Entry Price – THE Criteria

Now that everyone and his/her neighbour’s uncle have become an expert in the Euro crisis, having views on how the currency should or should not be pegged, how Greece can avoid bailout, how Goldman rules the world, why Paris Hilton came to India and some such, macro-economic views have no dearth of attention.  Instead, let’s refrain from the pack, and talk about the micro – specifically, why not look at some of the blue chip companies in India and see how they were doing over the past one year and probably learn a lesson or two.

We also know that RBI has been increasing their repo and reverse repo rates (whatever they might mean – but they do mean my loan rates are going up; not necessarily my deposit rates) due to increasing inflation (you know, commodities are at an all-time high, petrol prices are market-linked, food is rotting and yet food prices are high and all that). Given that information, we derive that all real estate and infrastructure companies are in trouble (you know, they have a ton of loans and interest rates are increasing – which means instalments increase and they don’t have money to pay). Therefore, many of these infrastructure companies and real estate companies stock prices will take a beating (and they have and how!). Also, since these infra and RE companies won’t pay, the Banks who have lent (primarily, Govt. banks, although ICICI and Kotak are right up there with them) to these companies are in trouble due to bad loans, provisioning for these loans and hence lower profits etc. Therefore Banking stocks have also taken a beating.

Given all this, let’s exclude the real estate, infra and banking stocks from the list below and see how some of the blue chip companies  (all the listed companies are in the BSE ‘A’ group) have fared over the last year.

Company Current Price Price 1 yr back Loss% Gain to be made for break-even
Jet Airways 263 835 68% 217%
Educomp Solutions 224 615 64% 175%
Bharat Heavy Movers 470 1106 58% 135%
PFC 144 345 55% 140%
Pantaloon 230 504 53% 119%
Reliance Comm. 81 170 52% 110%
Crompton Greaves 154 321 52% 108%
REC 174 345 50% 98%
Sun TV 275 527 48% 92%
SBI 1998 3155 37% 58%
BHEL 1643 2460 33% 50%
Tata Power 100 144 31% 44%
Tata Motors 155 215 28% 39%
Maruti Suzuki 1094 1494 27% 37%
Reliance Industries 791 1008 22% 27%
NTPC 164 211 22% 29%
Infosys 2453 3050 20% 24%

(I have slyly included SBI in the list)

Majority of the financial literature says that when it is a good and sustainable business, just buy and forget about the stock. Explain to me which one of these stocks do not count under ‘not good, not sustainable’ businesses. I agree that 1 year is a very short time frame to look at some of these stocks. However, people who have entered at last year’s prices would do well to look at the ‘gain to be made for break-even’ column and realize the stock has to move up approx. 1.5-3 times from current levels just to break-even.

Time and again, we are taught to invest in good, sustainable businesses. What we are not taught repeatedly is to check the entry price before investing in any particular stock. I am not being a retrospective determinant here – I am equally, if not more guilty to invest with the crowd sometimes. These losses don’t help in a couple of ways a) Gain to be made is much greater than the loss incurred just to break-even b) This loss, if realised, imagine the amount it could have compounded to in a fixed deposit and c) imagine the opportunity cost of investing in some other stock at reasonable price. (ok, that was three)

Moral of the story: Entry price, Entry price, Entry price. Check the damn thing whether it is reasonable or not before you bet on any stock. (A typical stock idea with more than a reasonable price right now is Jubilant Food Works – but then again, that’s my analysis. Your analysis might point to it being a multi-bagger from the current price)

Question: Since all these are good businesses, can I average down so that my effective purchase price is lower – you know in line with Buffett’s ‘invest in a good business at a fair price’ principle?

Answer: Sure you can – if you have the disposable income, if your analysis points out that the stock will make money in the future even from your average-d price.

Personal opinion: Never bet on any airlines. I don’t think they can make money. I am positive on Sun TV and SBI if there are further corrections.

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  1. #1 by Venkat on September 30, 2011 - 4:13 AM

    Nice one kiran…
    I will never bet on airline stocks since they require huge capital and dont make enough money…
    SBI is a very good bet..Sun TV i still have doubts because of the ongoing allegations..
    REC looks good for entry…
    Among the Infra Pack Gayatri Projects looks good for me…any say on that

    Thanks
    Venkat

    • #2 by kdaaku on October 1, 2011 - 12:45 PM

      Hi Venkat,

      If the allegations were not there (or if the Marans were still in power), Sun TV wouldn’t have been beaten down to a bargain, would it? 🙂

      As detailed out in my previous posts, am a little negative on the power generating and power financing companies in general for now. Maybe its become a bargain – haven’t checked off late.

      Haven’t really looked at gayatri projects (could you send me any details on this?). Among Infra, I like Pratibha industries.

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