Top 10 Cheapest India stocks

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:

1. 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.
2. The face value of the stock is Rs.10
3. The stocks should have fallen around 50% from their previous high.
4. 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.

Chart Patterns and market’s reaction

Many people who follow stock markets may have noticed charts. These are graphical representation of price volume data over a period of time. It could be price plotted every hour, day, week or month and are known as hourly, daily, weekly or monthly charts respectively.

These charts are very important since the stock’s demand versus supply can be ascertained from the price action. Volume is also displayed on the charts. A visual examination of the chart will reveal how the stock moved within a particular period (day, week etc.).

It is very much essential that the investors and traders get familiar with charts, particularly those who work full time in the markets. The two common types of charts are

OHLC bar Chart (Open, High, Low, Close Charts) or Western Bar Charts

Japanese Candlestick charts

An example of OHLC bar chart:

The same chart when represented by candlesticks will look like this:

As we can see, the ‘candlesticks’ are more visually appealing compared to the OHLC bar charts.

As co-movement of price and volume gets plotted over a time, the current market status can be examined easily. In a bull market, increasing volume with increasing prices during an uptrend indicates bullishness. During a corrective decline in a bull market, we can see declining volumes with declining prices. In a bear market, increase in volume with decreasing prices can be spotted. During pullbacks in bear markets, declining volumes with increasing prices can be seen. Though volumes may not increase uniformly all the time, a trend can be observed.

Chart patterns:

These are certain types of formations in charts which indicate bullishness or bearishness. These are formed by support / resistance levels and trendlines.

Support level is the price where buyers will enter the stock and take control over the sellers. Resistance level is the price above which the stock must trade in order to move up higher.

Some of the chart patterns are:

Bullish patterns: Double bottom, triple bottom, inverse head and shoulder pattern, cup and handle breakout, triangle breakout etc.

Bearish patterns: Double top, triple top, head and shoulder pattern etc.

The daily chart of SAMTEL is shown below. Let us analyze how many chart patterns have been formed over a period of time. This is an interesting stock since this gives an idea as to how the market reacts quickly to a chart formation.

Cup and handle breakout:

Bewteen March 2001 and April 2002 watch the ‘cup’ shaped price movement followed by the ‘handle’. Watch the resistance could not be broken on the first attempt. That lead to another decline. Eventually, after the resistance at 31.50 was broken, the stock touched a high of 57.50. It can easily be noted that the green line or the ‘top’ of cup was a strong support during the corrective decline from 42.90 to 30.90.

Inverse Head and Shoulder pattern:

This bullish pattern was formed between August 2002 and November 2003. It simply looks like an inverted man.

Please note that the ‘shoulders’ may not be horizontally on the same line and this is nothing unusual. After the resistance around 32.80 was broken, see how quickly the prices were flying vertically upto 74.65. This was again followed by a corrective decline.

Double bottom:

This pattern was formed around the 38.35 which was the next resistance when the stock bounced back during the inverse head and shoulder pattern. Again, after the resistance trendline was broken, we can see the heavy buying upto 124.70. Double bottoms and triple bottoms are usually more reliable bullish patterns, indicating strong support levels.

Head and shoulder pattern:

After hitting a high of 124.70, stock fell to 84.20 and after the reversal, it was unable to pierce the ‘neckline’ as can be seen in the chart. The neckline is an important resistance zone in this pattern. Ever since this happened, stock has been terribly bearish. All supports have been broken, except for the last one at around 12.70. This is almost 1/10^th of its high price. Just imagine a person who bought it near the high price and wondering what’s going on with this. Currently it is 16.25.

Conclusion:

As can be seen from the chart, the bullish and bearish patterns, when spotted successfully, foretell how the stock will perform in the near future. In this case, the head and shoulder pattern has clearly indicated the bearishness and stock was hit very badly.

What will happen to this stock in the near future? As mentioned earlier, it just managed to bounce back near its last horizontal support around 12.70 but without much volume. Momentum indicators are negative and if it is able to sustain above the support of 12.70, we can expect a consolidation phase. But consolidation phase may last for longer durations, and as such, there is nothing this stock can offer for anyone for the time being.

When investors make a decision to buy a stock for long term investments, it is better to observe patterns such as these. That will help them to hold stocks for better returns.