach to market, having a highly talented & culturally diverse workforce will help the company in good stead in the future. The company spends substantial amont on R&D - approx Rs 1.04 Billion or 7.4% of revenue. While this does not compare favorably with global pharma gaints, but this a lot better when compared to other Indian pharma companies - Cipla spends about 5% of its revenue on R&D.

The company has a highly talented workforce with about 400+ scientists including 100+ Ph.Ds. This allows company to focus on biotech research and develop new products focused on Diabetes, hepatitis-B, and Cancer. The results of this focus can be seen in the number of patents filed (215+) by the company.

Summary

The current share price of Rs 380 is an attractive buy for a long term investments. The expected return on this investment will be around 20-25% over the next year.

Create a Children Education Fund

Few months ago - May 4th 2006 to be exact, my beautiful daughter Shwetha was born. It was a happy momment and everyone rejoiced. After a few months when things settled down - a new realization set in - I needed to plan for her future. One of the most important thing I need to provide as a father is for her education. Given the rising costs of college education, I had to plan an investment program for her college education. I reckon that she will need atleast Rs 50 lakhs (or Rs 5 Million or $111,000) for her college education.

The plan I drewup for her education fund is as follows:

Invest Rs 5000 per month in a market linked investment fund which returns 12% on the investment. If I invest for 20 years this investment will be worth Rs 50 lakhs (or Rs 5 Million or $111,000) which will be used for her college education.

This money will be invested with a market linked investment fund from ICICI Lombard. The fund currently has a 23% CAGR over the last 5 years. I am assuming the net return over the period may be around 12%.

Welcome

This blog is dedicated for analysis of investments. Mainly stock investments, mutual fund investments and other bank instruments. In this blog I will mainly write about financial analysis and how my investment decisions are based on these analysis.

More to come.....