I Was Wrong in Infosys...But You Can Still Benefit from It

Aug 2, 2019

Apurva Sheth, Editor,Profit Hunter Pro

The Indian stock market has been trending lower ever since the Finance Minister announced the Union Budget on July 5. It was the worst ever July for benchmark indices Sensex and Nifty in 17 years.

Most of the 11 sectors I track ended the month in red except IT. The IT sector managed to end the month with nominal gains of 0.5%. IT bellwether Infosys saved the index from drowning as it was up by 8.5% during the month.

Now I want to make a confession. I was bearish on Infosys and shared my views on it with Profit Hunter Pro readers earlier in the month. But I ate the humble pie as the stock moved up after announcing its quarterly results.

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Nevertheless, I believed chances of further upside in Infosys were limited. I shared my view on the same with my readers last week. Now, yesterday the stock crashed more than 3% and looks like weakness could persist.

Today, I'd like to share an excerpt from the piece I wrote for my Profit Hunter Pro readers. I believe there are two things you could gain from it. First is our view on Infosys. Second how to use ratio charts to identify trading opportunities.

  • One shouldn't focus only on the successes. Failures are equally important for us to grow in life.

    At Profit Hunter Pro, I regularly reviewing our performance at the start of every month. Here we look at the stocks which worked and didn't work for us.

    I do a performance review every six months as well. We managed a win ratio of 66% in our last review for the period from January to June 2019. This also means that I failed in 34% of the trades I recommended.

    Apart from the recommendations I also share my insights in stocks on a regular basis. Infosys is one of the latest stocks which has completely moved against my expectations.

    I believed it was the most vulnerable stock in the IT index. Infosys was forming a triple top pattern on the daily charts and a break below the support level of 685 would confirm this pattern.

    A break below 685 could have triggered a 10% downmove in the stock. But this didn't happen. The stock reversed its trend immediately after I wrote about it and moved up significantly after it announced the quarterly results.

    Tanushree Banerjee who is research analyst and editor of StockSelect recently closed the recommendation with gains of 57%. She published her views on the stock immediately after the results on July 16. She believes the run up in the stock price of Infosys is mainly on two counts.
    • Margin Expansion: Infosys reported a healthy set of numbers in June quarter of FY20 with revenue growth and margins slightly above our estimates. In addition, it had large deal wins (up 1.7x QoQ to US$ 2.7 billion) and robust growth in digital revenues (up 39.4% YoY).

      Further, owing to the healthy start, Infosys has raised its constant currency revenue growth guidance to 8.5-10% (from 7.5-9.5%) for FY20 while maintaining its operating margin guidance of 21%-23%.

      Healthy earnings performance, digital growth, visibility from deal pipeline and improving margin trajectory could allow Infosys to narrow its revenue and margin gap with TCS.

      Healthy Capital Allocation Policy: Effective from FY20, Infosys expects to return approximately 85% of its free cash flow cumulatively over a five-year period through a combination of dividends/share buyback. The company's current policy is to pay up to 70% of the free cash flow annually by way of dividend and/or buyback.

    Here's what she recommends her subscribers could do...

    • The stock of Infosys today closed at lifetime high (adjusted prices).

      Although Infosys will continue to remain a stock with healthy dividend payouts, we believe that the current valuations price in most of the medium-term upsides. It also breached our FY20 target price.

      We recommend subscribers to consider selling the stock and book profits.

      Subscribers who had bought the stock on our recommendation could fetch 57% gains in two years.

    Now Tanushree has recommended to sell the stock and book profits which means she thinks upside is limited.

    The ratio chart of the TCS-Infosys pair suggests limited chances of outperformance by Infosys compared to TCS.

    I am sure regular readers know about ratio charts. It measures the relationship between two stocks. It is calculated by dividing the price of one stock by another. Normally, you divide the high-priced stock by the low-priced stock.

    I have divided the price of TCS by Infosys to create the following ratio chart.

     

    When the ratio line rises, we can say that TCS is the better performer among the two. Conversely, a falling ratio line would mean that Infosys is outperforming TCS.

    The grey line which runs in the middle is a one year moving average of the ratio line. And the blue bands which you see at the top and bottom are plotted 2 standard deviations away from this average. In simple terms, they indicate an extreme in the ratio line.

    You will notice that the ratio line doesn't stay in the lower half for too long. It barely touches the lower band and moves up. This means TCS doesn't stay grounded for too long compared to Infosys.

    Now, Infosys is trading in the lower half which means limited chances of Infosys's outperformance compared to TCS.

    There could even be a pair trading opportunity in these two stocks if the ratio line touches the lower band.

    Don't worry. I'll tell my readers when that happens.

If you are new to the concept of ratio analysis or pair trading then you can simply go through the links I am sharing below (requires subscription).

In case you still have doubts about it then feel free to write to me here.

Warm regards,

Apurva Sheth
Apurva Sheth
Editor and Research Analyst, Profit Hunter Pro

PS: Tanushree is ready to reveal details of the huge money-making opportunity called Rebirth of India in an exclusive online mega summit on 8 August. She has already picked 7 great stocks to ride this historic boom. Book your free seat for the summit here.

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