How I Like to Select Stocks

Dec 11, 2020

I'm glad that you have liked my previous video, how to become a successful trader. Please keep your feedback coming. I love to hear from you.

In today's video, I will discuss how to select stocks based on rising and falling commodity prices.

I always recommend including relations between stock prices and commodity prices in your stock selection process.

Believe me when I say that it's beneficial.

It will definitely help you improve your stock selection process.

Let me know your thoughts in the comments.

Hi viewers. Welcome back to the Fast Profit Daily video series. I'm Brijesh Bhatia.

Before standing today's video, I'm glad that you people are liking our previous video, how to become a successful trader, and in case you have missed it, you can go to our YouTube channel. Just browse and watch the video over there and do comment on our videos. That really motivates us to bring new various to you all and in case you wish some topics which should be covered in our next videos, do mention that. We will try to cover that in our upcoming videos.

In today's video, we will be discussing how to select a stock based on the commodity prices which are going higher and lower.

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So if you look at the oil prices, we have seen during the covid time moving into negative territory and for the first time in the history, it has moved the negative territory due to some of the demand constraints, supply constraints.

So there might be some companies which are beneficiaries from the rising commodity prices and some of the companies which are negative from rising commodity prices and vice versa.

So we have divided the commodities into 3 baskets. First is soft commodities, hard commodities, and energy baskets. So look at the first basket. Soft commodities. Generally we look at an industrial product like timber, beverages, cereals, beverages as you all know that we have a coffee stocks which are listed in the NSE. Tea stocks are listed in the NSE. If you look at the timber, plywood stocks are listed in the NSE, and even if you look at the fisheries, they are covered in the soft commodities, which is very much important or even the frozen foods, you can look at the Venky's or some of the other product companies which are into the frozen foods. Such kind of companies fall in the commodity basket for us and in the soft commodities.

Second, if you look at the hard commodities, we look at the precious metals, gold silver and if we look at the companies related to it, Manappuram, I will say Titan. Such kind of companies are there where you can do for the gold as a precious metal. Ferrous metal and non-ferrous metals or say zinc, lead, copper, aluminium.

Such kind of companies we look I look at as hard commodities which are very much important and not only that when the metals are there, you should also look at not only the metals companies, but the infra companies as well because they are the user of the metals. Real estate companies are the user of it because it really impacts their cost of building a construction.

When it comes to the matter companies, you can also look for the aluminium, copper, we have Zinc companies, steel companies, Tata Steel. Such kind of companies are there which where it could see a positive impact on the rising commodity prices.

So there are various aspects when it comes to the positive and negative of the commodities. Third basket we look at, oil which is the energy basket, natural gas, which is again the energy basket, coal, nuclear power, we look at as the energy basket in the commodity space.

Again, as I said, we have seen crude oil we have seen in the negative terrain. So when we look at the impact again, I would say the oil prices, negative for the OMCs because if they oil prices fall, it's been hitting their profit margins.

When again if we look at the oil prices going up, they will be a beneficiary when the profits are increasing. Then who will be negative?

The paint companies or the raw material companies which the crude oil is there for them. So it will put a negative impact on their stock. So now have you might be imagining how it will put a negative impact.

So when I just look at the filtration process, profit margins also depends on the difference between cost of goods and the sales. In the commodity prices, the cost of production, say, for X product is Rs 100 and if the oil prices are going decreasing day by day, the selling price might go from 110 to 104 or 105, so my profit margin from 10% dips to 5%.

If I just look at the other way around for manufacturing companies say Tata Steel. If prices are going higher and higher, my steel prices of making the production is say Rs 100 and steel prices go from 110, 120, 130, my profit margins are increasing even though the cost of goods produced remains the same. At the same time when demand is increasing metal prices are going higher, it will be beneficial for me

So you can just co relate some of those aspects into the metal space, oil space. When it comes to gold, if you look at gold it is a hot topic when we have seen US$ 2,000 in 2020 so right at 2011, where we have made all time high, now we are back now in 2020 where gold is hitting their all-time high. So who will be a beneficiary or what stock should you look at?

So my best bet would be Manappuram for two reasons. First if I'm lending my jewellery or my wife's jewellery and getting a loan of X percentage, which means that I am giving gold worth of one lakh, they will give X percentage, let's say 60%. So if I lend this gold at Rs 50,000 when the price of gold of gold is 50,000, I am lending at Rs 1 lakh rupees worth of gold and they are lending me 60,000. So they are taking a risk on 60,000.

Now the same gold prices from 50 to Rs 60,000 in the future and by the time says six months down the line. So I am paying my loans. My debt is decreasing and at the same time for Manappuram the risk is also decorating.

If you look at the gold prices from 50,000 to 60,000, a 10,000 increase but the same time when if you look at the risk now my gold worth of 20% increase in gold prices. So my gold jewellery worth of one lakh will turn out to be a 20% higher so 120,000.

At the same time now, if I just look at the risk apart from the amount which I have paid for EMI which I have paid, the risk was 60% for Manappuram. Now that risk us gone down to 50% because the gold worth was Rs 1 lakh. Now it is Rs 1.2 lakh. I have taken a loan of Rs 60,000 for Manappuram the risk has gone down from 60% to 50% because 60,000 is half of 120,000 or 50%.

So such kind of bets you can look at on Manappuram. I won't bet of Titan because it is a consumer company, gold prices increasing, will mean less walk ins for a gold buyers or jewellers. We Indian generally prefer only when weddings are there. So a necessity buying will be there but as an investment or I have a corpus fund, I'm going on buying gold at 60,000 would be a bet I would slightly delay it out. So such kind of bet on Titan I would avoid but on Manappuram I would definitely go long.

So such kind of commodity relations, you can look into the stock selection process and believe me it is beneficial. When you think that commodity prices, one of the commodity prices are increasing, it will definitely be a worth to take a bet on the stocks.

So thank you. Have a nice day. So signing of from the video. Do subscribe to our YouTube channel and do comment so that it will be good for us so that we can create new videos.

Thank you and also, if we haven't subscribed to our Fast Profit Report, which all this are covered where we select a commodity create a view on that and draw down to stock selection process, that's the kind of subscription report which we are offering at Equitymaster. So in case you haven't subscribed, do subscribe here.

Thank you.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "How I Like to Select Stocks"

S G THAMPI

Dec 14, 2020

Too many Grammar mistakes. Kindly proof read once or twice. We miss the point and perhaps even misinterpret. Very shoddy job.

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Dhayanandan Duraiswami

Dec 11, 2020

Hi, Brijesh warm greetings to you. I am a retired General Manager from Neyveli Lignite corporation of India Ltd (NLCIL) a Government of India PSU. I am a life member for all Equity master subscription for several years and I am a savvy reader of Fast profits report. Earlier based on Mr. Vijay Bhambwani's commodity analysis report Mr. Apurva Sheth used to give stock pick report based on technical price chart. Now, in your report I am seeing a wide difference in approach for selecting the stock based on not only technical pricing chart point of view but a in depth fundamental approach by detailing the commodity price impact and how it is going to be beneficial for the stock's earnings in the long run. This shows me how much depth of experience you are having in stock selection process. Thank you and a warm welcome to you. My best wishes to you and your team.

Regards,
Dhayanandan at ddhaya@gmail.com

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