Invest Without Emotions
Prabhudas Lilladher came out with a research report yesterday that picked 8 mid-cap stocks that looked good. Can these stocks out-perform the Nifty? How would an equally weighted portfolio of these stocks perform over a period of time? Is the hit ratio any better than 50/50? Well, we created a Theme that tracks this portfolio. So dood-ka-dood, pani-ka-pani.
Check out the Theme here: “Prabhudas Lilladher Midcap 10-Sept-2013”
Previously: CS Midcap 28-Aug-2013
[stockquote]PRECOT[/stockquote]
The Nifty rallied 3.81% this week, largely on the back of the new RBI Governor’s “Big Bang” entry.
Banks rallied on the back of RBI’s FX swaps that is expected to bring in $10bn from non-resident deposits.
| BANKBEES | +10.04% |
| NIFTYBEES | +4.09% |
| JUNIORBEES | +2.48% |
| INFRABEES | +1.53% |
| GOLDBEES | -1.79% |
| PSUBNKBEES | -8.24% |
Are we at the cusp of a breakthrough here?
Rates ended lower across the curve but the term-structure remains inverted.
IT corrected and banks rallied…
For all their great work, it is unclear that economists have actually helped government officials manage the complex task of managing a national economy any better than they ever have. We are bedeviled by manufactured complexity — complexity that could have been avoided but has instead been amplified by the pursuit of narrow knowledge in a broad world.
Source: Our Self-Inflicted Complexity
Messod Beneish, a professor at Indiana University’s Kelley School of Business, outlined a quantitative approach to detecting financial statement manipulation in his 1999 paper The Detection of Earnings Manipulation. (pdf) He based his model on forensic accounting principles, calling it the “probability of manipulation,” or PROBM model.
The model correctly identified, ahead of time, 12 of the 17 highest-profile fraud cases in the period 1998 to 2002. The PROBM model also consistently predicted stock returns over 1993 to 2007. Students from Cornell University, using the PROBM, correctly identified Enron as an earnings manipulator, while experienced financial analysts failed to do so.
Looking through balance sheets from 2010-2013, the companies with the least probability of manipulation are:
LGBFORGE [stockquote]LGBFORGE[/stockquote]
DISHTV [stockquote]DISHTV[/stockquote]
EROSMEDIA [stockquote]EROSMEDIA[/stockquote]
TATACOMM [stockquote]TATACOMM[/stockquote]
HERITGFOOD [stockquote]HERITGFOOD[/stockquote]
SUPERSPIN [stockquote]SUPERSPIN[/stockquote]
ASAL [stockquote]ASAL[/stockquote]
VIMTALABS [stockquote]VIMTALABS[/stockquote]
PIRGLASS [stockquote]PIRGLASS[/stockquote]
RIIL [stockquote]RIIL[/stockquote]
Since the PROBM score is more of a gatekeeper, here’s a slightly longer list of stocks with high PROBM score:
ASHIANA [stockquote]ASHIANA[/stockquote]
IDFC [stockquote]IDFC[/stockquote]
TUBEINVEST [stockquote]TUBEINVEST[/stockquote]
BAJAJFINSV [stockquote]BAJAJFINSV[/stockquote]
PTC [stockquote]PTC[/stockquote]
SHRIRAMCIT [stockquote]SHRIRAMCIT[/stockquote]
MAGMA [stockquote]MAGMA[/stockquote]
GODREJPROP [stockquote]GODREJPROP[/stockquote]
BAJAJCORP [stockquote]BAJAJCORP[/stockquote]
SRTRANSFIN [stockquote]SRTRANSFIN[/stockquote]
SGJHL [stockquote]SGJHL[/stockquote]
THANGAMAYL [stockquote]THANGAMAYL[/stockquote]
MANAPPURAM [stockquote]MANAPPURAM[/stockquote]
SREINFRA [stockquote]SREINFRA[/stockquote]
CHOLAFIN [stockquote]CHOLAFIN[/stockquote]
M&MFIN [stockquote]M&MFIN[/stockquote]
LICHSGFIN [stockquote]LICHSGFIN[/stockquote]
BAJFINANCE [stockquote]BAJFINANCE[/stockquote]
L&TFH [stockquote]L&TFH[/stockquote]
PFS [stockquote]PFS[/stockquote]
Note: we ignored stocks that don’t had 5 years worth of statements.
The PROBM score, along with SNOA and STA, allows us to screen for stocks with strong balance sheets. We’ll put these three together in the next post…
The intuition behind SNOA as a filter is that firms with a high level of net operating assets, scaled to control for their size, indicates a lack of sustainability of recent earnings performance. An accumulation of accounting earnings without a commensurate accumulation of free cash flows raises doubts about future profitability. If investors have limited attention and fail to discount for the unsustainability of earnings growth, then firms with high net operating assets will be overvalued relative to those with low net operating assets. In the long run, such mispricing will on average be corrected. This implies that firms with high net operating assets will on average earn negative long-run abnormal returns, and those with low net operating assets will earn positive long-run abnormal returns. The whole paper is worth a read: Do Investors Overvalue Firms with Bloated Balance Sheets (pdf)
The idea is that you go long stocks with low SNOA and short stocks with high SNOA. Going past 5 years, here’s a list of stocks with a low SNOA:
NMDC [stockquote]NMDC[/stockquote]
ORISSAMINE [stockquote]ORISSAMINE[/stockquote]
MOIL [stockquote]MOIL[/stockquote]
ENGINERSIN [stockquote]ENGINERSIN[/stockquote]
INFY [stockquote]INFY[/stockquote]
INGERRAND [stockquote]INGERRAND[/stockquote]
OFSS [stockquote]OFSS[/stockquote]
OIL [stockquote]OIL[/stockquote]
NAUKRI [stockquote]NAUKRI[/stockquote]
COALINDIA [stockquote]COALINDIA[/stockquote]
And the ones with high SNOA:
HALONIX [stockquote]HALONIX[/stockquote]
ESL [stockquote]ESL[/stockquote]
VGUARD [stockquote]VGUARD[/stockquote]
HITECHPLAS [stockquote]HITECHPLAS[/stockquote]
TIRUMALCHM [stockquote]TIRUMALCHM[/stockquote]
TTML [stockquote]TTML[/stockquote]
BIRLAERIC [stockquote]BIRLAERIC[/stockquote]
BURNPUR [stockquote]BURNPUR[/stockquote]
SURANAVEL [stockquote]SURANAVEL[/stockquote]
DIGJAM [stockquote]DIGJAM[/stockquote]
Note: we ignored stocks that don’t had 5 years worth of statements.
When you combine STA (discussed earlier) and SNOA, you get to a place where you have filtered a vast majority of the universe. But there’s one more gatekeeper to discuss…
The Nifty went down -4.71% (INR) / -12.52% (USD) in August. IT and Metals were the few bright spots.
The worst performer of the month award goes to Indian banks thanks to the deadly triumvirate of the falling rupee, rising rates and an asinine government.
| GOLDBEES | +8.89% |
| INFRABEES | +5.26% |
| NIFTYBEES | -5.24% |
| JUNIORBEES | -7.26% |
| PSUBNKBEES | -10.58% |
| BANKBEES | -13.93% |
Long-term rates continue to rise but the curve remains inverted.
Overnight MIBOR (inter-bank) rates seem to have stabilized at higher levels after gyrating wildly in July.
NSEL’s role was to bring farmers and buyers together by eliminating middlemen but it forged/manipulated documents regarding stocks and liquidity and allowed some of the companies to pledge the same stock with more than one financial institutions.
Source: Live Mint Coverage
[stockquote]NEULANDLAB[/stockquote]