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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fall would have impacted you – at such times, when a fundamental event has changed, your initial assumptions are no longer valid, so you must sell, even if you’ve made losses.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.

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