Brokerage Houses Recommendations and Views

1. Buy NIIT; target of Rs 187: HDFC Securities
2. Buy Cairn India; target of Rs 262: Citigroup
3. Buy Electrosteel Casting, tgt Rs 107: Angel Broking
4. Buy Madras Cement, target Rs 4800: Sharekhan
5. Buy Maruti Suzuki, target Rs 1230: Sharekhan

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How to Use Valuation Methodology to Find a Future Multibagger Stock?

Valuation Methodologies

One of the approaches on valuation discussed in the previous NCFM module5 was the so-called top-down valuation. In the top-down approach, an analyst investigates both international and domestic economic indicators, such as GDP growth rates, energy prices, inflation, interest rates etc. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition etc. in a sector in order to identify the best business in the sector.
In the bottom-up approach, the analyst starts the search with specific businesses, irrespective of their industry/region.

Top-Down Valuation (EIC Analysis)

Economy

The stock market does not operate in a vacuum. It is an integral part of the whole economy of a country. To gain an insight into the complexities of the stock market one needs to develop a sound economic understanding and be able to interpret the impact of important economic indicators, which may be studied to assess the national economy as a whole. The leading indicators predict what is likely to happen to an economy. Perfect examples of leading indicators are the unemployment position, rainfall and agricultural production, fixed capital investment, corporate profits, money supply, credit position and the index of equity share prices. An overall growing or a contracting economy affects every industry in the country positively or negatively. One can seldom find flourishing industries in an otherwise stagnant economy. Thus, understanding economy and capital flows, interest rate cycles and currency fluctuations, etc. is very important as it impacts the stock prices.

Economic Indicators

An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. Economic indicators include various indices, earnings reports and economic summaries, such as unemployment, housing starts, consumer price index (a measure for inflation), industrial production, bankruptcies, Gross Domestic Product, broadband internet penetration, retail sales, stock market prices, money supply changes etc. Economic indicators are primarily studied in a branch of macroeconomics called “business cycles”. Economic Indicators can have one of three different relationships to the economy:

• Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. Therefore, if the economy is doing well, this number is usually increasing, whereas if we are in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.
• Counter cyclic: A counter-cyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a counter-cyclic economic indicator.
• Acyclic: An acyclic economic indicator is one that is not related to the health of the economy and is generally of little use. They have little or no correlation to the business cycle: they may rise or fall when the general economy is doing well, and may rise or fall when it is not doing well.

Economic indicators fall into three categories: leading, lagging and coincident.

Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Baltic Dry Index, an index that tracks bulk dry freight rates across the world is another leading indicator and indicates a slowdown in the bookings for bulk dry carriers with its fall and thus indicating a subsequent slowdown in the international trade. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

A lagging economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

Coincident indicators are those which change at approximately the same time and in the same direction as the whole economy, thereby providing information about the current state of the economy. Personal income, GDP, industrial production and retail sales are coincident indicators. A coincident index may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.

Many different groups collect and publish economic indicators in different countries. In the U.S. the collection of economic indicators is published by the United States Congress. Their Economic Indicators are published monthly and are available for download in PDF and text formats. The indicators fall into seven broad categories. Each of the statistics in these categories helps create a picture of the performance of the economy and how the economy is likely to do in the future.

• Total Output, Income, and Spending

These tend to be the broadest measures of economic performance and include such statistics as the Gross Domestic Product which is used to measure economic activity and thus is both procyclical and a coincident economic indicator. The Implicit Price Deflator is a measure of inflation. Inflation is procyclical as it tends to rise during booms and falls during periods of economic weakness. Measures of inflation are also coincident indicators. Consumption and consumer spending are also procyclical and coincident.

• Employment, Unemployment, and Wages

The unemployment rate is a lagged, countercyclical statistic. The level of civilian employment measures how many people are working so it is procyclic. Unlike the unemployment rate it is a coincident economic indicator.

• Production and Business Activity

These statistics cover how much businesses are producing and the level of new construction in the economy. Changes in business inventories is an important leading economic indicator as they indicate changes in consumer demand. New construction including new home construction is another procyclical leading indicator which is watched closely by investors. A slowdown in the housing market during a boom often indicates that a recession is coming, whereas a rise in the new housing market during a recession usually means that there are better times ahead.

• Prices

This category includes both the prices consumers pay as well as the prices businesses pay for raw materials and include:

Producer Prices [monthly]
Consumer Prices [monthly]
Prices Received And Paid By Farmers [monthly]

1. Recap: Creative Eye was 5% upper freeze, Crew Boss gave a profit of Rs 23/-, Hindalco gave a profit of Rs 9/-, Reliance petro did not reach entry price, Zicom gave a profit of Rs 16/-, HFCL was upper circuit freeze and TV Today gave a profit of Rs 2.5/-.

2. Stock Market nifty Level update/span>: 20 day moving average stands at 5775 and thus one can be long till this level is not breached for NSE (Nifty). So far NSE and BSE indexes are in uptrend. Today downtrend was mirroring global trend due to deep US crisis in form of sub prime crisis and looming recession.

3. Daily Stock Market Update:It was a disappointing day as the Sensex and Nifty both closed in the negative. But the Indian market clearly outperformed its global peers as Asia bled and Europe remained subdued. Sensex closed at 20104, down 271 points and Nifty at 6058, down 101 points from the previous close. The BSE Smallcaps Index and CNX Midcaps Index both closed in the positive and all sectoral indices were in the negative except BSE FMCG which was up nearly 2%. The market breadth was positive with advances at 646 against declines of 572 on the NSE. The NSE gainers included ITC, Dr Reddys, Tata Steel, HDFC and Idea Cellular while losers included Bharti Airtel, Tata Power, ICICI Bank, GAIL and Maruti.

4. Key World Indices:

SENSEX 20104.39 -271.48
NIFTY 6058.10 -101.20
FTSE 6559.8 +0.35%
NASDAQ 2671.14 +0.71%
DOW JONES 13473.90 +0.31%
NIKKEI 15,536.52 -2.48%

5. Strong Future Stocks:

Lanco Infratech
Ansal Properties
Adlab Films
Essar Oils
JSW Steel
Deccan Aviation
Chambal Fertilisers
Jindal Steel
Tata Teleservices
Unitech

6. Weak Future Stocks

Federal Bank
Titan
Satyam
BHEL
Patni Computers
ACC
Crompton Greaves
GTL
Ultratech Cement
Shree Cement

7. Free day Trading Tips:

Buy MTNL>191.1,194,197,200 sl 187.25
Buy Indian Hotel> 153.1,159, 163 sl 149.5
Buy Surya Pharma>130.5,136,138,145 sl 127.9
Buy xpro India>46.4,47.5,48.75 sl none as likely to achieve a target of 50 in around 15 days.

8. Day Trading cum Delivery:

Buy Dish TV>93,94.3,96 sl 89.9 (It has a target of 120 and same was recommended by me a few days back at Millionaire Potential Stock Tips Blog and one can hold for long term till it holds 86 levels.

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