Chapter 2 : Finding Value Stocks sorry Value in Stocks

After reading Chapter 1, you are made up your mind to select stocks for building your portfolio. So how to choose a company whose stock will give handsome returns on your investment.

Investing in HPCL stock @ April, 2019

HPCL is a Large Cap stock and already corrected over 40%, so I consider HPCL is undervalued and has a great potential to create wealth. Two of my friends Ram and Shyam are invested in HPCL stock for over period of 2 years. So I thought it is better to ask them about investing in HPCL stock as they are holding the stock for a long time. Ram advised me to invest whatever possible amount I can invest in HPCL, whereas Shyam said his portfolio sunk due to HPCL and asked me not to invest in it. Should follow Ram’s advice or go with Shyam’s? I did neither

HPCL Investments By Ram & Shyam

From the above chart is is evident that Ram has earned 32% return on investment where as Shyam lost around 22% on his investment. What you can learn from Ram & Shyam’s Story? Ram is a good investor since hist portfolio appreciated and Shyam is a bad investor as his portfolio drawing negative returns.

In my opinion in the above scenario, both Ram and Shyam are just invested in a value stock. From the company’s financial soundness, dividend or profit ratios one can say that HPCL is a good company to rely upon. But Your portfolio grows when you find the value in Stocks not by finding Value stocks.

I asked both Ram and Shyam a straight question, when are they planning to sell their stocks?

Ram said he is not interested to sell HPCL stock as it is paying good dividend every year and also giving good appreciation. Shyam said he will sell the stock once it reaches break even.

From HPCL’s five year chart you can see that the stock reached it’s high value @ Rs. 482/-. From 482 level the share has fallen to 266 (around 44% correction), which means both Ram and Shyam lost their money to the tune of 44%.

Leave about Ram and Shyam for now, I will explain how they missed the opportunity earn more from HPCL stock in the upcoming Chapters. Read on to know the art of buying the stock at the right price…

Step 1 : Choose companies that you trust

I strongly suggest you to choose Large Cap stocks or Mid Cap Stocks to start with and never venture out with Small Cap Stocks. For Small Cap stocks you need read their financial data and few other parameters, will be explained in other Chapters.

Step 2 : Identify Pivot Points to Invest

If you read financial news or any watch financial interviews, you will find that most of the investors are interested in buying the stocks at a discount. Every investor has their own approach to calculate the discount to buy any stock.

Discount is the correction in stock price used to find the true value of a stock.

Calculation of Discount Value

For this step you need to use the ONE YEAR and THREE YEAR charts of the company to evaluate the trigger price.

I calculate the Discount using One Year Chart and Three Year Charts. Lets go with HPCL example for better understanding.

HPCL Three Year Chart

Source : Screener.in

You can find the Three Year High price of HPCL stock is Rs. 482.40 and Three Year Low Price of HPCL stock is Rs. 161.20.

Discount = (Three Year High – Three Year Low)/3

For HPCL stock, Discount = (Rs. 482.40 – Rs. 161.20) /3 = Rs. 107.

That means You can invest in HPCL stock when there is a correction of Rs. 107 from its High Value.

I suggest you to go with 1-1-1 investment plan. Simply invest equally in three installments.

Pivot 1 = High Value – Discount = 482.4 – 107 = Rs. 375.4

Pivot 2 = Pivot 1 – Discount = Rs. 375.4 – 107 = Rs. 268.4

Pivot 3 = Pivot 2 – Discount = Rs. 268.4 – 107 = Rs. 161.4

We have not considered decimals in calculation of Discount value, otherwise the Pivot 3 equals to the Three Year Low Price.

Now we have successfully calculated the Pivot points for the Three Year Chart, Now we have to calculate the Pivot Points for One Year Chart. Pivot points for One Year Chart is completely different.

HPCL One Year Chart

Source : Screener.in

From the above chart you can find the Year High Value of HPCL Stock is Rs. 330.15.

In case of One Year Chart we consider 30% correction as discount.

Discount Value = 30% of Year High Value or 30% of Pivot Value

Discount = 30% of 330.15 = Rs. 99.05

Pivot 1 = High Value – 30% of Year High Value = Rs. 330.15 – Rs. 99.05 = Rs. 231.10.

Pivot 2 = Pivot 1 – 30% of Pivot 1= Rs. 231.10 – (30% of 231.10) = Rs. 161.77

Pivot 3 = Pivot 2 – 30% of Pivot 2 = Rs. 161.77 – (30% of 161.77) = Rs. 113.24

Now You have calculated Pivot Points using One Year and Three Year Charts. Always choose the Lower value as your pivot to buy the stock.

 ONE YEAR CHARTTHREE YEAR CHART
PIVOT 1Rs. 231.10Rs. 375.40
PIVOT 2Rs. 161.77Rs. 268.40
PIVOT 3Rs. 113.24Rs. 161.40

You might be doubtful after seeing the above table that all pivot points belong to One Year Chart. You try the same rule for various stocks, you will see the difference and understand the concept of value investing.

Discipline and Patience are the most important aspects to be successful in Stock Market.

Profit Booking

Ok…Everything looks good. When should I Sell the stock?

Buying a stock is easy but selling a stock is the most difficult part for any investor.

After selling a stock, the first thing most investors will do

Actually it depends on your Greed & Risk Appetite.

For PSU stock, I do exit 50% of the stock when there is an appreciation of 50% and remaining 50% when the stock appreciate another 50%.

In case of a Private Company, I will exit 50% when it appreciates 50% and the remaining I will hold for longer periods for multibagger returns..

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