Thursday, September 6, 2007

For the Bears - Top Five stocks to avoid

In the last 10 trading sessions, Nifty has always closed positive except for yesterday when it lost a meagre 3.40 points. The investors have to realize that even when the index is bullish, there will be few stocks that are bearish. Let us now analyze some of these stocks.

Atul Limited (Group: B1, Scrip Code: 500027):

Atul Limited (formerly Atul Products Limited) operates through six business divisions viz. agrochemicals, aromatics, bulk chemicals, colours, pharmaceuticals and polymers. It manufactures herbicides, fungicides, insecticides, aromatics, inorganic chemicals, dyes, epoxy resins etc. The company’s net profits were down at Rs.29.6 crores in 2006 – 07 compared to Rs.83 crores in 2005 – 06.

What does the stock market thinks about this company? Let us now see the daily chart.

An interesting “Head and Shoulder Pattern” occurred in the stock between Septermber 2005 and November 2006. The pattern was confirmed when the stock had broken the neckline support in February 2007. This is an important reversal pattern and it also confirmed by volumes. Recently the stock had broken the short term support at 74.30 and closed below it for 7 days in a row. The monthly chart suggests that the stock trading well below the 61.8% retracement level at 84.65. So it is better to avoid the stock for short term.

Elgitread (India) Limited (Group: B1, Scrip Code: 590023):

The company specializes in manufacture of tyre retreading equipments. The product range includes inspection spreaders, tread builders, curing chambers, tyre buffers, envelope expanders etc. It also manufactures retreading tools/materials and repair equipment/materials. The company’s net profits stood at Rs.8.63 crores for the financial year 2006 – 07.

This stock has encountered a “descending triangle” breakout as shown above. It has fallen from a high of 56.50 in September 2005 to 23.30. It closed below the support at 23.50 for 14 days in a row – an indication that crowd is not at all interested in the stock. Somehow it managed to close above 23.50 only for a day; again it has gone below it for 6 days in a row. The bearish target for the stock works out to 15.05 which is still more than 30% away.

Hindustan Petroleum Corporation Limited

(Group: A, Scrip Code: 500104):

HPCL is a constituent of Nifty, BSE 100, BSE PSU, BSE Sectoral Indices – Oil and Gas. HPCL is a Fortune 500 company having 20% market share for petroleum products in India. The corporation operates 2 major refineries producing a range of petroleum products, one in Mumbai with 5.5 MMTPA (million metric tonnes per annum) capacity and the other in Vishakapatnam with a capacity of 7.5 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA.

The company’s net profits declined consistenly in between 2003 and 2006 – mainly attributed to the increase in crude oil prices. It declared a net profit of Rs.1571 crores for the year 2006 – 07, 3.86 times the previous year’s figure of Rs.406 crores.

In the above chart, volumes have been hidden to maintain clarity. The stock has broken on the bearish side with “descending triangle” breakout with a triangle height of 72.85. This when deducted from a low of 237.15 gives a bearish target of 164.30. During May 2004 when Indian stock market was witnessing huge fall, this stock lost nearly 35%. The Nifty has been shown in the above chart as a comparison. Hindustan Petroleum has not been moving along with the index in the last three months.

Rico Auto Industries Limited (Group B1, Scrip Code: 520008):

Rico Auto Industries is a world class engineering company supplying a wide range of high precision, fully machined aluminum and ferrous components and assemblies to automobile manufacturers around the country and all over the world. The product list includes fuel system parts, oil pump assemblies, turbine housings, crank cases, gear housings, flywheels etc. Some of the clients include Tata Motors, Hero Honda, Maruti, Ford, Volvo etc. The company’s net profits were at Rs.25.8 crores for the financial year 2006 – 07.

This stock too, has had a “descending triangle” breakout last month. The triangle height is estimated to be 12.90 and the bearish target works out to be 25.10. The stock has been badly hit in the last couple of years. It has fallen from 114.60 in September 2005 to 33.95. The company has declared nearly consistent profits around Rs.35 crores between 2004 and 2006 but the market is simply not interested in this stock.

Zenith Computers Limited (Group B1, Scrip Code: 517164):

Zenith Computers is one of most powerful brands in the Indian IT industry.One in every three branded PCs in Indian homes is a Zenith PC. Zenith PCs are now exported to Europe, South Africa, rest of Asia and the Middle East. Zenith’s products include both desktop as well as laptop PCs.

The company has declared a net profit of Rs.9.60 crores for the financial year 2006 – 07.

However, in the daily chart of the stock, a “descending triangle” breakout was formed during last month, as shown below:

After the breakout, it has been continuously trading below the previous support at 49.70. Recently, the stock has broken the new short term support at 43 and closed below it. The bearish target for the stock works out to be 28.85.

From the above discussion, one can understand that the company’s business and profit margins have little or no impact with the stock prices.