Stock pick review

If you had invested in any of the stock picks recommended on 22 April 2009

Your returns as on 30-09-10 would have been as follows against a market return of 79.9% during the same period

1. LIC housing finance - 384.7%

2. IFCI -146.5%

3. IOB - 103%

4. JSW steel - 322.5%

Recommendation for a 5 year hold modified - to initiate profit booking strategies at sensex levels around 20-21k.

A technical buy reco

Technical buy - Tech Mahindra

Buy rates : 620 -660

At a strong time tested support at 620-650 range the stock is in an excellent position to make a move towards the 1000 mark despite a 'disappointing' financial result in the latest quarter.

Some other positive factors

• A low PE ratio compared to the peers
• A reputed management
• Steadily growing business

Since the PE of the market is now over 25, a fundamental buy reco on this stock could be out of place. But still, from a technical point of view and for an individual who would risk a little downside for not missing a rally this could be a good pick.

A technical buy reco

Technical buy - Tech Mahindra

Buy rates : 620 -660

At a strong time tested support at 620-650 range the stock is in an excellent position to make a move towards the 1000 mark despite a 'disappointing' financial result in the latest quarter.

Some other positive factors

• A low PE ratio compared to the peers
• A reputed management
• Steadily growing business

Since the PE of the market is now over 25, a fundamental buy reco on this stock could be out of place. But still, from a technical point of view and for an individual who would risk a little downside for not missing a rally this could be a good pick.

Inclusion / Exclusion criteria for the stocks in a portfolio

This section contains the inclusion / exclusion criteria for picking stocks. If any of the answers to the below question is 'NO' the stock should not be bought as a long term investment

1. Does the stock belong to the F&O category?

2. Is the PE ratio of the scrip less than 22?

3. Is the company reporting consistent increase in earnings in at least 5 of the last 7 years with no losses in the last two years?

4. Is the buying capital for the scrip less than or equal to 20% of the total capital for long term fundamental investing?

Diversification

In investment, diversification is a very important risk management strategy. Ever wondered how is it possible for many top scrips to have the same degree of movement like that of the index? The reason is simple. When mutual funds and institutional investors buy

scrips, they do not buy just a single one. They buy the scrips as a group as a part of their risk management strategy. Some times they do buy a single scrip in huge amounts but generally the former pattern followed.

Amateur investors should also consider different options for diversification. Since their capital is limited, they should make a strategy which suits them best . A minimum of 5 sectors and a minimum of two stocks in each sector would be a good option.

For example one could ask a question "What are my five sectors?" The answer could be Banking, Steel, Finance, Infrastructure and Power

What would be my picks in this sector?

IOB and ALBK in banks, JSWSTEEL and SESAGOA in steel, LICHSGFIN and IFCI in finance, IVRCLINFRA and NAGARCONST in infrastructure and TORNTPOWER and POWERGRID in the power sector.

Alternatively one could pick his best stock in 10 sectors.

Investing in these diversified stocks should be according to a proportion. For e.g. Not more than 15% or less than 5% of capital in a single stock could be a guiding principle.

Diversification does not protect against market risk. When value of the market goes down portfolio value also drops regardless of diversification status. But if one is not diversified, a single bad performing stock can kill the intent and content of investment.

Opportunity for range bound trades

The market is now providing a trading range for many scrips.

My pick is IFCI with a buying range of 52-48.5 ; short term target of 57-59.