Saturday, January 6, 2018

Five Steps of a Bubble

          Courtesy : Investopedia

1.    Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low. A classic example of displacement is the decline in the federal funds rate from 6.5% in May, 2000, to 1% in June, 2003. Over this three-year period, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic lows of 5.21%, sowing the seeds for the housing bubble.

2.    Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.

3.    Euphoria: During this phase,caution is thrown to the wind, as asset prices skyrocket. The "greater fool" theory plays out everywhere.
Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%. Similarly, at the height of the internet bubble in March, 2000, the combined value of all technology stocks on the Nasdaq was higher than the GDP of most nations.
During the euphoric phase, new valuation measures and metrics are touted to justify the relentless rise in asset prices.

4.    Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health, because, as John Maynard Keynes put it, "the markets can stay irrational longer than you can stay solvent."
Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again. In August, 2007, for example, French bank BNP Paribas halted withdrawals from three investment funds with substantial exposure to U.S. subprime mortgages because it could not value their holdings. While this development initially rattled financial markets, it was brushed aside over the next couple months, as global equity markets reached new highs. In retrospect, this relatively minor event was indeed a warning sign of the turbulent times to come.

5.    Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.
One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy and Fannie Mae, Freddie Mac and AIG almost collapsed. The S&P 500 plunged almost 17% that month, its ninth-worst monthly performance. In that single month, global equity markets lost a staggering $9.3 trillion of 22% of their combined market capitalization.

Thursday, December 28, 2017


As per today's BSE Circular , Scrip ID of Amulya leasing will be changed to APOLLOPIPES Wef:03 January 2018.

 (Link to BSE Circular HERE) .

Saturday, December 2, 2017

5 Methods To Avoid Value Traps ....

Courtesy : Investopedia

In essence, value investing is the practice of identifying financially sound companies with solid future growth prospects that are available at attractively low valuations, with the company's stock trading below its intrinsic value. Some value investors have been drawn into value traps, in which they buy into stocks that may be low priced but that are not genuinely undervalued and whose stock prices may fall substantially further due to company or industry specific conditions that are long-term problems rather than just temporary setbacks.
There are relatively low-priced stocks that are genuine value investing opportunities, and then there are stocks that are low-priced value traps. Learn to look beyond just a low price and maintain a focus on strong fundamentals for a company and the industry in which it is engaged. Here are five warning signs that a stock may be a value trap rather than a real value investing opportunity.

1) A Bad Business Model

No matter how promising a company's statements on its website may seem or how attractively low its stock price may appear, be wary of any company that doesn't have a business model that is both easily understandable and clearly aimed at being profitable. If you can't easily and clearly see how the company's business model should lead to success and profitable revenues, it's probably best to avoid the stock no matter how temptingly low the price may look. Be especially wary of companies that rely on outdated technology. In today's rapidly changing economic world, a company offering a product or service that is outdated, or soon to be outdated, is in serious trouble. This kind of trouble usually results in a stock price that just continues to drop. Technological obsolescence has led to the downfall of many a business in the past couple of decades.

2) Price Too Cheap Compared to Earnings

The price-to-earnings ratio (P/E) is a good financial metric to consider when determining whether a stock is really a bargain or a value trap. If a company's stock price has dropped to the point where it is unreasonably cheap in comparison to earnings, this is often a strong indication that the company is fundamentally unsound. Since the market generally prices stocks in relation to future expected cash flows, consider the forward P/E ratio as well as the trailing P/E.

3) Too Much Debt

Many promising businesses have been undone and sent into bankruptcy by allowing themselves to become overly leveraged. The adage is true that it's much easier to pile up debt than it is to get rid of it. If a company's revenues and stock price have declined, the interest on its outstanding debt becomes a larger percentage of revenues and income. When this happens, the debt usually becomes increasingly difficult to manage. A company carrying a dangerously high debt load has very little room for error or even for minor setbacks in the marketplace. It's probably best to shy away from stocks that have substantially higher debt to equity (D/E) ratios than the industry average.

4) Lack of Competitive Advantage in the Marketplace

Virtually every market sector is increasingly competitive. If you can't look at a company and clearly see that it has a competitive advantage, then it very well may not have one. Consider potential sources of market advantage, such as unique products or proprietary technology, brand identity, less expensive suppliers or production costs, cash reserves or location. Unless a company has at least one competitive advantage that should allow it to succeed on a higher level than its competitors, it is not likely to thrive and grow, and that applies to the value of its stock as well.

5) Lack of Insider Buying

One of the clearest warning signs to stay away from a stock is a lack of insider buying or, even worse, signs of substantial insider selling. Include hedge fund and mutual fund managers in the group of insiders, and be careful if the percentage of funds holding a stock is dropping substantially. If company insiders aren't anxious to scoop up shares of the stock at what looks like a bargain price, then the stock probably isn't such a bargain after all.

Saturday, November 25, 2017

Using Enterprise Value To Compare Companies ....

Courtesy : Forbes 

The enterprise value - or EV for short - is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. When sizing up a company, investors get a clearer picture of real value with EV than with market capitalization.
Why doesn't market capitalization properly represent a firm's value? It leaves a lot of important factors out, such as a company's debt on the one hand and its cash reserves on the other. Enterprise value is basically a modification of market cap, as it incorporates debt and cash for determining a company's valuation.
The Calculation
Simply put, EV is the sum of a company's market cap and its net debt. To compute the EV, first calculate the company's market cap, add total debt (including long- and short-term debt reported in the balance sheet) and subtract cash and investments (also reported in the balance sheet).
Market capitalization is the share price multiplied by the number of outstanding shares. So, if a company has 10 shares and each currently sells for $25, the market capitalization is $250. This number tells you what you would have to pay to buy every share of the company. Therefore, rather than telling you the company's value, market cap simply represents the company's price tag.
The Role of Debt and Cash
Why are debt and cash considered when valuing a firm? If the firm is sold to a new owner, the buyer has to pay the equity value (in acquisitions, price is typically set higher than the market price) and must also repay the firm's debts. Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the firm's price as represented by market cap.
Think of two companies that have equal market caps. One has no debt on its balance sheet while the other one is debt heavy. The debt-laden company will be making interest payments on the debt over the years. (Preferred stock and convertibles that pay interest should also be considered debt for the purposes of calculating value.) So, even though the two companies have equal market caps, the company with debt is worth more.
By the same token, imagine two companies with equal market caps of $250 and no debt. One has negligible cash and cash equivalents on hand, and the other has $250 in cash. If you bought the first company for $250, you will have a company worth, presumably, $250. But if you bought the second company for $500, it would have cost you just $250, since you instantly get $250 in cash.
If a company with a market cap of $250 carries $150 as long-term debt, an acquirer would ultimately pay a lot more than $250 if he or she were to buy the company's entire stock. The buyer has to assume $150 in debt, which brings the total acquisition price to $400. Long-term debt serves effectively to increase the value of a company, making any assessments that take only the stock into account preliminary at best.
Cash and short-term investments, by contrast, have the opposite effect. They decrease the effective price an acquirer has to pay. Let's say a company with a market cap of $25 has $5 cash in the bank. Although an acquirer would still need to fork out $25 to get the equity, it would immediately recoup $5 from the cash reserve, making the effective price only $20.
Ratio Matters
Frankly, knowing a company's EV alone is not all that useful. You can learn more about a company by comparing EV to a measure of the company's cash flow or EBIT. Comparative ratios demonstrate nicely how EV works better than market cap for assessing companies with differing debt or cash levels or, in other words, differing capital structures.
It is important to use EBIT - earnings before interest and tax - in the comparative ratio because EV assumes that, upon the acquisition of a company, its acquirer immediately pays debt and consumes cash, not accounting for interest costs or interest income. Even better is free cash flow, which helps avoid other accounting distortions.
The Bottom Line

The value of EV lies in its ability to compare companies with different capital structures. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued.

Saturday, November 11, 2017

Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons.....

Courtesy: Investopedia

Most basic articles on investing advise having a diversified investment portfolio. Diversifying investments is touted as reducing both risk and volatility. However, while a diversified portfolio may indeed reduce your overall level of risk, it may also correspondingly reduce your potential level of capital gains reward. The more extensively diversified an investment portfolio, the greater the likelihood it, at best, mirrors the performance of the overall market. Since many investors aim for better than market average investment returns, they may wish to revisit the issue of diversification versus concentration in their portfolio choices.

Ways to Diversify a Portfolio

There are a number of ways to attain some level of diversification. One is simply company diversification, which is owning stock in more than one company. A portfolio can also be industry diversified. Owning stock in both a banking company and an insurance company is more diversified than simply owning two bank stocks. Further diversification can be achieved by investing in more than one market sector. Another means of diversification is to own stocks of companies with different levels of market capitalization, from small- to large-cap stocks. Portfolio diversification can also be achieved by investing globally rather than just in domestic stocks. Investing in different asset classes, such as stocks, bonds and futures, also creates diversification. Finally, investing choices based on varying trading strategies, such as growth investing and value investing, also provide diversification.
The real question for investors is to what extent they should diversify their investment portfolios, and the answer is that each individual investor should largely be driven by his personal investment goals, level of risk tolerance and choice of investment strategies. Investors should consider the relative advantages and disadvantages of diversification within that personalized investment framework.

Advantages of a Diversified Portfolio
Diversification reduces an investor's overall level of volatility and potential risk. When investments in one industry, market sector or asset class perform poorly, other investments in the portfolio with a negative correlation to the poorly performing investments should perform relatively better and at least partially offset losses and reduce the portfolio's overall volatility. Diversification may also open up additional profit opportunities. For example, an investor who chooses to diversify his portfolio with investments in foreign stocks may find he has invested in the stocks of countries experiencing economic booms, and those stocks produce large gains at a time when the performance of domestic stocks is mediocre to poor.
Disadvantages of Increasing Diversification
The disadvantages of diversification are less publicized, and therefore less well known, but the fact is diversification can also have adverse effects on an investment portfolio. Overly diversifying an investment portfolio tends to reduce potential gains and produce only, at best, average results. If your investment portfolio contains five stocks that are performing wonderfully, but 45 others that are not doing well, those stocks may substantially water down the gains realized from your best stock selections.
Another problem with aiming for broad diversity is it may require extra transaction costs to re-balance your portfolio to maintain that level of diversification. A widely diversified portfolio with a lot of different holdings is generally more trouble to monitor and adjust since the investor has to stay on top of so many different investments. Diversification can even increase risk if diversifying leads an investor to invest in companies or asset classes that he knows little or nothing about but have been added to a portfolio solely for the purpose of achieving diversification.
Advantages of Concentrated Portfolios
One of the advantages of a more concentrated portfolio is that while it does increase risk, it also increases potential reward. Investment portfolios that obtain the highest returns for investors are not typically widely diversified portfolios but those with investments concentrated in a few industries, market sectors or asset classes that are substantially outperforming the overall market. A more concentrated portfolio also enables investors to focus on a manageable number of quality investments.
The Bottom Line
The best path for an investor may be to aim for only a modest amount of diversity while putting his primary focus, not on diversification, but on selecting high-quality investments chosen in accord with his preferred investment strategy of growth investing, income investing or value investing; his personal risk tolerance level; and his overall investment goals. While some level of diversification should be a consideration in constructing an investment portfolio, it should not be the driving concern. The primary focus of an investment portfolio should always be on putting together a portfolio designed to best meet the personal investment goals and financial needs of the individual investor.

Saturday, October 28, 2017

An Introduction To Small Cap Stocks

Courtesy : Investopedia

Small cap stocks have a bad reputation. The media usually focuses on the negative side of small caps, saying they are risky, frequently fraudulent and lacking in quality that investors should demand in a company. Certainly these are all valid concerns for any company, but big companies (think Enron and Worldcom) have still fallen prey to issues of internal fraud that virtually destroyed shareholder interest. Clearly, company size is by no means the only factor when it comes to investors getting scammed. In this article we'll lay out some of the most important factors comprising the good and the bad of the small-cap universe. Knowing these factors will help you decide whether investing in smaller-capitalized companies is right for you.

Before we get into the pros and cons of small caps let's just recap (no pun intended) what exactly we mean by small cap. The term refers to stocks with a small market capitalization, between US$250 million and $2 billion. Stocks with a market cap below $250 million are referred to as micro caps, and those below $50 million are called nano caps. Small-cap stocks can trade on any exchange although a majority of them are found on the Nasdaq or the OTCBB because of more lenient listing requirements.

It is important to make the distinction between small caps and penny stocks, which are a whole different ball game. It is possible for a stock to be a small cap and not a penny stock. In fact, there are plenty of small caps trading at more than $1 per share, and with more liquidity than the average penny stock.

Why Invest In Small Cap Stocks?
When you are eyeing small cap stocks, a number of positive factors weigh against some of their negative attributes. Below we have outlined three of the most compelling reasons why small caps deserve representation in many investors' portfolios.

1. Huge growth potential
Most successful large cap companies started at one time as small businesses. Small caps give the individual investor a chance to get in on the ground floor. Everyone talks about finding the next Microsoft, Wal-Mart or Home Depot, because at one point these companies were small caps - diamonds in the rough if you will. Had you possessed the foresight to invest in these companies from the beginning, even a modest investment would have ballooned into an extravagant sum.

Because small caps are just companies with small total values, they have the ability to grow in ways that are simply impossible for large companies. A large company, one with a market cap in the $1 billion to $2 billion range doesn't have the same potential to double in size as a company with a $500 million market cap. At some point you just can't keep growing at such a fast rate or you'd be bigger than the entire economy! If you're seeking high-growth companies, small caps are the place to look.

2. Most mutual funds don't invest in them
It isn't uncommon for mutual funds to invest hundreds of millions of dollars in one company. Most small caps don't have the market cap to support this size of investment. In order to buy a position large enough to make a difference to their fund's performance, a fund manager would have to buy 20% or more of the company. The SEC places heavy regulations on mutual funds that make it difficult for funds to establish positions of this size. This gives an advantage to individual investors who have the ability to spot promising companies and get in before the institutional investors do. When institutions do get in, they'll do so in a big way, buying many shares and pushing up the price.

3. They are often under-recognized
This third attribute of small caps is very important. What we are saying here is that small caps often have very little analyst coverage and garner little to no attention from Wall Street. What this means to the individual investor is that, because the small cap universe is so under-reported or even undiscovered, there is a high probability that small cap stocks are improperly priced, offering an opportunity to profit from the inefficiencies caused by the lack of coverage devoted to a particular area of the market.

The Drawbacks to Small Cap Investing

As with any investment, small caps are not without inherent drawbacks. These include:

1. Risk
Despite the fact that small caps demonstrate attractive characteristics, there is a flip side. The money you invest in small caps should be money you can expose to a much higher degree of risk than that of proven cash-generating machines like large caps and blue chips.

Often much of a small cap's worth is based on its propensity to generate cash, but in order for this to happen it must be able to scale its business model. This is where much of the risk comes in. Not many companies can replicate what U.S. retail giant Wal-Mart has done, expanding from essentially a mom-and-pop store in Arkansas to a nation-wide chain with thousands of locations. Small caps are also more susceptible to volatility, simply due to their size - it takes less volume to move prices. It's common for a small cap to fluctuate 5% or more in a single trading day, something some investors simply cannot stomach.

2. Time
Finding time to uncover that small cap is hard work - investors must be prepared to do some serious research, which can be a deterrent. Financial ratios and growth rates are widely published for large companies, but not for small ones. You must do all the number crunching yourself, which can be very tedious and time consuming. This is the flip side to the lack of coverage that small caps get: there are few analyst reports on which you can start to construct a well-informed opinion of the company.

And because there is a lack of readily available information on the small-cap company, compared to large caps like GE and Microsoft which are regularly covered by the media, you won't hear any news for weeks from many smaller firms. By law these companies must release their quarterly earnings, but investors looking for more information will be hard-pressed to find anything.

The Bottom Line
There is certainly something to be said for the growth opportunities that small cap stocks can provide investors; however, along with these growth opportunities come increased risk. If you are able to take on additional levels of risk relative to large-cap companies, exploring the small cap universe is something you should look into. Alternatively, if you are extremely risk averse, the rollercoaster ride that is the stock price of a small cap company may not be appropriate for you.


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