Overview:
The term “cheap stock” is used to mean a stock that has fallen in price considerably (at least 50%) from its previous high. In stock market the crowd sometimes runs after a stock vigorously and afterwards it tends to forget about it. As a result, the stock loses lot of its gains over a period of time. It is said that public memory is short. In stock market the crowd’s memory is even shorter. The stocks which were chased by the crowd very strongly are forgotten quickly. In one of my previous article Technical review of select India stocks for medium term we discussed about one such stock, Ind Swift Laboratories.
There is a lot of difference between “cheap stocks” and “penny stocks”. Penny stocks is a term used to denote a stock that trades below its face value. Here we shall discuss only those which are cheap in the sense they have fallen reasonably in the past few months.
Some people buy stocks once it breaks a 52 week high, or once it bounces back from its 52 week low etc. This cannot be a good strategy. Even if a stock is bought near its 52 week low, it is not guaranteed that there is no downside risk. Instead, one should focus on the business, financial data such as P/E, how much the stock has lost from its previous high value and the possible risks. After careful analysis, it is still better to take professional advice. Technically, a stock may have more downside; or it may be in sideways movment; only a qualified person can recognize it.
Some basic rules to be followed in choosing stocks that have lost the buying interests of the crowd:
The portfolio shall be divesified. Never choose multiple stocks from same industry.
Assess the business conditions and prospects of the company and the industry it belongs to.
Check the management’s credentials and verify it with a knowledgeable person if possible.
Avoid stocks that trade far below its face value.
Avoid companies that are too small, thinly traded or those who do not keep investors informed about their financial results, management functions etc.
Criteria for selection:
The 10 stocks that we discuss below are selected based on the following criteria:
- These belong to B1 category of the Bombay Stock Exchange; The idea is to avoid small companies which are traded in B2 category; others in S, T, TS or Z cateogy may have listing related issues and hence these are not considered.
- The face value of the stock is Rs.10
- The stocks should have fallen around 50% from their previous high.
- 21 day exponential moving average volume of the stock shall be more than 50,000. This will eliminate thinly traded stocks.
The following table gives the list of stocks, in the descending order of percentage fall:
Stock | Industry | Current | Previous High | Percentage | |
|
|
| Price | Date | Price | fall |
| Samtel colour | Electronics | 15.75 | 12/05/05 | 124.35 | 87.33 |
| Amar remedies | Pharmaceuticals | 32.40 | 27/04/06 | 101.80 | 68.17 |
| Noida toll bridge | Infrastructure | 26.45 | 02/05/06 | 64.80 | 59.18 |
| Pochiraju | Floriculture | 26.55 | 09/02/07 | 63.70 | 58.32 |
| Oriental trimex | Marbles | 22.55 | 07/03/07 | 52.50 | 57.05 |
| Uttam steel | Steel | 32.15 | 16/03/05 | 74.65 | 56.93 |
| Nitin spinners | Textile | 15.65 | 02/02/06 | 32.00 | 51.09 |
| Hindustan motors | Automobile | 31.10 | 04/05/06 | 61.20 | 49.18 |
| Tamil Nadu petro | Petrochemical | 18.05 | 05/01/04 | 35.50 | 49.15 |
| Gallantt | Metal | 11.95 | 10/04/06 | 21.35 | 44.03 |
It can be observed that all these falls have occurred in the last 3 years when the overall index is very bullish. So, it is not necessary that just because the index is going up, all other stocks should go up.
Samtel colour is the worst hit, followed by Amer remedies and Noida toll bridge.
Hindustan motors, Tamil Nadu petro and Gallantt are the last in the list.
As mentioned earlier, stocks have been so chosen that one from each industry is discussed.
The following table lists the key financial data for the companies mentioned above.
| Stock | Current | Book | PBV | P/E | Net profit |
|
| Price | Value |
|
| 2006 |
| Samtel colour | 15.75 | 60.32 | 0.26 | NA | 0.84 |
| Amar remedies | 32.40 | 33.70 | 0.96 | 5.33 | 20.95 |
| Noida toll bridge | 26.45 | 16.65 | 1.59 | 44.92 | 2.61 |
| Pochiraju | 26.55 | NA | NA | NA | NA |
| Oriental trimex | 22.55 | NA | NA | NA | NA |
| Uttam steel | 32.15 | 40.65 | 0.79 | 3.46 | 74.33 |
| Nitin spinners | 15.65 | 20.71 | 0.76 | 8.06 | 5.60 |
| Hindustan motor | 31.10 | 4.85 | 6.41 | NA | (43.69) |
| Tamil Nadu petro | 18.05 | 40.85 | 0.44 | NA | 2.04 |
| Gallantt | 11.95 | 9.87 | 1.21 | 16.23 | (0.98) |
NA = Not available; Net profit in Rs. crores
It can be seen that barring Hindustan Motors and Gallant, rest are profit making companies. Price to book value is also very low for these companies.
Conclusion:
Samtel colour and Amar Remedies look very attractive as far as their valuations are concerned. Pochiraju industries are exporters of roses and floriculture industry is relatively unknown in India. Oriental trimex are in marble and granite business. These two companies may flourish, since the real estate industry has a lot of scope in India.