Stocks you should sell immediately - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Stocks you should sell immediately 

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In this issue:
» Four common themes in stocks that are about to suffer huge fall
» No less than a nuke required to deal with BP oil leak
» Only 5-6 players will remain in telecom industry
» Bad news for investors in commodities
» ...and more!!


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00:00
 
What is common amongst companies like DLF, Unitech, Reliance Capital and Reliance Infra? Indeed, all of these were the darlings of the last Bull Run. The story does not end here though. These companies also turned out to be huge duds when the markets corrected from their peaks. So much so that they didn't just give up all the gains of the bull run. They are also unlikely to make meaningful returns to the investors who invested in them at their highs. However, there is a set of investors out there who would have made tons of money from the entire episode. These investors are none other than short sellers, people who excel in the art of short selling. Short sellers derive their profit from a fall in the value of asset.

We believe that the risks involved in short selling are too high for an average investor. However, this does not mean that there is nothing for us to learn from short sellers. Jim Chanos, arguably the world's most successful short seller believes that there are certain recurring themes in short selling. And we could do well to remember those themes if we were to avoid the mistake of investing in another DLF or another Unitech at peak prices.

Chanos talks of four broad themes. He believes that companies that have a lot of debt or have strong growth rates priced into their stock prices are prime candidates for short selling. Also, he asks investors to look into the technological obsolescence aspect as the cash flows here can go down just as fast as the share prices. Finally, he also asks investors to be wary of companies that resort to complex and structurally flawed accounting.

We may not want to short sell like Chanos does. But these points are worth remembering from a buy and hold point of view as well. First, we should stay away from companies that possess the qualities mentioned above. Secondly, if you already have such stocks in your portfolio, perhaps it's time to sell them now.

01:07  Chart of the day
 
US may be going through one of the worst crises in more than a century. But this has not stopped the world's only superpower from splurging big time on military spending. As today's chart of the day shows, the US was way ahead of other countries when it came to total military spending in the year 2009. Considering that the US GDP is around 3-4 times that of the Chinese, its military spend should also reflect that reality. However, that does not seem to be the case. The US currently spends more than six times what China spends on defence. Perhaps, Obama and company may want to have a hard look at this number. As in the past, the US is not so fiscally robust any more so as to keep splurging on defence. As for India, it may be one of the top spenders but as a percentage of GDP, it too spends less than the US.

Source: LiveMint

01:49
 
Producing oil & gas is a hazardous activity. And it is getting increasingly so as the low hanging fruits have been plucked. Very few new oil fields are found on land. Most of them are in the sea. Often deep sea. The most chilling reminder of this difficulty is recent BP oil leak, which has everyone extremely concerned. As per estimates it is releasing up to 120,000 barrels of oil per day into the ocean. Most conventional solutions for plugging the leak do not seem to be working. So much so that Matt Simmons, a noted energy analyst and investment banker, says that a nuclear detonation will be required to seal in the BP oil leak. Even though that approach raises eyebrows, the extent of oil spillage is also alarming. One thing is certain - finding new sources of oil is getting prohibitive difficult. In our view, sooner or later, oil prices will reflect the extent of this difficulty.

02:20
 
In a recent issue of The 5 Minute Wrapup we had sought readers' opinion on rating agencies. We also asked our readers whether Buffett has been right in recently defending rating agencies. Most of them replied in the negative even saying that the rating agencies themselves need to be rated.

Ironically, Buffett himself seems to agree with this. In an interview to New York Times, the legendary investor criticized the business model of rating agencies. 'What was once a bullet-proof franchise may not be bullet- proof' is how he has referred to the business of Moody's. Buffett accused the company of making the same mistake of misjudging credit quality, as others did. He believes that lack of competition has given rating agencies the right to overcharge. That too without retaining the quality of their services. As more independent raters evolve, the rating businesses are certain to get hurt. We could not agree more. Rating agencies globally need to do a lot more to retain their credibility and their businesses.

02:53
 
Telecom's price war has cooled down a bit over the past couple of months. Now, one can hear murmurs of consolidation within the industry. After all, smaller players without a pan-India presence cannot survive just on lower prices for long. And if Bharti Airtel's CEO Mr. Sanjay Kapoor is to be believed, India will be left with only 5-6 operators after the consolidation takes place. And even then, only three will have profitable businesses.

Mr. Kapoor also believes that in the long run, companies with just 2G or 3G spectrum may find survival tough. As he told a leading business daily, "Generally, what we have seen is that operators with combinations of both 2G and 3G have survived in most parts of the world." We second his thoughts.

03:19
 
If you hold a lot of commodity stocks in your portfolio, you may have been frowning at their performance on the bourses recently. And the world's largest consumer of commodities offers a reason for their dull performance. China has been steadily decreasing its import of commodities.

One, because it has begun sourcing more and more of its commodity needs internally. This as it slowly reopens a lot of its capacity that it had been quick to shutdown during the downturn. Second is an element of destocking. The country has been using up some of the inventory of commodities it already has lying with itself, adding to the decline in imports into the country.

However, there's only so much destocking one can do. Thus this factor cannot sustain its self as a reason for a decline in imports for too long. Increases in domestic capacity though are likely to continue to dampen China's import needs going forward.

03:50
 
With a string of bad economic news once again gripping the world, gold has continued to glitter better than ever. As per reports last coming in, gold prices in India touched a new high of Rs 19,050 per 10 gms yesterday. While the yellow metal jumped in the international markets, the depreciation of the rupee against the dollar further helped its cause. Gold, easily the asset of the last decade, had a few quiet months up until recently as it was being widely anticipated that the stimulus efforts taken by Governments across the world are beginning to bear fruit. But it was not to be. After the US, it is now the Euro zone that is threatening to buckle under the load of Government debt and this is making investors seek the relative safety of gold.

The latest in the string of bad news was the downgrade of Spain's debt by the ratings agency Fitch. Furthermore, with news from China also not encouraging, what with its economy showing signs of slowing, looks like Gold may continue to inch higher. Hence, if you haven't yet made the yellow metal a small part of your portfolio, it may be not too late to do so currently. After all, as someone said, gold is a speculation alright but it is a speculation against a certainty. And that certainty is the debasement of paper currencies.

04:36
 
Meanwhile, Indian markets were displaying a great deal of strength at the time of writing as the BSE-Sensex was ruling higher by more than 300 points. Heavyweights like Reliance, Infosys and L&T were seen driving most of the gains on the index. Other indices in Asia too showed a similar trend whereas Europe has also opened on a positive note.

04:49  Today's investing mantra
"Since the long-term corporate outlook changes only infrequently, dividend patterns should change no more often. But over time distributable earnings that have been withheld by managers should earn their keep. If earnings have been unwisely retained, it is likely that managers, too, have been unwisely retained." - Warren Buffett
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15 Responses to "Stocks you should sell immediately"

V.VIJAYAMOHAN

Oct 4, 2010

Warren Buffet is very right in his comment that retained earnings must earn good returns. Else, the managers, who retained those earnings must not be retained.
In India too, there are many such companies, with bloated book values, which are not earning any returns.

Like 

KMR Sampath

Jun 6, 2010

good information

Like 

Pradeep Patel

Jun 5, 2010

Dear Sir,
I would like to know about the following scrips target & when to sell.
1 Heidelberg cemcnt 500292 BSC code
2 Timex Group 500414
3 Saint Gobain 515043
4 Medicam Biotech 531146

Thanks Lot
Pradeep Patel

Like 

Noufal

Jun 4, 2010

NO more lists............. jus bothering all not to invest stocks which performed well in the last 2 yrs..
Here is a lot of stocks that may give 50%+ returns

1. Glenmark pharma (Never miss)
2. MSK Projects
3. ICICI Bank
4. Tata Motors
5. Suzlon(For 2 to 3 years)
6. Skumars nationwide
7. Hanung Toys
8. JP Associates
9. Alstom projects
10.STCINDIA(Never miss)

Like 

Sundaravaradan

Jun 4, 2010

Credit Rating:
Each Listed Company must be asked to do SELF RATING in addition to rating Agencies.(Just like Self Appraisal in HR Policies, for the same reason.) The Credit Rating should be standardized based on inputs of standard accounting practices like IFRS.

Like 

m raja

Jun 4, 2010

pls let me know the performance of mcleod russels in the coming days

Like 

nagesh

Jun 3, 2010

I fully share your views.Fortunately I do not deal with realty shares.But I am in possession 250 eq shares of reliance infra got when it was BSES Bombay.I am long time investor.

Like 

rohit

Jun 3, 2010

THIS IA A GOOD VIEW TOWARDS REAL ESTATE STOCKS I REALLY AGREE WITH THAT BUT REAL ESTATE STOCKS WILL GIVE GOOD RETURNS ON KEEPING THE VIEW OF 4-6 YEARS. BCOZ THEY R ALREADY CONSOLIDATING & THOSE STOCKS U MENTIONED THEY R THE HEAVY WTS OF MKTS.THEY WILL PERFORM GOOD BUT STAY INVESTED KEEPING THE VIEW OF 4-6 YRS

Like 

krishnan

Jun 3, 2010

there is no list with the article.if you subscibe to stockpro research etc ,you will get such a list

Like 

R K JOHRI

Jun 3, 2010

Please Name the Companies you advise to Aviod Investment in IMMEDIATELY and mail the LIST.

Thanks,

Johri R K

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