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Stock Update: BHEL

On April 3, I recommended that you buy BHEL on stellar results. What’s happened in the last few days has prompted me to propose an update.

The stock closed at Rs. 2,465 today, April 10. That’s a 215 point jump from the day I wrote the article – from 2,250. This is 10% returns in a week – and that’s usually a point where my eyes pop out.

Stock Update: BHEL

Ok, now this stock has gone up 10%, what should you do?

Answer: If you believe that my analysis still holds good, and the resulting value of Rs. 135 per share next year will result in a net price that’s good enough for you, then keep buying.

But if you now think the share will be valued at something like Rs. 2,600 after a year, it’s not very exciting, is it? A Rs. 150 gain is about 6% on today’s price – and you can get better, lower risk returns from a bank.

Here’s where the lessons begin. BHEL may be a fantastic company. Yet, it may be overpriced, and the gains you see in a year or so may not be as good a return as you expect. Remember the fundamental rule of timing: There are good stocks, and there are good times to buy good stocks.

The two are not related. A good stock may be overpriced.

In this case though, I estimate that the market will still give a P/E of 20-22 in a year for this company. For an EPS of Rs. 135, that translates to a price of 2700 to 2970 in one year. That’s a gain of 10-20% from today’s values, which is not all that bad. But if you’re looking for greater returns in this one year period, you may need to look elsewhere.

Another thing to note: Timing makes no sense if you don’t need the money in one year. As I’ve mentioned, the 5 year target price of Rs. 5720 is quite attractive – still gives you 20% annualised growth on today’s price. Don’t get carried away by short term rises and don’t rush to exit just because you’ve made good profits.

Now, here’s another cardinal rule: Let your profits ride, and cut short your losses. That means, when you’re profitable, don’t sell just yet. You can go to lower positions – i.e. when you get a 50% profit, sell 1/4th your holding (that’s similar to what I use).

But when you’re negative, be ruthless in cutting your losses if a fundamental has changed. If you were in bank stocks in Feb this year when they raised interest rates again, the resulting fall would have impacted you – at such times, when a fundamental event has changed, your initial assumptions are no longer valid, so you must sell, even if you’ve made losses.

One caveat: if nothing has changed, and the stock is still down, should you still sell? NO. This is an opportunity to buy. But always do your research – check if something is wrong, check your calculations again. And if it seems like you’re still right, trust your judgement. Some people will say “the market is always right” – but time has proved it has consistently undervalued or overvalued stocks. At any point, when it seems like it would be silly not to buy a stock, you should be buying.

That brings me to my next idea: SRF. It has gone up 30% in the last three days, but it’s still undervalued. I’ll talk about it later; but if you have the time, do the research.

  • uday says:

    >Hi Deepak,

    Thanks for your suggestions. BHEL is still going stronger (CMP 2517). After reading one of your posts, I have picked Balaji Telefilms. That has already given 24 % returns in 10 days. Really Amazing. It will be really good, if you can write a post on how one should identify an undervalued company. You have given some indicators regarding this at various occassions. But detailed post will be really helpful.

    Thanks,
    Uday.

  • Deepak Shenoy says:

    >Uday: Thanks. I have been buying Balaji over one year now, and just got a Rs. 3.5 dividend on the share as well. My average buy price is Rs. 102 now 🙂

    It’s at 150 and going strong – but I don’t know why.

    Why was it undervalued? SImply because a) it was growing much faster than its P/E and b) it had huge cash reserves.

    That’s one funda. Have to put in a more detailed post about it.

  • hari says:

    >Hi deepak,

    I have a query here.As a long term investor I feel that once a stock is brought it is better to hold it for a long term,and at the same time utilize the price dip to accumulate even more. Even if the stock price increases do you think that cutting down to 1/4 th is necessary? I would like to utilze the dips only to accumulate,and stay calm at peaks. “Our favourite holding period is forever” –> Warren Buffet.

    Also one more doubt ,I have been watching BHEL for the past few months.After having seen the stock at 2000 I do not wish to wait.But I still like it.So is it appropriate to buy it now or wait little more so that it comes to an attractive valuation.

    Thanks a lot.

    hari

  • Deepak Shenoy says:

    >Hari: Warren buffet buys companies to OWN them, and has control over their finances. It makes sense for him to hold them forever.

    You have no such leverage. If the company or sector is not doing well, nothing you do will affect the stock price. And the same for the upside – if the stock is overvalued (in your opinion) sell it, or at least sell a part of your holding.

    I’m not recommending cutting down to 1/4th. I have a funda that at 50% gains (annualised) I sell off 25% of my portfolio.

    REcently I bought Mindtree at 660. I sold 1/4th my holding at 990. The stock’s at 834 now, and I’ll buy more only below 800. I’m currently not sure whether this stock is over or undervalued, will wait for hte results to determine it.

    BHEL: In the long term there is definitely value. In the short term, less than a year, I don’t know – the markets are too fickle for me to predict anything. But the price targets I have – 2700 to 2970 – after a year is perhaps not very exciting for you.

    Note that they have some news also – they’re looking at a 300-600 cr. order for oil rigs from ONGC, are restarting their oil rig manufacturing facility. That’s a good thing and once the order is in, will modify their fundamentals.

  • hari says:

    >Hi Deepak ,

    I am so frustrated about certain things. When mindtree got listed I could have easily bought it. I even saw the share price go to 575. But greed prevented me.I thought that the share price will come little down and waited. Now I have burnt my fingers. I have not bought it since as it has risen to 850.But you had the insight to buy it at 660 and sell at 990.That is why you are deepak and I am hari. I have missed the golden oppurtunity to make A profit of about 50% in a month.Also I have missed BHEL when it was at 2000.Misses Bharti at 720 and so the list goes on.Until I learn to calculate the PE and the valuation of the company I think there is no salvation for me.

    Also is Zee Entertainment a good pick now.

    Thanks
    Hari

  • Deepak Shenoy says:

    >Hari: Don’t worry about it. Last year, I bought NIIT technologies at 185. I sold at 290 – this time I sold all my shares because a) I hadn’t really understood the concept of not exiting completely and b) I wanted some money to invest in some other stocks. It is at 430 today! In fact it moved from 290 to 400 within three days of my selling it. I felt bad but a lesson was learnt: Don’t sell out all your losses.

    Earlier I had done that with Sintex – I bought at 110, sold at 400. It then went to 800, split 1:5, and now is at 210. If I had held on, I would have had shares worth 10 times my investment! But I wanted the money then to pay for my marriage expenses 🙂

    But I made good decisions with say Bata – bought at 85, sold at 240. With Solectron Centum, bought at 93, sold at 294. Both these are lower than my selling prices (of April 2006)

    Now I’m learning every day. Greed and fear will always force you to reduce your risk taking ability. With Mindtree, I was very confident of the company. I still hold shares, adn today the price is below 800, my buy price. I’m going to buy tomorrow.

    Zee: I have no idea. Currently am not tracking it. Will have to check and get back, sorry. Little time problem today.

  • Anonymous says:

    >Deepak, Do you trade intra-day also?

  • Deepak Shenoy says:

    >Nope. Not yet, at least. I don’t think I would do day trading unless I had an automated system that would generate profitable tradign strategies for me…so that I trade blindly.

  • Anonymous says:

    >Hi Deepak
    I am really disappoint with you. Its because I am very much impressed with your Value Cost Averaging (VCA)fund and try to do it myself. But i am not been able to construct the spreadsheet properly so I ask you about the spreadsheet ” if it posssible for you to provide spreadsheet for me. I have not received any reply nor I received spreadsheet(offocurse, it is at your discreetion). I wnated to ask you one thing, I want to open my demat account, what do you think which financial services company is having better demat service & also which charges low commission on trading?.

    Praveen Hegde

    praveenhegde at ibsaf.org

  • Deepak Shenoy says:

    >Praveen: I don’t mail anyone who provides their mail id here, as a rule.

    If you see my post on VCA, you will notice that I have provided the link to the VCA spreadsheet in that post.

    Plus, as a response to your comment, I have
    opened out the spreadsheet
    for you to download as well.

    Please do revisit the blog to get updated on my responses. I may not respond to email because sometiems I get way too much of it.

  • Vikram says:

    >Deepak
    Whats ur take on Kalpataru Power?
    I bought this 10 days back at 1045.Its now nearly 10% up.Its PE is around 16.66 very healthy EPS growth rate.

  • Anonymous says:

    >Hi Deepak,

    Thanks for the advice on BHEL. Had bought it post reading your blog entry and must say it is doing very well, in line with your expectations.

    Two requests:
    1) In response to Uday’s comment you had mentioned that you would be putting up a detailed post on how to identify / analyse a good (read undervalued) business which can be bought into. How soon can we expect to see that on your blog?
    2) The analysis on SRF, probably clubbed with the above so that we all get an insight into how to identify a good stock, determine a target buy price (like 800 you have for Mindtree). I personally feel that Mindtree would be a very good stock to hold. It may or may not be the next Infosys / TCS but it would still be a good stock with reasonable returns. I have not done any analysis on this (awaiting your post on how to do that) but I feel that the senior management of Mindtree is very capable and the company should do well. What do you feel?

    In continuation of your funda of selling 25% of your holdings when you get 50% returns (annualized, I am sorry but I did not quite follow what do you mean by annualized), I had an alternate thought. If one were to adopt an approach wherein once the stock is giving around 50 % (or maybe higher if we get that) returns, you sell out enough stocks to recover what you had put into it initially, to buy it, and then invest it in FD (9% returns) to reduce some of the risk associated with equities or may be invest some of it back to some new stock and some in FD. Of course, each one would have his/her own approach but wanted your opinion on the above school of thought. Is it a reasonable approach or does it defeat the purpose of investing in equities (which are having highest return potential)?

    Please keep up the good work of regularly putting your thoughts / analysis on the blog.

    Thanks & Regards,
    Sumeet

  • Deepak Shenoy says:

    >Sumeet: Thanks! I’m glad BHEL is doing well, and honestly I find it surprising that it moved up so fast.

    I am writing a post on how to identify and invest in stocks. It’s taking a while to shape up, should be up soon.

    Mindtree is a good stock , I think. The overall tech impact is down now because of the strong rupee. But Mindtree’s model is better than most outsourcers – they actually own IP.

    About the 50%: I have that rule, and I only chase stocks that can move up 50% annualised. Annualised means weighted over the year. So 4% a month = 48% a year and so on. Don’t bother doing this daily – monthly is fine. i.e. BHEL is up 10% in 10 days but you don’t annualise that saying: 365 days a year, so 10% in 10 days = 365% a year – since you don’t invest every day but more likely every month, you should think of it as 10% a month – 120% a year.

    You should use whatever approach works for you. Remember that one or two stocks will gain enogh to make up for other stocks’ losses, so it is important to let your profits ride. But try out what works for your risk taking ability.

    Will talk about that too.