Wednesday 2 September 2015
Torrent Pharmaceuticals Ltd. is the flagship company of the Torrent Group. Based in Ahmedabad, it was promoted by U. N. Mehta initially as Trinity Laboratories Ltd. and was later renamed to its current name Torrent Pharmaceuticals Ltd.
Torrent Pharmaceuticals operates in more than 50 countries with over 1000 product registrations globally.
Moreover, it has 7 fully owned subsidiares:
Heumann Pharma GmbH & Co Generica KG,
Torrent Pharma GmbH,
Torrent do Brasil Ltda.,
ZAO Torrent Pharma,
Torrent Pharma Inc.,
Torrent Pharma Philippines Inc.,
Torrent Pharma Canada Inc.,
Torrent Pharmaceuticals acquired Heumann GmbH, a Pfizer group company in 2005.
Operations
The company's key areas are Formulations, API, Drug Discovery, Marketing and Sales of Drugs. Its operations locations are:
Manufacturing plant at Chhatral, Near Kadi, in North of
Manufacturing plant at Indrad, Mehesna, Gujarat
Manufacturing plant at Baddi,
Manufacturing plant at
Manufacturing plant at Dahej, Gujarat (under progress)
Research Centre, Ahmedabad-Gandhinagar region, GujaratCorporate Office, beside sales India, off Ashram Road, [Ahmedabad]- Gujarat
Exports business remains in sweet spot
The exports business (~65% of the total turnover) is witnessing strong traction, especially from the US even as Brazil is slowing down due to structural issues. Other export markets such as Europe and RoW are growing at a steady pace. In the US, the company owns a healthy product pipeline (70 filed ANDAs, 48 approvals and 38 launches). We expect US sales to grow at a CAGR of 20% in FY14-16E to | 1125 crore. Similarly RoW and European sales are likely to grow at a CAGR of 18% and 13% to | 528 crore and | 1181 crore, respectively, during FY14-16E.
Indian formulations growth steady
Despite having a higher proportion of chronic therapies (65%) the company remains an underachiever in the branded formulations space, growing at a CAGR of 13% in FY09-14. The acquisition of Elder Pharma’s branded portfolio is likely to add new therapies such as neutraceuticals and gynaecology and to fill the portfolio gaps. We expect Indian branded formulations to grow at a CAGR of 27% in FY14-16E to | 1904 crore.
Conclusion
Going ahead, the new filings and approvals in the US will be keenly watched for multiple upgradation. The company, however, keeps on working on other important aspects such as improvements on the cost front via savings in selling and other expenses and Q1 numbers were testimony to this. the margins were healthy. We have also witnessed a turnaround in Brazil and this seems sustainable. In India, consolidation of Elder’s portfolio and growth from its own legacy products is likely to sustain growth momentum. The company remains well poised to deliver well rounded growth with geographies such as the US, EU and RoW joining traditional growth geographies such as India and Brazil.
CMP around Rs.1600
We have maintained a target price of | 2045 in the medium Term
Disclaimer:I am neither a Research analyst nor an Investment Adviser as Per SEBI Guidelines. The information about the stock ideas in this blog are my personal opinions as an experienced investor and are only meant for educating the readers. Readers should always consult their financial/investment advisors before investing in any stock idea given in this blog. I am not responsible for any loss arising out of any information, post or opinion appearing on this blog.It may automatically be assumed that I have a vested interest in the stock idea being projected in my blog.BEFORE ACTING ON ANY OLD RECOMMENDATIONS, PLEASE ENSURE ITS RELEVANCE IN CURRENT CIRCUMSTANCES.
What is derivative?
A Derivative is a product whose value is derived from the value of one or more basic variable(s), called the underlying asset. The underlying asset can be equity, foreign exchange, commodity or any other asset.
Who are the participants in the derivative market?
There are basically three types of participants.
- Hedgers: They are the producers (like farmer, mining company) or users (business entities, consumers) who face the risk associated with the price of an asset and hence use derivative markets to reduce or eliminate this risk.
- Speculators: They are traders who wish to bet on the future movement in the price of an asset.
- Arbitrageurs: They are in business to take advantage of discrepancy in prices between two different markets.
What are the basic functions of the derivative market?
- Price discovery: It helps in discovery of price of the underlying asset in future;
- Transferability of risk: It transfers risks from those who have them but may not like them to those who have an appetite for them.
Types of Derivative Instruments
Basically, there are only two types of derivative instruments
- Forward Contracts
- Option Contracts
Where can one trade derivatives product?
What are the different types of derivative products available in the Indian market?
The derivative products traded on exchanges are known as exchange traded derivatives, whereas privately negotiated derivative contracts are called Over-the-Counter (OTC) contracts. The differences between both the platforms are as follows:
| Exchange Traded | OTC | |
|---|---|---|
| Terms of the contract | Standardized | Customized |
| Counterparty Risk | No | Yes |
| Margin | Yes | May or may not |
| Price Transparency | High | Low |
What are the different types of derivative products available in the Indian market?
The different types of derivative products available, as per RBI’s comprehensive guidelines are:
- Forward rate agreements (FRA)
- Interest rate swaps (IRS)
- Interest rate futures (IRF)
- Foreign exchange forwards
- Currency swaps
- Currency options
- Interest rate caps and floors
What is a Forward rate agreement (FRA)?
A forward rate agreement (or FRA) is simply speaking, a forward contract on interest rates traded over the counter. It is typically an agreement between a bank on one hand and a borrower or depositor on the other. The party which gains from an FRA when interest rates fall is referred to as the “seller” or “lender” of the FRA. Similarly, the party which benefits when interest rates rise is called the “buyer” or the “borrower” of the FRA. The amount on which the interest (difference) is calculated is the notional principal of the FRA.
For example, if the agreed 6 month LIBOR rate under an FRA is 0.75% p.a. on a given future date and the actual rate happens to be 1% p.a., the bank (seller of FRA) will reimburse to the counterparty (buyer of FRA), the difference of 0.25% p.a. Interest is paid in arrears and therefore the difference is payable not on maturity of the FRA but at the end of the interest period beginning on that day. However, in practice, parties do not wait for the end of the interest period to exchange the difference; its present value changes hands on maturity of the FRA. An example of USD FRA quotes
| Tenure | FRA rates |
| 3*9 | 0.3800 |
| 9*12 | 0.4250 |
The first quote represents a bank selling an FRA on the 6 month LIBOR to rule after 3 months from the date of contract. If after 3 months, the 6 month LIBOR is above 0.38%, the bank will compensate the buyer of the FRA to the extent of the difference. Similarly, the second quote stands for a bank selling an FRA on the 3 month LIBOR to rule after 9 months.
What are Interest rate Futures?
An interest rate futures (IRF) contract is the exchange traded version of an FRA. One of the most popular futures contract is the 3 month Eurodollar contract. This is a contract on the 3 month LIBOR expected to rule on maturity of the contract. IRF contracts having maturities up to 10 years are quoted on the Chicago Mercantile exchange. The price of the contract is quoted as {100-rate of interest agreed}. Thus a price of 98.50 would mean an interest rate of 1.5%.
What is a derivative contract?
A “derivative” is a financial instrument whose value changes (is derived from) in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, price index, or such similar variable. These variables are called the “underlying”. While there are a number of structured derivative products in the financial markets, they are essentially a variation or combination of the two basic building blocks- namely, the Forwards and the Options. The generic derivatives, which can be used in structured products in India, as per RBI’s comprehensive guidelines are:
- Forward rate agreements (FRA)
- Interest rate swaps (IRS)
- Interest rate futures (IRF)
- Foreign exchange forwards
- Currency swaps
- Currency options
- Interest rate caps and floors
What are Interest rate swaps and currency swaps?
A swap is defined as a “financial transaction in which two counterparties agree to exchange streams of payments, or cash flows, over time” on the basis agreed at the inception of the agreement. A swap is like a series of forward contracts. While the two main types of swaps are “interest rate” and “currency” swaps, equity swaps, credit swaps and commodity swaps have gained acceptance in recent years.
Under an interest rate swap, interest payment streams of differing character are periodically exchanged. There are two major types:
- Coupon swaps – exchange of fixed rates for floating rates
- Basis (or floating) swaps – exchange of one floating benchmark for another (eg. LIBOR for T-bill).
Under a currency and interest rate swap, the two counterparties agree to exchange interest and principal in one currency for interest and principal in another currency. These exchanges are generally done at the spot exchange rate ruling when the swap was entered into.
How is the swap market in India different from the international swap market?
One basic difference between the swap market in major currencies and the USD/INR swap market in India is that, while the cash flows are similar, the pricing is different. In the major currencies, swap prices closely follow the yields on the AAA bonds. While in India, swap prices are more a function of demand and supply rather than bond prices. Due to exchange regulations and the absence of a liquid term interbank market, the forward margins in the USD/INR do not follow the interest rate differentials. Since a swap is essentially a series of forward contracts, it also suffers from the same constraints.
The banking system in India has tried to overcome this difficulty through the introduction of an INR swap called the Mumbai Interbank Forward Offered Rate (MIFOR) swap.
What are the different swaps popular in the Indian market?
The swaps popularly used in the Indian market are
- MIFOR swaps
MIFOR is the sum, in percentage per annum terms, of the USD LIBOR and the forward margin on the US Dollar in the Indian forex market, both for a given maturity. This serves a proxy for raising term Rupee funds. - Principal Only Swaps (POS)
Principal only swaps have become popular in recent years and in effect hedge (or create) exchange rate risk on the principal amount alone, leaving the interest payment in the original currency. - Coupon Only Swaps (COS)
Coupon only swaps merely exchange interest payment in one currency (eg. INR) for interest payment in another currency (eg. USD). The principal amount remains outside the scope of the coupon only swap.
What are currency options?
An option contract is an agreement between two parties in which one party grants to the other, the right to buy (“Call option) or sell (“Put option) an asset under specified conditions and assumes the obligation to sell or buy it. A currency option is a contract where the underlying assets are currencies.
More often than not, option contracts are settled not by the sale or purchase of the asset but by the seller paying to the buyer, the difference between the market price and the agreed (Strike) price.
What are the common terms associated with option contracts?
Some of the terms commonly used in the option market are:
- Seller (or writer) of the option: The party who has the obligation to buy/sell the underlying asset, at the agreed price and time, if the option is exercised by the buyer.
- Buyer of the option: The party who has the right but not the obligation, to sell/buy the asset underlying the contract, at the agreed price and time.
- Call option: It confers the right but not the obligation, to buy an asset.
- Put option: It confers the right but not the obligation, to sell an asset.
- Strike price: Also called ‘exercise price’, is the specified price at which the buyer of the contract can exercise his right to buy or sell the asset.
- Option premium: Fee or price paid by the buyer of the option contract to the seller.
- Value of an option: The market price of the option contract.
- Money-ness of an option:This is a measure of comparison of the strike price of an option with its market price. An option with a strike price equal to the current price of the asset is an At-the-money (ATM) option. If the strike price is more favourable to the buyer of the option than the current market price, it is an In-the-money (ITM) option. Conversely, if the strike price is less favourable to the buyer than the current market price, it is an Out-of-the-money (OTM) option.
Source- AV Rajwade(www.avrco.com)
Today i'm here to give you a idea about what actually operators do and how they manipulate prices of the securities and make fradulent gains
Who are the operators?
It may be stock brokers,Company insiders,Retail Traders in collusion with brokerages and lot more people can do it.
Here we would like to explain the manipulation with an example of Manipulated stock and is still being manipulated now too..
The Name of the security is pochiraju industries ltd.
The operator play started with Sale of shares on 21.05.2014 when the price was meager Rs.9 as given in the below images
From there on the traders who are colluted with the operators keep on trading Intraday for inflating the price and volumes volumes You can see the volume increase from May 2014-August 2014
In this case the traders as seen from the images are Shraddha Invt , Gajanan Enterprises,Vijit Shares etc.,
and also these people post on various forums,send bulk messages to create buying interest
In this case it was through forums like Moneycontrol Message Board etc., they created buying interest quoting good fundamentals and future prospects as the reason for jump in price.
Here an another issue that comes into picture is technical analysis when the charts are looking good with a rise in price and volume no one would want to lose that opportunity unless they know that it is a junk company
With the contribution of all these factors the price has been manipulated from Rs.9 to Rs.80 an increase of 888%
Now Operators started offloading (selling) their shares at these high prices making huge gains due to selling pressure the price has now come to Rs.22
Who are the losers ?
You retail investors ,sad thing is that some operators involved are penalised but the manipulation is continuing.
Do you know what the cycle again started now at the price of 21 on 19.06.2015
Observe what will happen in the days to come..
Note:This is not an Illustration on how to make gains when operators have entered the stocks ,this is a explanation for cautioning you about operator plays going on retail investors being trapped and making heavy losses
And also this is my understanding of how the manipulation has taken place or i say it is a 'manipulation' you may not think so this is purely my opinion and I take no responsibility for your take on my opinion
Investing in the stock market is one of the best things you can do with your money, provided that you know what you're doing. If you don'tknow what you're doing, you might as well take your money to Vegas — you might even get better odds. But if you're going to play the market, do it right.
Here are some common mistakes many investors make. Know them and avoid them.
1- Buying a stock because it pays a dividend
A profitable corporation can distribute profits in the form of dividends. In other words, each share gets a certain amount of money. While it's great to get a dividend, it's not wise to hunt them. So, the mistake that a lot of guys make is to buy a stock shortly before they expect it to pay a dividend.
While that sounds good, the problem is that the price they pay for the stock likely reflects the anticipated dividend. In other words, shopping for dividends means you're overpaying.
What to do instead: It's good to have dividend stocks in your portfolio, but they're not the only way of making money. Instead, hold a diverse portfolio, knowing that some of your stocks will likely pay a dividend and others won't for a very long time (if ever). If you do that, you'll find that you're one step further on the road to holding a collection of blue chips (which tend to pay dividends) and more speculative securities (which may be years away from profitability, despite increasing stock prices).
2- Buying a stock before an earnings report
An earnings report is like a quarterly scorecard from a company. But before that scorecard is released, market analysts spend their days making predictions. Most companies meet or beat expectations. The mistake, then, is taking an earnings report too seriously because meeting or beating earnings just isn't news. So, if your strategy is to speculate based solely on earnings reports, you'll be basing your predictions on accounting tricks.
What to do instead: Earnings reports have their place, but you want to use them as a signal. What should you be looking for? The company that doesn't meet its earnings.
Why?
Well, it may be a good investment, depending on why it didn't make its earnings and what it can do to change that (you'll have to investigate). But in the meantime, the stock price has likely gone down, which means there could be an opportunity for you.
3- Buying into the hype
Remember Pets.com? It was pretty much the poster child for hype in a boom market. In fact, there was so much hype around Pets.com thatJeff Bezos (CEO of Amazon.com) later confessed that investing in that company was one of his biggest mistakes. But what happened to Jeff happened to a lot of guys: They got carried away by the hype (and by a stock price that grew in leaps and bounds daily). In the end, the company was worth nothing.
What to do instead: It's easy to tell you not to believe the hype. But that is, in essence, what a lot of guys should do. Few companies out there can live up to the hype, so you should take it with a grain of salt. When you see a rocketing stock price and all you hear is about this hot, new company, think to yourself that these are warning signs, notinvestment signs. Remember; living up to that kind of hype is a once-in-a-lifetime investment.
4- Assuming that if a stock price is low, it's good to buy
Buy low, sell high, right? Well, maybe. Just because a stock price is low, doesn't mean it's a good buy. And, conversely, just because the price is high, doesn't mean it's a bad buy. The mistake is not knowing that "buy low; sell high" is really shorthand for "buy stocks that are undervalued and sell stocks that are overvalued."
What to do instead: High and low are relative terms — $300 may seem like too much for a stock, whereas $3 might seem like a bargain. But you have to put the trade in context. Ask yourself if the company is under- or overvalued at its present price, based on market cap and P/E. That's the mark of 6- Blindly following the lead of an anchor investor
Sometimes it's easy to get the business page confused with the gossip column; after all, both do a ton of name dropping. A lot of guys make the mistake of following a big-name investor like Mark Cuban or Kirk Kerkorian.The even bigger mistake is thinking that by copying them, you're guaranteed a payday. First, there are no guarantees. Second, even if they are right, they haven't told you their strategy, so you won't know when to sell.
What to do instead: You should follow what some of these investors are doing (if only because they have the capital to move markets). But by follow I mean pay attention to, not copy. In short, know everything you can, but think for yourself.
5- Not cashing out & locking in your profit
At some point, you need to take profits. But when you take profits (sell), it can make all the difference. The truth is that there is no easy answer for this. Sadly, a lot of guys get a gambler's mentality when it comes to profit taking. That's the mistake. Or, they see a little bit of profit, and hit the panic button and sell too soon. That too is a mistake.What to do instead: Look at the profits (rate of return) that are common to the sector. The key is to be realistic. What you need to do is stay disciplined and not get greedy or scared. Plan your profit taking as carefully as you plan your investing.
6- Not cutting your losses
Stocks move up and down. But sometimes a stock suffers a steady decline. Surprisingly, some guys see that happening and they root for their stock like it's their favorite sports team. In other words, they become emotional. Day in and day out, they obsess over a declining stock price as they lose more and more money.What to do instead: Short and sweet, sometimes you need to cut your losses. Success is a relative term when it comes to investing. Ideally, we think of success as how much you make. But sometimes success is about how little you lose. A smart investor not only knows when a stock is in a tailspin, he has the courage to let it go, so he can take his money elsewhere and start making it back.
7- Not doing your own research
Chances are that you have more than a few friends with their own ideas about investments. The mistake that most guys make is taking their friends' advice at face value. This isn't to say that you shouldn't trust your friends. They could be right. But copying them without questioning them is like giving away your money and hoping it comes back.
What to do instead: Find out where your friends get their information. If they have a broker that has made them a lot of money, ask for a referral. If they have their own strategy, ask them to teach you (it may not be the best strategy, but any worthwhile strategy should be able to hold up under the scrutiny of a student).
8- Gambling on penny stocks
With their low prices, penny stocks look like sexy investments. But there are two problems with such stocks. First, small prices typically mean smaller margins, so the transaction costs can eat you alive. Second, penny stocks are more susceptible to fraud and manipulation. While most penny stocks are legit, it's an area where crooks ply their trade.
What to do instead: Penny stocks aren't for green investors, despite their price. Why? Because to make money in penny stocks, you need resources. Furthermore, transaction fees are likely higher when you're trading a high amount of stocks. Investing always means doing research, but you won't read about penny stocks in the business section, so you'll need the resources to dig a little deeper.
9- Being afraid to invest during bad times
For the most part, the economy moves in cycles. Boom years are followed by bust years. While you can't seem to keep guys away from investing in boom years, it's like pulling teeth to find investors in the bust years. Of course, there are more bargain investments in leaner times, so staying out of the market in those years can be a big mistake.
What to do instead: Remember this rule: economic downturn is an investment opportunity. While that doesn't mean going all in when things turn south, it does mean that you should look at the market with a different eye. Don't be discouraged when things are tough, and don't follow the crowd.
10- Blindly following a broker
Do you have a friend who begins every sentence with, "my broker says..."? Well, so what? More than a few guys get burned by blindly following their broker's advice. Is he an expert? Yes. Does he have an agenda? Quite possibly. Does he have the power to predict the future? Of course not.
What to do instead: You should listen to your broker. But you should also question him. Remember; at his core, he's a salesman, so he's trying to sell you something. Press him on details. Why is this stock the next great stock? Did he invest his own money in it?
11- Not staying on top of your investments
Some guys spend months doing research, setting up a diverse portfolio only to make their initial buys and go to sleep at the wheel. It's puzzling, but it does happen. The trouble is that the market won't call you before things change. As a result, a lot of guys wake up one day to find themselves busted.What to do instead: It depends on the type of guy you are. If the trouble is that you'd like to follow your investments but you just don't know how, you'll want to take advantage of the tools offered by your brokerage house. All brokers offer them and they work like household accounting programs. On the other hand, if you're just lazy (it happens), you probably shouldn't be so active in the market: look for mutual funds where you'll only have to review things on a quarterly basis.
12- Entirely selling a winner
When you make a profit, it's only natural to want to sell and take that profit elsewhere. Conversely, a lot of guys look at their losses and hold onto them hoping they'll get back to even. While those may seem like different problems, they have the same root cause: misallocating your money. While nothing is constant, the above strategy actually has you pulling away from winners and getting closer to losers, which doesn't make any sense.What to do instead: It's okay to take a profit (in fact, it's smart). But unless you think the bottom is going to fall out on your stock, don't sell it all — hold on to some of the winner stock.
13- Trading too much
Being a trader or being active in the market doesn't mean making a ton of trades. But some guys make trades the way the rest of us order drinks (pretty much without thinking). While they may know what they're doing when it comes to the trade itself, what they're missing are the transaction costs. Each trade has a commission fee and each trade has tax implications. So, if your profit margin is slim, chances are it will evaporate with fees and taxes.What to do instead: Never let fees and taxes dictate your trading moves. If you have to change your position, do it. But don't ignore fees and taxes, and don't get trade happy.
14- Assuming that if you like the product, the stock is good
How often have you and your friends enjoyed a product (like a Krispy Kreme donut) and said that you should own stock in the company? Well, some guys incorrectly assume that a great product equals a great stock. But the truth is that there's more to a good company than a good product.What to do instead: Look at the product as a good starting point. Okay, you found the next big thing. Now do your homework. Learn everything you can about the company from its management team and its business plan to its stock performance. Then make your investment decision.
Make money by avoiding mistakes
In total, we discussed 14 common mistakes that investors make. Sadly, this is by no means an exhaustive list. The truth is that all guys make mistakes with their money. But what separates the winners from the losers are the guys who can apply what they've learned.A mistake is bad in and of itself, but it is insurmountable if you don't learn anything from it, because you'll likely repeat it.
Below are ten guidelines that are smart and often necessary to follow in order to be successful at long term investing in stocks.
1. "Buy low and sell high."
This is a very obvious bit of advice but achieving this goal can be more difficult than it might seem and this simple rule can be easy to forget. An obvious key to successfully investing in stocks is to pick investments to buy that will increase in value over time and then eventually sell the stock at a higher price. Some of the recommendations and guidelines that follow may be helpful in following this first principle.In order to "buy low" and "sell high" it is sometime necessary to do the opposite of what the majority of investors seem to be doing. This is called being a contrarian. When everyone else is pessimistic about a company they have likely acted on their negative opinions and sold shares of its stock. On the other hand, when investors are very optimistic about the prospects of a company, they have likely already acted on their hopefulness and purchased the stock. An investor who can buy at an extreme moment when others have been selling and sell when others have been aggressively buying may be able to accomplish the goal of "buying low/selling high" more often than those who follow the general consensus.
Unfortunately, this strategy doesn't always work! Sometimes there are good reasons for investors' pessimism and a company is headed from bad to worse. Someone who buys when everyone else is selling may end up owning stock in a company with grim long term prospects. Alternatively, selling shares of a great company with wonderful long term potential (e.g., Microsoft in the early 1990s; Apple in the early 2000s) too soon can be very frustrating as well. Needless to say, successfully investing in stocks is never easy.
2. Understand what you are buying.
Some investors meet with success by investing in companies for which they already have a very good understanding (or hold a good opinion of) because they like what the company makes or the service they provide. This is a perfectly valid and, often, useful strategy. At the same time, it is a good idea to do some research about the past financial performance of a company and projections for its future earnings. Personal experience can help, but there are many reasons why it will not always lead to accurate predictions about the future stock price of a company.
3. Patience is a virtue.
4. "Growth at a reasonable price" investing.
The major risk that growth investors run into with their approach is that they will pay a very rich price for a company with seemingly good long term prospects. Even a small disappointment in the earnings of a company with an expensive stock price (i.e., high P/E ratio) can result in a big drop in the share price as investors reconsider how fast the company will grow its earnings and sell the stock. A major setback in a company with a high P/E ratio can devastate its share price (e.g., the price of a stock could drop 25% or more on bad earnings news). Alternatively, with a value-oriented investment approach, the risk in owning what appears to be a cheap stock is that what seems like a temporary setback is actually much more serious or permanent in nature. A low share price, which looks like a bargain, may be well justified and the price could head much lower as more investors sell the stock after they come to recognize the long term nature of the company's problems.
Another investment strategy that attempts to blend the best of the growth and value-oriented strategies is called "growth-at-a-reasonable price" (GARP). Investors who follow this approach pay particular attention to a stock's PEG ratio. This is the P/E of a stock divided by its annual earnings growth rate. PEG ratios under 1.0 indicate that a company's P/E ratio is less than its growth rate. The lower the PEG ratio the more it suggests that the stock is reasonably valued (or even undervalued). Alternatively, the greater the PEG ratio, the more expensive the share price would seem to be.
A GARP investment strategy can offer protection against the problematic risks of both growth and value-style approaches. Investors who follow a GARP approach in a disciplined manner will draw a limit on what they are willing to pay for a stock with fast growing earnings. GARP investors like companies with fast growing earnings (the denominator in the PEG ratio) but, at the same time, will insist that this growth rate be high enough to justify a stock with a high P/E ratio. Likewise, GARP investors will not purchase a stock simply because it has a very low P/E ratio. If the company's earnings are not also increasing at a decent rate, they will avoid buying the stock for fear that the company's earnings have stopped growing (or worse have begun to decline).
5. Some of the "secrets" to Warren Buffett's success as an investor.
Buffett is a great illustration of an investor who has followed the above listed guidelines virtually to perfection. He has a keen knack for "buying low, then selling high." He is very patient in his approach, both in terms of waiting until the right opportunity comes along before making a stock purchase and then owning shares of stock in a company for a long period of time to allow his investment thesis (i.e, the reasons why he likes the company and purchased the stock) to be borne out. Buffett tends to stick to investments where he can understand the business the company is in well enough to make thoughtful and independent decisions. For example, he personally is uncomfortable owning technology-oriented companies as he does not feel he understands the products these companies make (nor trends in the broader industry) well enough to make smart investment decisions. Buffett's investment approach is probably best categorized as a "growth-at-a-reasonable-price" strategy. Some people consider Buffett to be a value-oriented investor, given his tendency to buy shares of stock in companies when they appear to be "bargains" but Buffett is careful to avoid companies that do not appear to have bright prospects for their future earnings.
When Buffett discusses his investment philosophy he will highlight several things he is looking for in a company that he wants to invest in. The following include some of the most important things he looks for:
a) "A durable, competitive advantage." By this Buffett means that he wants a company that is relatively difficult to compete against; hence it will likely be able to sustain a high profit margin over time. Companies which have strong brand-name products (e.g., Coca Cola, Proctor & Gamble), or have patent protections on their products (pharmaceutical companies), or have very strong customer loyalty and high customer retention rates tend to have a "durable competitive advantage" over their competitors.
b) A competent and honest management. For obvious reasons, Buffett is only interested in investing in companies for which he respects and trusts the key managers of that company. An incompetent, and especially a dishonest, management team at a company can spell big problems and Buffett wants nothing to do with investing in a company where he has reason to doubt the abilities, strategies, or ethics of the managers of the company.
c) Pay a "reasonable" price for a stock. An indication of Warren Buffett's patience as an investor is that he refuses to overpay for a company's stock. While he may love thecompany, if the price is not right, he will not like the stock and seek out alternative investment opportunities or wait until the stock price becomes more attractively priced. Nevertheless, Buffett is not a cheapskate. A well known quote of his is that "it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This is spoken like a true GARP investor: Buffett is willing to pay a reasonable price for a company with great future prospects and would choose to invest in such a business over a company that has a cheap stock but only modest potential for improved future earnings.
Another key to Buffet's success is his temperament. He seems much better than most investors at staying calm when others are panicking over short term concerns about the stock market or a particular company. In fact, Buffet welcomes it when other investors are very worried, as it may create potential to buy companies that others have hastily sold. Another famous quote of his is as follows: "You pay a very high price in the stock market for a cheery consensus. Uncertainty is actually the friend of the buyer of long-term values."b) A competent and honest management. For obvious reasons, Buffett is only interested in investing in companies for which he respects and trusts the key managers of that company. An incompetent, and especially a dishonest, management team at a company can spell big problems and Buffett wants nothing to do with investing in a company where he has reason to doubt the abilities, strategies, or ethics of the managers of the company.
c) Pay a "reasonable" price for a stock. An indication of Warren Buffett's patience as an investor is that he refuses to overpay for a company's stock. While he may love thecompany, if the price is not right, he will not like the stock and seek out alternative investment opportunities or wait until the stock price becomes more attractively priced. Nevertheless, Buffett is not a cheapskate. A well known quote of his is that "it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This is spoken like a true GARP investor: Buffett is willing to pay a reasonable price for a company with great future prospects and would choose to invest in such a business over a company that has a cheap stock but only modest potential for improved future earnings.
6. Don't take a big loss.
Warren Buffet's first rule of investment is "Don't take a big loss." His second rule of investment is: "Don't forget Rule #1!"
A corollary to Buffet's rule is a piece of advice offered by Jim Cramer of the CNBC show "Mad Money": "Ring the register; no one ever lost money taking a profit." In particular, he directs this advice to investors who have seen shares of stock they own go up significantly in value. It may not be necessary to sell all shares, but it is a good idea to sell some shares in order to ensure that you realize a profit. For instance, if a stock doubles in price, some investors will sell half the shares they own, thereby recovering their initial investment and knowing that the remaining shares they own represent pure profit. Such a disciplined approach in taking profits helps to protect investment gains. However, it is a good idea not to reinvest the proceeds of such sales in companies within the same industry (e.g., selling stock in one energy company, then buying another company in the energy industry) in case the entire industry runs into difficulty and the stock price of all companies in that industry go down.7. Be aware of your emotional tolerance for losses
The stock market swings between extremes of human greed and fear. The best investors recognize these extremes and try to take advantage of them. Always set aside some of your investment money in the form of "cash" for extreme events that cause the stock market to significantly sell off. Such a cash cushion allows investors to better weather a market downturn and to take advantage of companies that suddenly see their stock price drop for no good reason due to widespread investor panic. Taking advantage of a good buying opportunity when many other investors are fearful is only possible if you yourself are not also in a panic. Be aware of the extreme emotions of greed and fear in yourself. Succumbing to either these emotions (selling due to fear and buying due to over optimism and greed) is the cause of a lot of investment mistakes.
8. Dividends are important.
9. "Don’t confuse a bull market for genius."
10. Adapt to changing circumstances.
An easy "mistake" to make is to invest in a company that make products (or provides services) that can be made obsolete by newer technologies which come along. When a new technology develops or something else changes in a significant way that will harm the future earnings of a company, it may be wise to see the "writing on the wall" and sell the stock. Circumstances change and developments emerge that were not easily foreseen. All good investors take in new information and reassess their investment decisions based on new facts. Good investors force themselves to "listen to what they don't want to hear." In other words, if there is bad news about a company, it should be acknowledged and one must then think about the long term implications such news has for the earnings potential of the business.
VALUE TRAP:
A stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Stock traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves. Trading that occurs at low multiples of earnings, cash flow or book value for long periods of time might indicate that the company or the entire sector is in trouble, and that stock prices may not move higher.
Companies, and even sectors, can be doomed, because of situations such as the inability to survive competition, the inability to generate substantial and consistent profits, the lack of new products or earnings growth, or ineffective management. Often, a value trap appears to be such a good deal that investors become confused when the stock fails to perform. As with any investment decision, thorough research and evaluation is recommended before investing in any company that appears cheap when reviewing its relevant performance metrics.
Of course, it's easy to say with hindsight that a failed investment was a value-trap but are there any ways to flag this in advance? Fundamentally, the key to avoiding value traps is doing your homework and exercising caution when approaching enticing investment prospects. It's crucial to be as precise as possible about intrinsic value through fundamental bottom-up company analysis. The other issue is that it's important to have an adequate margin of safety since this is the value investor's buffer against errors in the intrinsic value calculation. However, beyond that, there are some common fact-patterns that it's worth watching out for....
Few Signs that Your Stock May be a Value Trap
1. Is the sector in long-term secular decline?
A company may simply be serving a market that no longer exists in the way it used to. No matter how good the company, it will need a fair wind behind it eventually and and if the sector itself is dying, it's likely to be a huge battle to realize value. From a demand perspective, it's important to distinguish between cyclical and secular declines. In the former case, short-term demand will rebound with an improved economy. In the latter case, demand is in long-term decline (e.g. due to societal and demographic changes), which means that the remaining players are left to fight for a share of an ever-decreasing pie.
2. Is the risk of technological obsolescence high?
Technological progress can radically reshape an industry and its product lines - this can have a major impact on the life cycle and profitability of a firm .One might assume that a stock is cheap enough to compensate for decreasing cash flow but, sometimes, cash flows hits a tipping point and drops off faster than you expect.
3. Is the company’s business model fundamentally flawed?
Sometimes, a company may simply be serving a market that no longer exists, or at a price-point that is no longer relevant, given competition and/or new substitutes for the product.
4. Is there excessive debt on the books?
More often than not, financial leverage magnifies the pain of a value trap. Limited or no financial leverage gives firms access to the the most precious commodity of all - time! A company with no debt is unlikely to go under, barring a major catastrophe (e.g. a massive legal settlement against it). On the other hand, excessive leverage can destroy even a great company. For a good margin of safety, the debt to equity ratio should be as low as possible and interest cover should be comfortable
5. Is the accounting flawed or overly aggressive ?
It's best to stay away from companies where aggressive or dubious accounting is employed. You should be “triply careful” whenever management uses some metric that they define, rather than conventional metrics .
6. Are there excessive earnings-estimate revisions?
Analysts are quite lenient and usually revise their estimates downward before earning releases to allow companies to beat their estimates. Occasional missed earning estimates can provide an opportunity to buy on the dip, but a pattern of missing earning estimates may mean that management are struggling to forecast properly, with a knock-on effect for the analysts, and/or that management doesn’t understand or are not willing to fix problems.
7. Is competition escalating?
Be careful of companies facing increasingly stiff competition. Is there a tendency for the industry to compete on price to squeeze margins? If there are limited barriers to entry and a company is unable to differentiate itself, then it's possible that the market structure has simply moved against it - it may never recover the glory years of the past. One way to test this is to compare the historic profit margin trend over the last 10 years. If the profit margins are decreasing, this may suggests the company is unable to pass increasing costs onto its customers due to increased price competition
8. Is the product a consumer fad?
Another sign of a possible value trap is a product that is subject to consumer fashion or whims. Evolving consumer tastes and demand may mean that the market for the product is just a short-term phenomenon
9. Are there any worrying corporate governance noises?
It's worth checking for any history or noise that suggests minority shareholders might be getting a raw deal .
How to avoid Value Traps...
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