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Stocks

If you want to do…

I have recently realized that what you see as a “press release” that sounds like it will make the company a juicy buy, might actually have more to say on the negative side than the positive. Let me cut the theory and get to the real world examples.

Suzlon’s Selling Of Key Units In The Future

Suzlon, on February 7, 2013: News comes in after a sharp rise in the stock price, that the company “may sell stake in three divisions to pay off debt”. A banker, supposedly involved in the CDR process with Suzlon, seems to have said that Suzlon needs to get rid of some key units in order to pay back the debt; prompting calls that this would be an awesome thing for the stock. It was not:

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The big candle is the stake sale by promoters (largely to Morgan Stanley) which was on the budget day.

However, the stock has only been making new lows. The rise from the sub-17 levels in November to nearly 27 in Feb – more than 50% in two months – had people wondering.

My problem was that piece of news. Which banker would reveal that a company has committed to sell some key assets? If you are a buyer and you know the seller is desperate to sell because he has a commitment to bankers, will you not squeeze the fellow out dry? Why would a banker jeopardize a deal? Why not sell and THEN reveal that this was part of the commitment?

That would be normal behaviour. When you find abnormal behaviour, you ask questions. With Suzlon, I had told a friend about this and he smartly sold the stock. I, being a sissy, did not go short (there were more complicated reasons but you can attribute sissy-ness).

The correct trade would be to put a stop loss of around 30 and go short. (30 is a nice technical level in the past)

Airtel’s So-Called DTH Sale

Again, coming after a near-term upmove, there was a news piece on Airtel that said it is in “talks to sell a 25% stake in the DTH arm”. The news was remarkably detailed, like this:

Sources with direct knowledge suggest that the company is expecting a valuation of $1 bn. Bharti Airtel has already signed a non-disclosure agreement (NDA) with at least seven strategic and private equity players for the stake sale, sources confirmed.

U.S. based DTH players like Comcast and Liberty Global are said to be in talks with Bharti Airtel for buying stake in the DTH arm. Some of the private equity players like KKR, Providence, Bain Capital, GAAP are also said to be in the fray. Bharti is looking at raising over $200 mn via stake sale.

This I can’t digest. Airtel wants to sell stake, that’s okay. But to reveal that it’s already signed an NDA, with named players, with already a number out there about how much it’s looking for…who does this? Deals happen behind closed doors, numbers are discussed face to face, in the back seat of a car or over a phone conversation. No one gives you information in such detail BEFORE the deal has been done.

And then, the Airtel stock was showing a sign of technical weakness. A H&S formation, with a key moving average just proving to be strong resistance.

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So if this news was all bull, nothing would come out of it, and the trade was: Short Airtel at 322, with a stop of the 50 DMA (around 329) and the interim target was the last low (actually just below it) of around 290. It was a 10% profit chance for a month’s trade, with a 2% chance of a loss, and I took it. I exited around the 290 level.

But the trigger wasn’t the technical story – the trigger was this piece of news that sounded incredulous to me.

Update 26 Nov 2013: Yes, it’s been scrapped, this potential sale.

Note: In both the above stories there was no management involvement. People make money on stocks and they have incentives to rig up prices, even if they are not management, and this includes big brokers and banks. So we don’t know where these rumours came from, but it definitely “marked the fall”.

The Unfinished Demerger of Halonix

Owned by Actis, a PE fund, Halonix has in the past stoked investor appetites by saying it will sell the profitable arm of the company by demerging the less-useful general lighting division to a promoter owned entity. The whole story is here, but my question then was: If you want to demerge, and you have all the permissions, you should demerge – why are you not doing it? The answer, six months later: The selling of anything is not happening.

Recently, the company again reported plans to sell the general lighting business. And yet:

 

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I’m not saying that there is fraud involved by management or otherwise. I’m just saying that when I find news that a company WILL do something, I always wonder why they don’t just do it if they want to, instead of telling us they’re considering it. I mean we have enough information already, and adding a “maybe” is just useless.

I have of course shown you survivor bias – that the stocks I mention are the losers of the pack, and others may have seen great gains based on similar rumours. I’ve not seen many in the recent past – though in 2007, all you had to do was mention a stock’s name and “acquire” in the same sentence for it to go up 10%. However, please notify me of such stocks you’ve seen recently, to keep me honest.

I suppose this boils down to a mantra:

If you want to do, do. And then say.

(I’m guilty of violating this as anyone else. I have still not started gymming. I have still not lost the weight I said I will lose last year. This needs to be a mantra for me!)

  • asmita says:

    Look at Cairn India..all positive news still stock is falling everyday. They are going to start gas production, oil ramp up is all set, refinary planned near fields, new drilling approved.

  • Suhail says:

    “If you wanna shoot, shoot; don’t talk” ~ Ugly in Good Bad Ugly firing Clint Eastwood from his bathtub.
    Good point and congrats on a good trade 🙂
    You can add KFA payment newsflow to yr list. Every other week we hear Mallya assuring that all of [salary/PF/taxes/AAI/fuel/parkg/whatever] dues will be cleared.
    But what I hate most is how subserviently our fin analysis/journalists just take everything on face value and basically act as a reprint tool.
    We need more investigative, probing journalists – folks like Felix Salmon, Matt Taibbi who can get under their skin, needling into their noses. Right now, I don’t see any harbinger of bad news in our pink press. Someone who can consistently wash dirty corp laundry in public (and anyone who’s worked a salaried job knows there is tons of it). Whatever we have right now is just too mediocre. And we don’t have any Einhorns either.
    Aside: In such shorts trades, do you buy puts or short futures? Do the returns differ?

  • Great article.
    That big candle that you talk of in the Suzlon case is the money they have pumped in towards the CDR requirements.
    I guess for all the grandstanding, they will eventually have to sell some of their stake in RePower. Wockhardt in CDR also sold off chunks of their business to raise cash.
    I am studying the stock seriously. Many variables in this one.

  • Gaurav Akash says:

    “If you want to do, do. And then say.”
    Nice quote…to add to this
    “When you have to shoot, shoot don’t talk.”
    from the movie The Good, the Bad and the Ugly of course.
    another one
    “If you want to shoot, shoot don’t wait for microphone.”
    source unknown
    On a serious note nice info and it seems situation is alarming, every now and than we hear that some external force is actually moving the stock/s in their favor.
    Regards
    Gaurav Akash

  • Ashwin says:

    Add Amtek India and Bilcare in this list. Both stock have substantial fall after stock specific news.

  • Harish Nagpal says:

    This is the solutuion to your obesity Deepak …….Chk this video …………Hope it helps http://www.youtube.com/watch?v=ZLlLarodYbM

  • Murty says:

    I have been watching another analyst(In fact, a Reseach Team), which offfers Pick of the Day, and for the past 3 Months, none of their picks worked. But they say they are experts. Bull Crap. Do never listen to them. Do your home work, thoroughly!
    Examples:
    On a day they recommented a SELL on Essar Oil, it rose alomost 20%.
    on 4th March, it was 72, rose above 90, and only this friday, it is 71.
    February 19th : Tata Global: Recommendation was to buy @146.3, and today, it is 126
    on 18th Feb, PVRLtd was a buy for a short term perspective,but until March 4, it is around Rs.274, only then it rose to the current 285.
    United Phosphorous, a sell on February 14th , rose to 126….
    Apollo Tyres falls within 4 days of BUY,
    Idea Cellular BUY at 114, today, it is 107.
    …………..
    Ofcourse , there are exceptions, random luck?
    But they did not mentioned to sell SUZLON or buy WOCKHARDT or BUY INFY…..

    • Murty says:

      Educomp is a BUY at 82 on March 4th , it is now 63?
      Jain Irrigation 72 on March 11th and a BUY , today it is 62.
      Prestige was 176 , a BUY on 14th March, today it is 168, from a low of 162
      Hindustan Copper was a BUY at 137 on Feb11, to day it is reeling under 95
      PFC was a buy on Feb11 at 222, it is now 178…
      ARE YOU GETTING ANY IDEA?

  • Murty says:

    Aigis was a buy on March 12 at 156, today, it is 121
    IOB, CIPLA they fresbeniusoncology… they were right, even Castrol, but what about LIC Housing Finance , a buy at 249, today it is 216,
    EDUCOMP , a BUY at 82 on March 14th , today it is 63
    ABGSHIPYARD , Claris Ls,is an exception,
    Ruchi Soya coming down from a buy at 65,
    PVR is a buy at 300 but today it is 285

  • Vishal says:

    As the old adage goes, “buy the rumour, sell the news”.

  • Ravi Shankar says:

    Brilliant article and some very astute observations! My only issue is that is ex-post and yes there is a selection bias, but what you say about news and subsequent stock behaviour would work easily 9 out of 10 times. As for you being sissy, I cannot comment but only say traders are very hard on themselves on lost opportunities. Trades are easier said than done. What if you went short on Suzlon, then it went the other direction triggered the stop loss and closed out your position. You will think twice to enter the same trade gain. I have done a lot of trading with a lot of strategies and lost a LOT of money. There is an element of luck/chance and loads of nerve and discipline. Else everyone will be in this game. But MOST importantly, it is a ZERO SUM game 🙁 !! It scares me to hell !!
    P.S:- Hoping to see some ex-ante stuff 🙂 !

  • Ravi Shankar says:

    Of-course, please trade first before the recommendation, but with not much of a time lag ;)! If there are enough people picking up the same side of the trade, would work in your favour 🙂 ! My view is, the market is too large not to absorb the trades or put you in any disadvantage !!