Analyze Banking Stock

Banking is one of the most important part of any economy without which the country's progress will definitely reach an impasse. The raw material and product in case of bank is money itself, unlike any other typical firm where raw material maybe coconut and the product obtained is hair oil. In our country the banks though autonomous work under the guidance of RBI (reserve bank of India). For a bank the asset is the money it lends and liability is the money deposited by the common man.

 The 3 important Ns (numbers) to be noted for selecting a banking stock are...  NII (net interest income),  NIM (net interest margin) and  NPA (non performing asset)


 NII is the net interest income i.e. the total money it obtains as interest from the people who have taken loan. A continuous increase in it over longer period is a good sign that the bank has been able to market its products. NIM is another lead indicator. It is difference of interest income and interest expenses over average earning assets. An increase in it over the longer term is sanguine sign that the company is able to squeeze the margin for its growth. The third is NPA, it is a case where recovery of the money lent by the bank is doubtful and it is here that the provisions come into play. An increase in NPA over longer term should be a red signal as it indicates that the bank is unable to marshal its funds to the right people.

 Naturally the good old indicators like EBITDA, operating income, management, type of bank (public or private) etc are also helpful in value buying , but the above given indicators provide a more intrinsic view of the stock. Since banks work under the guidance of RBI, decisions made by the apex bank is also crucial to ponder whether the banking stocks are worth buying or not. Going by the ratios P/B ratio governs over the other ratios. CASA ratio is another significant number with its increase the profit visibility increases. The loan book growth and with advanced technology number of ATMs are also helping to indicate the growth of bank as a whole. 

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An Analysis of the World from Asia

A recent meeting we had with Michael Spencer PhD, Chief Economist for Deutsche Bank in Asia, outlined a number of extremely useful insights into how Asia views some of the current international issues around Central Bank activity, as well as some of the long-term economic trends at play in the Asian region, and their importance for the New Zealand and Australian economies. We will look more closely at some of the key issues that came out of this discussion. 

 In the short term, the key policy issue is the management of capital inflows into small, open, emerging market financial systems. Policy independence in an environment of prolonged zero rate policy in the US is a desired result from Central Banks, and they are increasingly looking at capital controls to achieve this. One area of concern is that high capital inflows from the US into emerging markets could lead to emerging market asset bubbles. 

 Contributors to such an outcome as mentioned above would include: excess global liquidity, a weak US dollar, and an ineffective monetary policy tightening response from Central Banks in emerging markets. A significant value to watch is inflation pressure in emerging Asian economies. 

 Likewise, we appreciate these risks, although we note that despite large inflows of capital into emerging markets, these are coming off a relatively low base, and many worldwide fund managers still hold only moderate weightings to the emerging world. It is important to note that such a scenario is simply a risk to be aware of, rather than our expectation. 

 In the current market, there is a conflict between most central banks, who are tightening (raising interest rates), and the Fed, who are loosening (keeping interest rates at very accommodative levels, virtually zero). A lot of the Central Banks disprove of the Fed for essentially trying to devalue their currency, and they are also conscious that periods of crisis in emerging markets have tended to follow periods of loose US monetary policy. As a consequence, this loose Fed policy could lead to increasing inflation, credit growth, and the asset bubbles mentioned earlier. 

 If problems do arise, it will likely be when the US starts to tighten and raise interest rates. This could have negative implications for markets and growth. 

 If inflation does increase rapidly, it is of some comfort that the Fed can tell banks to increase reserve requirements from 10% to 15%, as Asian central banks have done in the past, to curb excess credit growth. 

 From the Fed's view point, it clearly wants the Chinese currency to appreciate so it can shift some growth away from China and back to the US. Conversely, China sees itself as the less wealthy country and would prefer to keep all of that growth for itself. 

 Looking from a more international perspective, Michael notes that while global growth has slowed in the third quarter, it is far from a double dip, and he is not expecting one. Michael's team is forecasting 2011 growth in China of 8.7%, India 8.1% and the rest of Emerging Asia 4.6%. This compares with 3.6% in New Zealand and 3.2% in the US. 

 This is a modified article from Mark Lister. To read the complete article visit www.craigsip.com. Craigs Investment Partners Limited (formerly ABN Amro Craigs.) is an NZX Firm that was established in 1984. It is one of New Zealand's largest and most established investment advisory firms. 

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How to reject a stock

How to reject a stock? 

Is this a crazy idea? Why should you have a checklist to reject stocks?

You will generally find ten tips to select the next ten bagger, but not many write on how to reject stocks.

Let me first try to convince you why this a sound idea –

The problem of abundance

A typical well diversified portfolio tends to have 15-20 stocks (anything more does not reduce risk any further).  Let’s assume that the holding period is 2-3 years per stock. So in effect one needs to find and replace 5-7 stocks per year in the portfolio.

Even if one assumes a much higher level of diversification, I cannot see a scenario where one is replacing more than 10-12 stocks per year (as an investor and not as a trader).

We have around 5000+ companies listed in the stock market and a selection of 10-12 stocks means that you will reject 4990 stocks (if you were able to have a look at all the companies each year).  That is around a 99%+ rejection rate. Even if you were to play around with the number of stocks you can analyze each year and the number you end up selecting, I cannot envisage a scenario where you will reject less than 95% of the stocks you review.

If you are rejecting stocks most of the time, does it not make sense to have a checklist to make the process more efficient and robust?

Finally a corollary to my point –The main problem is that we are not limited by choice, but by time and effort.

Building the framework

To design a rejection checklist, it’s important to understand what we are looking for and identify factors which negate that.

At the risk of oversimplication, I would say a long term investor is looking at high rates of return for a long period of time. Putting it quantitavely, I would say that I am looking at a CAGR of 26% per annum for 3-5 years or longer if possible.

So what are some of the characteristics of a company which can deliver these kinds of returns?

-          The company operates in an industry with above average growth rate which means that the industry is growing atleast at 15%+ rates (higher than the GDP). 

-          The company is able to earn a high rate of return on capital (atleast 15% or higher) for a long period of time (sustainable competitive advantage)

-          Company is led by a competent and ethical management

-          The company is selling at reasonable valuations

Easier to reject stocks

You must have noted that I have omitted a lot of factors which go into selecting a winning stock and that’s precisely my point. Selecting a profitable stock is a complicated Endeavour and one can write books on it and still not cover all the points needed to identify a profitable idea.

On the contrary if one inverts the idea and looks for an approach on how to lose money on stocks, the list becomes surprisingly small. This is also called the Carl Jacobi maxim on inversion

So let’s look at how we can select stocks to lose money

-          The company operates in an industry which is in a terminal decline (fixed line telephony) or is highly cyclical, commodity in nature and with very poor return on capital (metals, sugar, airlines etc)

-          The industry is subject to a lot of change (regulatory, competitive or technological) which causes several companies to fail or loose money due to sudden change in the competitive scenario (telecom, mining etc)

-          The company is managed by an unethical and incompetent management (do you need examples here?? – just look around )

-          The stock is purchased at high valuations in a cyclical industry right at the peak of the business cycle. To add insult to injury, the company is managed by an unethical and incompetent management. This combination of factors is guaranteed to loose atleast 50-60% of your capital if not more

That’s it! I think the above four factors will help you weed out 80% of the stocks in less than an hour

Is it comprehensive and works 100% of the time?

Of course, this list is not comprehensive. I can come up with a lot of additional points, but I can say that these broad criteria can be used to eliminate a lot of companies at the first glance.

Some of  you may point out that you are aware of a company XYZ with above characteristics, which gave a 50% upside or has even been a multi-bagger.

My counter point is – Do you really want to search for a needle in a haystack when there are often gems lying around? If your idea of fun is to find that nugget of gold in a pile of manure, then welcome to my world. I have engaged in it often and the results are not great compared to the effort put in. In addition if you are not a full time investor, then it makes all the more sense to focus your limited time on good opportunities.

The benefit of my mistakes

The list I have shared is not something I have just dreamed up while sipping coffee. I did a small exercise of listing of my failures for the last 15+ years and found a few common threads among all of them.  If I boil it down, it comes down to the four points listed above.

Now, I know some investors who are able to make good returns by investing in cyclical or commodity stocks. Some others are able to do well, even if the management is not great. However I am quite sure that a majority of investors cannot achieve superior results if they decide to ignore one or all of the four points listed above.

Let me make another bold claim – if you want to lose 90% of your money, buy a highly cyclical and commodity type company at high valuations at the peak of the business cycle and run by an incompetent and crooked management. You will be guaranteed this result. How do I know – I tried it a few times and have never failed to loose my shirt (and other garments!)

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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Agriculture Stocks To Feed Into Your Portfolio

Will farmers be driving Ferraris in ten years? That's what Jim Rogers, the immortal billionaire investor who founded the Quantum fund, thinks. We'll have to wait and see if that turns out to be true, but his sentiment is based upon a few key factors that continue to put upward pressure on the prices of agricultural goods.

 3 Factors That Could Effect Agriculture Stock Prices

 1.) Emerging Market Demand

 Emerging-market economies like China and India are growing by leaps and bounds, enriching the citizens of those countries and creating more demand for higher-end food products. But due to a combination of rolling demand and massive populations, these countries lack the infrastructure and production capacities to satisfy that 'hunger'. China, for example, is home to 22% of the world's population but just 7% of its arable land. So in order to fill the gap, these countries will need to enlarge their imports, which stand to be a boon for long-term gains in the agriculture stocks industry.

 2.) Inflation Hedge

 With the Dollar collapsing at a fast pace, investors continue to flock to companies that trade in 'hard assets', and the agricultural stocks complex definitely qualifies. Although corn, beans and wheat are down sharply from last year, prices have recently begun to rebound and move higher. Hard assets are currency neutral and will continue to be a great investment destination for anyone alarmed about the ruining of paper currencies.

 3.) Global Weather Volatility

 Farmers live in a shaky world. One season, they spend months praying for rain to nourish their crop; then in the next season, the crop gets wiped out because of too much rain. Just this summer, sugar prices soared to a new 28-year high after a drought killed production in India. Ag producers need just the right balance of rain, sunshine and nutrients to produce the desired yield, something that consistently effects production and, in turn, prices.

 Now that we have a essential understanding of the underlying essentials affecting prices and consumption in agriculture, let's go ahead and take a look at some companies that appear to be well positioned to profit from the trend.

 4.) Agriculture Stocks

 The Anderson's, Inc. (ANDE - Analyst Report) is an agriculture producer and transporter in the U.S. The company's share price took a hit last year but has since bounced back nicely as the economy and its estimates have recovered. With the current-year Zacks Consensus Estimate pegged at $2.22, this Zacks #1 Rank stock offers some value with a P/E of 15X. The Zacks Consensus Estimate for agriculture stocks next year is bullish, projecting 27% earnings growth for this agriculture stock. 

 China Green Agriculture, Inc. (CGA - Snapshot Report) operates as a fertilizer producer out of China. Shares posted big gains this year as China's economy has remained hot (recently reporting GDP growth of 8.9%). Next year's agriculture stocks growth projection for the company is a bullish 57%.

 Zhongpin Inc. (HOGS) has posted huge agriculture stocks gains in 2009, with its share price more than doubling after bottoming out just above $7 in early March. The Chinese-based agriculture producer and Zacks #1 Rank stock offers big value in a very bullish environment, trading at just 10X projected current-year earnings, with a solid 18% next-year growth projection to boot. 

 Deere Co. (DE - Analyst Report) builds and manufactures farming machines and equipment. Farmers will be seeking to upgrade their equipment if they're raking in big bucks, and that will provide shares of DE with a very nice boost. As it stands, the company's share price is down from its peak in early 2008, but has begun to rebound on a nice earnings beat last quarter and rising agriculture stocks estimates.

 Agriculture Stocks Conclusion

 When you take a composite view of the agricultural stocks landscape, it's easy to see that there are a number of macro-level trends that could produce long-term growth prospects. It's a great way to round out your portfolio and give you a chance to outperform the averages over the long haul.  

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Advantages of Fixed Income Funds

A mutual fund is a collection of stock and bonds managed by an investment company for mutual benefits of all investors. In such funds, each investor who contributes money in the scheme, entrust responsibility of his investment in the hands of a professional investment manager of a financial institution or a company. The key benefit of such investment is that as each member contributes to the cost of investment, it consequently makes less burden of cost upon each member. 

 A fixed income mutual fund promises a fixed rate of return and less of a risk than other mutual fund schemes. In such funds, money is primarily invested in government and corporate debt. While fund holding may increase in value but the basic purpose of such scheme is to provide current income on a steady basis to investors. Fixed Income funds offer many benefits to investors. Few of them have been discussed below: Regular Income 

 As the name suggests, fixed income fund promises a regular monthly income from your investment while preserving capital. Income from such funds is in form of interest and dividends. Thus, fixed income investment provides great potential for capital gains. 

 Liquidity 

 Fixed income funds are found attractive by those who want to invest money with flexibility of withdrawing it in case of emergencies. 

 Choices of investments 

 Reputed financial companies provide options of fixed income schemes with low to moderate and to high risk level. Hence, investor can choose scheme as per his risk taking capability in relation to fixed income investments. 

 Diversification 

 Fixed income fund scheme offers benefits availed by diversification of an investment. Such funds can be easily diversified as per sector, credit quality, and maturity; as these funds have access to larger capital pools. 

 Professional management of investment portfolio 

 Investors can avail benefits of professionalism. When you invest in such schemes, professional fund managers manage your fixed income investment portfolio with in-depth analysis, research and greater diversification to bring best benefits on behalf of your investment. Every investment is associated with certain risks and fixed income fund is not any exception. While objective of such funds is to provide a steady cash flow and regular income to investors, though, it advisable to delegate your investment responsibility into the hands of reputed and responsible financial institution or company. 

 ICICI Prudential offers one of the best mutual funds in India. Here you will get top mutual funds, Fixed Income Investment, online mutual funds, Fixed Income Fund, tax saving mutual fund and much more for more information login: www.icicipruamc.com. 

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