Dec 26

IT’S THAT TIME OF THE YEAR AGAIN

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It has been sometime since I wrote. The stock markets were for most of 2017 fully in control of the bulls or optimists. As I write this Nifty is not only at an all time high of 10500 but also is almost touching a high PE multiple of 27. That’s expensive by any standards when your median is close to 17.5 and mode is at 14.5 . It is in stratosphere. But I may be made to look like a fool in another 4 trading sessions when sensex crosses 35000. The markets are discounting the earnings of FY 2019 also. And if Gujarat elections were somthing to go by, 2019 may not be a cakewalk for the BJP. 

As investors some of you may have had a great run. A rising tide takes up all boats. And stockmarkets this year have given upwards of 40% returns so one did not have to bang his or her head. Just buy the sensex and sit tight. 

What will happen next year? I do not know. But I do know that two stocks are giving a decent arbitrage opportunity today. Swaraj Engines and Eclerx Services. They have announced a buyback at Rs 2400 and Rs 2000 respectively. What’s the play?

  1. Buy Rs1.99 Lakhs worth of each stock at current price. Swaraj Engines at Rs2000 and Eclerx at Rs 1500. Beyond 2 Lakhs you come in HNI category. .
  2. Wait for record date to be announced by the company for calculating the ratio of shares which will be accepted, generally the ratio is between 50-70% i.e to say if you have bought 100 shares of Swaraj Engines, the company will accept 60 shares at Rs2400 to be sold back to them. And balance 40 you may sell at market prices. Or hold on for the long term. So you tend to make 60×400=Rs 24000 worth of gains in 3 months or less on an investment of Rs 2 Lakhs. A 12% return. Even with a short term capital gains of 15% ie Rs3600 One makes Rs 20400 or a return of 10.2% post tax in 3 months. It is an annualised return of 47.48%
  3. The return is with zero downside risk. And in case the company accepts more than 60 shares, your gains increase further.

I look for such lopsided opportunities which the market offers from time to time. One always does not have to remain invested. As I always say, hold 10-20% of your portfolio in cash for opportunities which are fleeting. This is one such time.

My Picks at current prices for 2018 and beyond are:-

WONDERLA HOLIDAYS

LUPIN LABORATORIES

AUROBINDO PHARMA

GATEWAY DISTRIPARK & CONCOR

and THOMAS COOK

Stay Safe, Stay partially in Cash. This party will eventually get over just like all of them do. Wait for that for investing your bulk.

MERRY CHRISTMAS AND A HAPPY NEW YEAR

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4 comments

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    • anz on December 27, 2017 at 9:02 am
    • Reply

    Dear Sir,

    1. Thank you for the post. Yes, really a long time.

    2. Sensex does seem to be bloated by all measures. The industrial output has not been as bright as expected I believe. I have been slowly moving out from equities to Cash as I see higher multiples. Do you suggest such an apch as the invariable Reversion to Mean shall happen? What about the market still making greater highs and I ending up looking like a fool (this is Greed talking I believe, LOL)

    3. Interesting Arbitrage opportunity given out by you, seems logical with a decent ROI. Have never done such a thing earlier, so will read up on it and come back with queries, if any.

    4. Thank you for sharing these insights sir.

    Regards
    Anshul Gaur

    PS : am having doubts on Gateway Distriparks, revenues have been steadily declining and reason is not obvious. I know its a play on the Logistic sector & I am bullish on the industry in the long run, but is GDL the best bet in that space? Need to study a bit more. (Have been holding GDL since 2012 and have been averaging up so buy price is close to CMP)

    PPS : Coming to India for the new year. Will catch up with you sir, if you are avbl. This time, it shall be dinner at my place sir

      • Fauji on December 29, 2017 at 2:58 pm
        Author
      • Reply

      Dear Anshul

      Nice to hear from you.

      Yes reversion to mean will happen. When? I do not know. Sitting on cash. Good Strategy. Don’t let your patience wear out. This market can make you look like a fool for a greater duration than you actually are. :-)))

      I suggest a 80:20 allocation of Equity vs Cash as of now. With every 5% northwards move of Sensex, increase cash by 10% more. And keep following it blindly like an algorithm. If markets rise from here by 10% more, increase cash position by 20%.Get to 60-40 Equity : Cash.

      Arbitrage opportunities are fleeting and have zero downside risks. Only upside. Percentages may vary. They are therefore worth an investment. I have learnt to take advantage of these only in last few months and want all my readers to also take advantage.

      As far as Gateway Distripark is concerned. It is a business directly linked to the economic output. More trade imports/exports means more transportation and more earnings for the company. Add value of Snowman Logistics to the business of Gateway as it owns that company. Also, I believe the stock should be in band of Rs180-240 for some more time and when it breaks out of 240-250 range, with a volume momentum it should see its next orbit.

      The only other company in this business is Container Corporation (CONCOR) which has a better cash flow. But is fully priced. So take a call. My recommendation, stay tight. Add position if it falls. It is not a stock to average up. Averaging up should be followed on FMCGs or FMCG type businesses which throw more cash than they consume e.g. Asian Paints, Nerolac, Gilette, Colgate, Symphony, Relaxo etc.

      Enjoy

    • vikrant on December 27, 2017 at 3:57 am
    • Reply

    sir, unlike infosys where size of buyback was 13000cr, here , buyback is just 240 cr which is too less, as a result acceptance ratio will be far less.

      • Fauji on December 29, 2017 at 2:24 pm
        Author
      • Reply

      Dear Vikrant
      A good observation. Infosys had a market capitalisation of Rs2,35000 Crores and company was keeping Rs13000 Crore as per your observation for buyback. That amounts to roughly 5% of shares. In case of Swaraj Engines, the market capitalisation of the company is Rs2500 Crore and amount allocated for buyback is Rs 70.73Cr and NOT 240 Crores as mentioned by you. The company cannot buy more than 2.94 Lakh shares or 2.4% of the equity. So, yes acceptance ratio may be less than Infosys.But for retail investors the ratio is always higher. In case of Infosys, as per your reasoning only 5 shares out of my 100 should have been accepted but they accepted 69 out of 102 shares. Also, record date of Swaraj Engines is as close as 12 Jan 2018 so money available for recycling will be faster. End of the day please remember, BALANCESHEET OF YOUR NET GAINS IS CONTROLLED BY YOUR DESTINY and no matter what advice I give or you assimilate, you will make money only as much as is in your PRARABDH (luck, karma, destiny, fate, randomness ….call it what you may) ;-))
      Ciao

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