Archive for the ‘Market analysis’ Category.

 

I have written earlier that there seems to be more value in the midcap space than Large caps represented by the Sensex and Nifty. The above hypothesis came about as I am finding far more ideas in the midcap than the large cap sector of the market.

I decided to check the above hypothesis and generated the above two charts for the Nifty index and CNX midcap. The nifty index has appreciated by around 23% in the last year, whereas the midcap index has increased by around 13 %. Does this prove my hypothesis. Yes and no !. Yes because some of the stocks have come down quite a bit and may be worth investing. No, because the midcap index as a whole is not too cheap, currently trading at around 17 times PE.

So blindly buying into the index may not make sense, but picking specific stocks would.

Based on the above view I tried to look for some mutual funds in the midcap space and found the following interesting. I am listing the negatives of each of the funds. The returns of the funds have been fine and they may be worth a look

Birla midcap – This is a 5 star fund. It does not have a very long operating history. The fund has been around 3 years and the last 2 years performance has not been great

Sundaram mid cap – This fund has delivered good performance in the long run. However the last 1 year performance has not been great. Also the fund has a new fund manager. The fund is extremely spread out and has more than 70-80 stocks in the portfolio

Franklin prima fund – This fund has the longest operating history. It has done well in the past and the fund manager has been around from the beginning. The manager follows a buy and hold philosophy and has higher portfolio concentration. The last 3 year performance has been average though.

As usual, the fund expenses are high and the volatility of these funds is also high. An SIP mode of investment may be a good approach.

In addition, funds like HDFC equity and Franklin prima plus have a diversified approach and can move between various caps. These funds may also be good way of investing in the mid-cap space too as HDFC equity has around 50% exposure midcaps and Franklin prima plus has around 35-40% exposure to midcaps.

You can look for the details for each fund at valueresearchonline.com. I am not recommending any of the above funds, just laying out the facts for some funds which I find worth investigating further in the midcap space. A superior approach would be to pick specific stocks, but that requires a higher amount of effort and time.

 
 

I typically do not invest based on the market cap of companies. Though I have a cutoff of 100 crs for market cap when filtering for investment ideas, I do not give it anymore importance than that.

I have been reading a few articles that the midcap sector of the market seems to be performing poorly as compared to the index. As I hold several midcap stocks in my portfolio, I decided to check the validity of this view.

I checked on the performance of the midcap index and compared it with the nse nifty. Since april, the midcap index been in a bear market and has dropped by around 2-3% whereas the nse nifty is up 7-8 % (see under statistics section of the nse india website)

In addition, my stock filters seem to be turning up a few good ideas in the midcap space.

The above thought does not mean that I am planning to rush out and buy midcap stocks indiscriminately. However the small cap and midcap space is now a good place to look for new ideas

You can find are recent post on market breadth
here on galatime.com

 
 

I have been reading this book : Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.

I have found this book quite good especially if one wants to learn about odds, betting etc.

I am just halfway through the book. The book discusses about the kelly’s formula.

F = edge/odds. I have written about this formulae earlier (see here).

I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.

I have also been doing some analysis on the NSE data and have the following data

The above is the distribution of PE ratio for the last 7 years. It clearly shows that the only for around 8% of the trading days has the PE ratio been higher than 22.

If we take the above numbers as proxy for probability of occurrence and multiply that with the gain/ loss ( current PE – PE of the particular day / current PE) for each day, the expected value is around –19%.

To cut a long story short, the market seems to be overvalued by historical measures (which may not mean that the market is overvalued if the future performance is better than expected). Overall, I am planning to be more cautious especially in investing in the index (via index funds or ETF)

update : 8-Jan : Found this interesting discussion thread on the Berkshire board on MSN on the same topic. For those interested in kelly formulae, i would recommend reading the thread

http://groups.msn.com/BerkshireHathawayShareholders/general.msnw?action=get_message&mview=0&ID_Message=26958&LastModified=4675605385636001835