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Price to book value is an important ratio which is used by many analysts for valuing a company.  Some companies trade at higher price to book value, some trade at lower.  Book value is the value of equity, therefore what price to book value multiple a stock will get depends a lot on how much return the company is making on the equity capital.

Below is a method to judge the fair price to value of the company from its Return on equity. Its called the PB-ROE method. This method takes into consideration growth, cost of capital and ROE.

Growth: Here we will take the self-sustainable growth, which is the growth that the company can achieve without raising any further capital. It is calculated as

g = (1 – Payout ratio) * ROE

The payout ratio is the dividend payout which the company is making. We are taking here are the capital that will be left with the company after making the dividend payment. On mulitplying it with the company’s return on equity we get the self sustainable growth

Cost of Equity: Equity capital has some cost. The general cost of equity is

Cost of Equity C = risk free rate of return + risk premium

risk free rate of return is the return from FD or goverment bonds , the risk premium is the excess minimum return that we deserve for taking the risk of investing in equities. Can take it 5%

Cost of equity = 7=5 = 12%

Now the right P/B multiple can be calculated as

Price/Book Value Ratio = 1+ (ROE – g) / (C – g)

Lets take the case of Maruti

Current ROE is 16.3% and payout ratio is 31%

this gives the sustainable growth rate r = 16.3(1- 31%) =  11.2%

Price/Book Value Ratio = (16.3 – 11.2) / (12 – 11.2)    = 6.3

The current book value of the company is 1382  on multiplying it with 6.3 we get 8700 as the fair value of the company

Lets take another  case of Marico

Current ROE is 31% and the payout ratio is 67%

this gives the sustainable growth rate r = 31(1- 67%) =  10.2%

Price/Book Value Ratio = (31 – 10.2) / (12 – 10.2)    = 11.5

the current book value is 23.6 , the share price become 23.6*11.5 =  272

Note: This method can be used only for companies with stable ROE and sustainable growth.

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Nifty is an index of 50 companies. The price of nifty is determined by adding the price of these 50 companies in proportion to their weight in the Index. Below are the Nifty top 10 stocks

Top 10 Nifty  and Sensex Companies

1. Reliance Industries: This oil major company is the most expensive company by market capitalization in the Nifty Index. Reliance currently has a weight of 10.34% in the index. This means 10.34% of Nifty is Reliance alone. The market cap of this company is 880,888 Cr

2. Tata Consultancy Services: This is the second most valuable company in Nifty and also in Sensex. It has 9.17% weight in the index.

3. HDFC Bank: This is the most valuable bank in India. The market cap of HDFC bank is bigger than the market cap of all PSU banks combined. The weight of this bank in the index is 7.35%

4. Hindustan Unilever: This biggest FMCG company of India is the 4th biggest company in the nifty and sensex with a weight of 4.3%

5. ITC: ITC is India’s biggest tobacco and also FMCG company. ITC has weightage of 4.27% in the index.

6. HDFC: This is India’s biggest housing finance company and has a weightage of 4% in the index.

7. Infosys: This is India’s 2nd biggest IT company after TCS and is ranked 7th in the index with the weight of 3.89%

8. State Bank of India: SBI is India’s biggest PSU bank and 8th largest company in the index with the weight of 3.4%

9. ICICI Bank: This bank is India’s largest private bank and holds the weight of 3.1% in the index

10. Kotak Mahindra Bank: This bank hold the weight of 3% in the nifty index

So, these are the top 10 nifty and sensex stocks by their weight in the index. The combined weight of these companies in the Nifty Index is 52%. Therefore more than half of the index representation is done by these companies.

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Many companies gets into trouble sometimes and their stock prices drops hevility in short time. Some of the troubles are temporary and company gets out of them and the stock prices recover as well, but many troubles are permanent and company never recovers. It not easy to find whether the company can recover or not.

If the company gets out of the trouble the stock can multiply. Investing in such companies is high risk high return affair. To experiment with the falling knives companies I am here making a falling knive experimental portfolio of 10 companies and will see how they perform over a couple of year period. Not including any troubled company , we will see some fundamentals as well so that that there is some possibility of reocvery.

We will need a strike rate of 50% to make positive returns. Out of 10 , 5 should atleast double, 2 might go no where and 3 might go bankrupt. If half of the companies does well we can make a return of 20% on the portfolio.

Since these are the companies in trouble. I will not put more than 10,000

  1. Reliance Infra CMP 110

The company is one of the largest infra company in India. The stock price has fallen from 500 to 110. Fall is mainly because of one of the Reliance group company Rcom going bust. What is positive for the company is that it has an order book of 20,000 crore and current market cap is 2500 crore. The companies balance sheet has improved in the last 3 years and its debt has gone down from 30,000 crores to 16,000 crores. Considering the size of its order book the current market cap of 2500 gives the hope of recovery.

Disclaimer:
Please note, The above article is only educational in nature. It is my opinion and not a stock recommendation. All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. I

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Like any kind of investment requires some basic research mutual funds too. People usually invest in mutual fund on the mutual fund distributor recommendation or they invest by simply checking the top performing funds on the internet. This is not the right way to invest. Few basics things should be checked in the Mutual Fund always before investing

  1. Your time horizon

Investment in mutual fund should be as per your time horizon. If you want the funds back soon, then investing in equities is not a good idea for you. In general, if your holding period is less than a year then you should go for liquid fund or fixed maturity fund, if your time horizon is more than one year but less than three years then go for the balanced fund and when you are ready to give more than five years go for the equity fund.

2. Expense Ratio

Your mutual fund charges some fees for managing your money. That fees various from fund to fund. Higher fees will put some dent in your returns. Compare the funds in the category you wish to invest and look for the fund with reasonable fees.

3. Turn over ratio

Turn over ratio indicates how many times a the mutual fund manager is turning the portfolio. A higher turnover tells the fund manager is doing more buying and selling and a lower means he is doing less buying and selling. I prefer fund with lower turnover ratio. As investment in mutual fund is for long term I don’t want the manager to be doing trading like investment.

4. Number of stocks

Mutual fund typically holds lots of stocks. Too many stocks helps in limiting the fall but it also makes the portfolio rise limited when market do well. I prefer to avoid the funds holding more than 80 stocks in their portfolio. Also, check how much allocation is there in the top 10 stocks.

5.Performance

How the fund has performed in the past also matters. Here one should prefer the fund with slight out performance and not very superior performance. Very great performance specially in the recent year means, that fund will be getting lots of money from the investors. More money meas the fund manager is most likely to run out of good ideas and his performance in future won’t be that great like before.

6. Portfolio valuation

Many investors ignore this very important valuation factor. Check what is the average PE or P/B ratio of the portfolio. If this ratio is high the fund is most like to underperforme in future.

This was all from my side, if you believer there is something else to be checked do let me know in comments.

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Volatility measures the average movement that the stock gives in a day. High volatility means high movement low volatility There are thousands of stocks to trade in the stock market but, not every stock is a good stock for trading. Few things should always be kept in mind before selecting the stock to keep the probability of profit high.

1. High liquidity

A trader should avoid the stock with low liquidity. Low liquidity stocks have wide differences in the bid and ask price that makes it difficult to enter and exit at the right level. Such stocks can also give violent movement and can take away your stop loses easily. Therefore, select the high volume stock only for trading.

2. High volatility

means low movement. A trader doesn’t want to deal with the stock which doesn’t moves. So always check the volatility of the stock before entering any trade. Prefer the stock with daily average volatility of at least above 1.5% . You can check the volatility figures from the derivative section of any stock on the website of nse bse. For example, Tata steel has daily volatility of 1.7

3. A clear trend

Trend is the friend of a trader. Choose the stock which has a clear trend. It can be either bearish or bullish trend. Avoid the stock which is not showing any trend in the last 30 days.

4. No news flows

Any sudden news flows can make the stock go violent in any direction. Before taking the trading position make sure there are no news events are due like quarterly results, election results, RBI policy meet, merger acquisition etc.

5. No trading position in the first 60 minutes

In the early morning, the number of participants in the market is very less. Early morning movements are usually not reliable.  So take your trading position only after 60 minutes from the market opening.

6. Don’t go against the market

If the market is trending downwards prefer trading on the sell side and if the market is trending upwards prefer trading in an upward direction. Going against the market trend can be injurious. There is an exception to rule, there are some sectors that can do well in the bearish market. Like weak rupee is bad for the overall market but good for the IT stocks. You can choose such kinds of sectors for trading if you want to go against the trend.

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Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”  NBFC stocks are bleeding from the few weeks after the IL&FS crises emerged, but in many NBFC companies, good insider buying from the promoters is going on 

Bajaj Finserve 

Bajaj Finance

IIFL

Manappuram Finance

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Recently BSE/NSE made all-time high, now the question in most of the investor’s mind is, Is the Market  Overvalued?  Are the stocks expensive? Is it the time to lighten up the investments in stocks or do market have more fuel left to go further up?

Commonly most investor typically use price-earning (P/E) ratios to evaluate market valuation. But legendary investor Warren  Buffet has a different method to measure overall market valuation which is popularly known as Buffett Indicator (Stock market cap to GDP ratio)

What is Buffett indicator?

In simple terms Buffett Indicator is the ratio of Stock Market Capitalization to GDP it is a measure of the total value of all publicly traded stocks in a market divided by that economy’s Gross Domestic Product (GDP) (say India’s GDP)

Market Cap to GDP= (Value of the public stock in a company /The gross domestic product of a county) * 100

What is the use of the Buffett indicator?

To know whether an overall market is undervalued or overvalued or fairly valued.

How to calculate the market cap of a company and stock market cap?

market capitalization for a company is the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price. Market capitalization for the Stock market is Calculated by adding  the total value of all publicly traded stocks

We don’t have to worry about calculating all this you just visit BSE website under Equity Market Capitalization. The market capitalization will be available in crores. Or in USD billions

What is GDP?

The Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

How to calculate GDP?

GDP = private consumption + gross investment + government investment + government spending + (exports – imports)

Where do we get this data?

We don’t have to worry we get the details in the various website

Calculating Buffet Indicator

• Stock Market capitalization as on today September 16, 2018 is say 2.3 trillion USD (not proper value)
• GDP as on September 16, 2018 is 2.848 trillion USD which is equals 284.8 lakes crores (not proper values)

As on September 2018
Stock Market cap to GDP (Buffet indicator) = 2.14/2.848 * 100 = 75.1%

2008 before market crash
Stock Market cap to GDP (Buffet indicator) = 1.2/1.24 * 100 = 102.6 % (rough values)

Buffett considers a stock market trading below 50 percent of the country’s GDP too low, and undervalued. If it trades between 75 percent and 90 percent of GDP, then the market is fairly valued. But anything above 115 percent is overvalued

Buffett Indicator: क्या बाजार महंगा हो गया है ?? - YouTube

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Buyback can be a great opportunity to a make decent profit in a short period. But not all buybacks are worth to participate. Let us try to understand how you can profit from the share buyback of a company. 

What is buyback

When a company buys back its own shares its called buy back. When the buy back is complete the number of shares outstanding reduces by the amount the shares are bought back. The cash on the blance sheet of the company also goes down because the company is buying back the shares by using that cash. To encourage the existing shareholders to surrender their shares in the buyback, the buyback price is usually set 10-30% higher than the current market price. That gives a good opportunity to make the profit by surrendering the shares at a higher price and even you don’t want to surrender you can still make good trading gains.

When not to participate in the buyback

Many times the share price of a company falls due to some serious problems in the company. In such kind of situations, the managment sometimes announces the buy back to improve the sentiments of the investors towards the company. I prefer to avoid the buy backs of the company who are in trouble.

Also when the buyback price is less than 20% above the current market price then also I prefer to avoid buyback.

How to profit from the buyback

To understand whether buyback trade will be profitable for you or not you have to first understand the acceptance ratio. Acceptence ratio tells how many of your shares are likely to be accepted in case you tender your shares. When the company announces the buy back plan, it also announced how many shares from the small category share holders will be accepted. Usually, 15-20% are reserved for the small shareholders.

You need to check the shareholding distribution to know what could be the possible acceptance ratio.

Below is the share holding pattern of a company that announced buy back of 92 lakh shares, out of which 15% that is 13.8 lakh shares were reserved for the small shareholders.

If you look at the shareholding distrubtion here, people holding 1 to 5000 shares are considered small shareholders and they are holding 12.8 lakh shares, since 13.8 lakh shares buy back is reserved for them there will be 100% acceptence from the retail shareholders.

But this won’t be the case by the time of record date for buy back. As by knowing about the buy back more people will buy it before the record date and this will take the number of small shareholdres to a higher level and the acceptence ratio will get reduced. This buying from the small shareholder will result in the increase in the share price also. So even if you don’t plant to surrender your shares this can be a good trading opportunity.

Your effective cost of buying

Lets say the shares of a company are trading at 100 Rs in the market and it has announced buy back at 130 Rs. If you buy 100 shares of it at the current market price of 100 Rs. There are different scenarios possible

In the case of 100% acceptance, you will make a profit of 30% by buying at the current market price.

In case of 70% acceptance your 70 shares will be accepted at 130, this will give a cashflow of 9100 Rs and you will be left with 30 shares for which your effective outflow has been 900 Rs. Which makes your cost of 30 shares 30 Rs

In case of 50% acceptance your 50 shares will be accepted at 130, this will give a cashflow of 6500 Rs and you will be left with 50 shares for which your effective outflow has been 3500 Rs. Which makes the cost of 30 shares 70 Rs

In case of 30% acceptance your 30 shares will be accepted at 130, this will give a cashflow of 3900 Rs and you will be left with 70 shares for which your effective outflow has been 6100 Rs. Which makes your cost of 70 shares 87 Rs

In case of 10% acceptance your 10 shares will be accepted at 130, this will give a cashflow of 1300 Rs and you will be left with 90 shares for which your effective outflow has been 8700 Rs. Which makes your cost of 90 shares 97 Rs

So you can see here in case 30-70% acceptance your effective buying cost will 13-70% lower than the current market price and you can make a decent profit.
Below the acceptance ratio of 30%, the profit won’t be decent.

You need to keep a watch on the latest shareholding distribution pattern, to understand what can be the acceptance ratio. If you see that number of small shareholders has increased by a good number and acceptance ratio is not that attractive it is better to sell the shares few days before the record date in some decent trading gains.

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Stock at long term moving average support on weekly chart

 Balkrishna Industries 

Maruti 

Reliance Industries 

IFB Industries 

Larsen and Toubro 

S

Suntek Reality 

Hindustan Unilever 

JSW Steel 

Bata

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