Credible Stock Market Tips for October 2017

Investors look forward to credible stock market tips at the beginning of every month for investing. The stock news is full of junk tips from equally rubbish quacks. So what the investors are looking for is credible stock recommendations. So, as usual, I write this monthly article providing reliable stock market tips based on sound logic.

This month, October 2017,  I have liberalised the rules for buying stocks a bit.

Why?

Because the market is too hot. Perhaps there is excess liquidity in the market? Of course there have been a few crashes in September but still, the stock market is at a high. The scorching markets have made stocks expensive across the board. And if we don’t make the belt loose we will not be able to buy any stocks and do justice to the good companies listed in the ‘Portfolio2K15‘.

As in the last month, I have tightened the dividend yield criterion this month too. But unlike last month, this month I set a hurdle rate of a minimum 4.00% dividend yield. Only those stocks that jump over this hurdle will get allocation under this category.

I have set a liberalised yet strict rules such that besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the four criteria prescribed below:

1. The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalization from a stringent 1.00 earlier.
2. The Price to Earnings (PE) Ratio shall be below 15. This is again liberalization from the tough hurdle of 10 earlier.
3. The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
4. The Dividend Yield shall be more than 4.00%. This is tightening from the last month’s 3.50%. Further, a mere good dividend yield is not sufficient. In addition, the stock must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BV criteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investable sum is taken as multiples of 20,000, that is Rs.20,000, 40,000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 20,000 is equally distributed among the four criteria at Rs.5,000 each or multiples thereof.

Summary of Stock Market Tips/ Recommendations

This October 2017 all the stocks constituting our Portfolio 2K15 qualified, however National Aluminium Company Ltd., whose price had appreciated throughout September, though managed to qualify could not earn enough allocation even to buy a single share! On the other hand MOIL Ltd., which could not earn enough allocation for many months in past made the mark this month.

13 stocks qualify for investment in October 2017. An unlucky 13? Please don’t bother. I assure you that these 13 stocks will be the luckiest thing ever happened to you.

Stock Market Tips Based on Price to Book Value Ratio

Let us examine the stocks under the important price to book value ratio criterion.

Stock Recommendation Based on Price to Earnings Ratio

Please see the table depicting the stock recommendation based on price to earnings ratio criterion.

Stock Market Tips Based on PE x P2BV Criterion

The product of the price to earnings and price to book value ratios is also an important criterion. As per value investing principles, this number shall not be more than 22.5 (1.5 * 15). Let us see what stocks pass this test.

Stock Recommendation Based on Dividend Yield Criterion

The dividend yield is an important aspect in stock selection. Let us see how our stocks fare under this key criterion.

We see that five of the 14 stocks could not pass the hurdle.

Conclusion

To conclude my stock recommendation for this October 2017 is to buy the 13 stocks in the recommended numbers for each 20000 of your investment. Happy Deepavali and investing!

What is the Meaning of Small Cap Stock?

Small-Cap stocks means those stocks with a small market capitalisation. Market capitalisation means the market value of all shares ((outstanding) of a company. 

There is no single, precise definition of small cap. It varies from country to country as well as between various brokerages within the same country.

For example, as per Investopedia a company that has a market cap of US$ 300 million to 2.00 billion (approximately Rs.1800 – 12000 Crores).  However, the Economic Times, the popular financial newspaper in India, defines small cap as a company having market cap of less than Rs.2000 crores.

Let us examine how the Bombay Stock Exchange (BSE) deals with the subject. BSE Small Cap Index comprises of small cap companies listed on the BSE. The small cap companies constituting the index and occupying the top five ranking and weight are as follows with market cap of quite different sizes:

In conclusion small cap stocks means those stocks with small market capitalization or market cap. There is no precise definition for what actually constitutes small, though.

How to Choose the Stockbroker?

Actual Question:

Which is better for a long-term investment, Geojit or Zerodha?

Answer:

Dear Friend!

You have raised a very important question which needs serious consideration. The question I presume revolves around the brokerage fees charged by the stock broker firms. I am sticking to cash delivery here, since I do not indulge in intra-day-trading and also because when you said long-term it should mean for taking delivery and holding the stocks for long.

I have an online trading account with Kotak Securities. The declared brokerage charges for cash delivery is 0.5%. But many times after seeing the big difference between the total value of securities I had purchased and the amount debited from my account, I had wondered whether I am being charged 5% and not 0.5%!

To be honest with you, so far I have not attempted to investigate the matter of brokerage charged by Kotak Securities thoroughly and completely. I strongly believe that they will charge only 0.50% that they have shown on their website.

Coming back your specific question of whether Geojit or Zerodha is better, presently Zerodha does not charge any fees on cash delivery. I believe that Geojit charges 0.30% for delivery based trading. Therefore obviously Zerodha is better, for every penny saved is two pennies earned. 

If you already have a trading account with any stockbroker, it is difficult to have another trading account as you must give a power of attorney (POA) to the stockbroker and giving two POAs creates conflicts. Zerodha had admitted to me that when two trading accounts are involved, I could only buy through Zerodha and any sale of securities can be effected only through my first broker, Kotak Securities.

An online trading account is a long term relationship and should not be based purely on freebies. 

Further and most importantly, a 0.50% or 0.30% or 0% is not going to have any significant impact on the long-term investments. What is important for making the important decision who is:

Size, Sponsor:

During great market crashes, many of the customers of stockbrokers, especially those indulging in margin trading become bankrupt and default. As a result, small brokerage firms’ financials get impacted severely and sometimes they also default. Therefore large firms sponsored by equally large organisations are preferable.

For example, Kotak Securities is sponsored by Kotak Mahindra Bank, might be in a position to honor its financial commitments.

Vintage:

Companies that have been in existence for a very, very long time are preferable.

Why?

Their long existence gives an indication that they had successfully weathered many severe financial storms in the past and may reasonably be expected to be resilient in the future.

Zerodha being a recent entrant does not have a long vintage.

Financial Means:

The stockbroker must have a strong, stable and reliable financial strength. You are entrusting your life’s savings with your stockbroker. There are two components of financial assets you are entrusting the broker with:

Hard cash you deposit in advance to buy stocks and lying with the broker. This is relatively a small sum though.

The value of stocks, which will surely amount millions in the case of serious investors over long periods of time.

In case the broker becomes bankrupt, your life’s savings are under serious risk.

Reliable Service:

• The software platform and other services should be reliable.
• The software should have minimum downtime.
• The broker  should provide reliable support through telephone, email and persoanl visits as and when required.

In conclusion, selecting a broker is not simply based on brokerage fees charged but a serious matter as the fate your hard earned savings and investments are in the hand of your stockbroker.

Thank you,

With Best Regards

Anand

Can one Invest in Inox Wind Stock after Steep Price Correction?

Actual Question:

Is now the correct time to buy Inox Wind shares, as the prices have dropped down to 167 Rs?

Answer:

Dear Friend!

Inox Wind’ shares have tumbled over 19% supposedly on the back of a 36% slide in Q4 net profits.

However, this is not the real reason to keep away from the share.

The main problem with this company is the fundamental change in it’s business model. In the statement announcing the Q4 results the company had admitted this when it said, “The industry is under-going a significant change in market dynamics by shifting from the FIT based market to an auction based market. Under the new scenario, our conventional order book loses its relevance, …”

Further, in the light of such a competitive environment, Inox Wind’s parent company Inox Renewable, it seems, has lost interest in the wind power project setting-up business and is focussing on manufacturing wind turbine. It has sold it’s entire portfolio of wind farms of 260 MW in March.

Inox Wind appears to have performed quite decently in the past and its past financial performance parameters appear to be quite decent.

• The EBDITA Margins in the range of 20-22% is good.
• EBT in the range of 17 -19% is attractive I should say.
• PAT margins of 12–16% is something one can’t complain. 

So where does the it's malady lie?

The company is facing bleak prospects not because of it’s performance but because of fundamental changes in the external environment.

In conclusion, despite the steep correction in the price and whatever maybe the reasons for the company’s future prospects, in the prevailing scenario of auction based bidding for wind farm development projects resulting in ever falling tariffs and other reasons discussed above, as per value investing principles, Inox Wind shares should not be considered for investment.

Thank you,

With Best Regards,

Anand