Chart Patterns of Housing Finance Companies (an update)

A few days after the Sensex and Nifty peaked in Nov ‘10, news of the housing finance scam dampened investor sentiments further. I had written a post on the chart patterns of housing finance companies at that time - all of them were correcting from their respective peaks.

Multiple interest rate increases since then have taken a toll on interest-rate sensitive industries, including housing finance companies. However, there are always one or two stocks that buck the trend. Those are the ones to put on your buy list. Let us look at the current charts in alphabetical order:

Can Fin Homes

After touching an intra-day high of 172 in Aug ‘10, the stock has been in a long down trend – halving in value when it touched an intra-day low of 86.55 in Feb ‘11. It has been consolidating within a bearish descending triangle pattern. The likely break below the support level of 90 can push the stock deeper into a bear market. On the upside, the 200 day EMA and the blue down trend line will provide strong resistances. Avoid.

Dewan Housing Finance

The stock peaked at 347 in Nov ‘11 before starting a prolonged correction within a downward sloping channel. So far, the stock has corrected 47% from its peak. Today’s high volume spurt was on news of its fund-raising plans. The stock is in a bear market, and such news driven spurts are good selling opportunities. Avoid.

GIC Housing Finance

The stock has been trading within a downward sloping channel, and is in a bear market. The drop from its Nov ‘10 high of 161 to its recent low of 74 has corrected 54% from its top – making it the worst performer among the housing finance stocks. Avoid.

GRUH Finance

This HDFC subsidiary has been a star performer – outperforming even its better known parent. After making a double-bottom (311 in Feb ‘11 and 310 in Mar ‘11) pattern, the stock embarked on a strong bull rally that peaked at 629 in Nov ‘11 – a 100% gain in 8 months. This was one of the two top picks in my previous post, and has certainly lived up to expectations. Add on dips.

HDFC

The stock was the other top pick in my previous post. It has been a favourite of the FIIs. That perhaps led to its relative underperformance, even though the fundamentals remain strong. The FIIs have been net sellers of Indian equity in 2011, and stocks like Infosys and HDFC have borne the brunt of their selling. The stock has been moving sideways – oscillating around its 200 day EMA. Hold.

LIC Housing Finance

This scam-tainted stock had a sharp fall, followed by a 5:1 stock split (marked by light blue bell) that exacerbated the fall as a large number of stocks hit demat accounts. The company had no alternative but to make top-level changes, which led to a decent recovery. The stock has been trading within a rectangular consolidation pattern for the past 8 months. Hold.

Bottomline? The stock chart patterns of housing finance companies clearly show that high interest rates have affected performance – with the sole exception of GRUH Finance. Its business concentration in the state of Gujarat – one of the best administered states in India – has helped its cause.

5 reasons why small investors should avoid stocks and buy mutual funds

Reason No. 1: Insufficient funds

Many small investors are unable to spare more than Rs 5000 or 10000 per month for investing. Such amounts are insufficient for investing in excellent stocks. Investors can at best buy only 25 shares of ITC, or 10 shares of HDFC.

Alternatively, they can buy 50 units of DSPBR Top 100 fund. The fund’s equity holdings include ITC, HDFC, TCS, Larsen & Toubro, Coal India, ONGC, ICICI Bank, Hindalco, Grasim, Bank of India, Bharti Airtel, Glaxo Pharma, Lupin, and many more stalwart stocks. 

Reason No. 2: Insufficent knowledge

Small investors have very little knowledge of how the stock market works, and what are the rules and criteria for success. They jump into the market feet first – attracted by stories of untold riches with very little effort. No wonder they end up losing big time.

Some never recover from the initial trauma, and quit the stock market for ever. Others plod along manfully, feeling happy if they can recover their losses after a few years. A handful eventually learn the ropes and end up with a decent retirement kitty.

It is much better to invest in a mutual fund, and leverage the knowledge of the fund manager.

Reason No. 3: Insufficient time

For most small investors, buying and selling stocks is a part-time activity that provides some extra money and thrills. But to become truly wealthy from one’s stock investments, one has to be engaged in it full time.

Why? Because one has to learn and monitor a variety of information – the economy, its particular cycle stage, inflation, interest rates, oil and other commodity prices, activities of FIIs and DIIs, quarterly results of individual companies, analysing annual reports, tracking promoter activities, their shareholding, and so on. Most investors have insufficient time to spare for such learning and monitoring.

The fund manager and his team get paid to do such monitoring on a daily basis. Benefit from their services.

Reason No. 4: Insufficent experience

It takes years of experience in the stock market to learn the intricacies of fundamental and technical analysis that would enable a small investor to distinguish between a good stock and an excellent stock. A good stock may give you decent returns over a couple of years and then fall from glory (think Pantaloon or Suzlon). An excellent stock – like ITC or HDFC – will provide superior returns year after year, and can be bequeathed to future generations.

Take a re-look at some of the stocks in the portfolio of DSPBR Top 100 fund (mentioned in Reason No. 1 above). That is an excellent portfolio selected by an experienced fund manager.

Reason No. 5: Insufficient risk tolerance

Almost inevitably, a stock falls in value when a small investor buys it, and rises in value when a small investor sells it. The result is usually panic, and a desperate desire to either recoup the loss or re-enter for more profits at the earliest. Without knowledge of her own risk tolerance, a small investor invariably sells too soon or buys too late.

Better leave the buying and selling of portfolio stocks to the fund manager, so you can sleep more easily at night.

Please note that a fund manager is human and can make errors in judgement. That is why it is important that you do a little research before selecting the fund you buy. Keep investing your monthly savings regularly in buying a fund through bull and bear markets. After a few years of regular investing, your investments are likely to grow considerably – and so will your experience. Then you can contemplate building a stock portfolio of your own.

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Why building a stock portfolio is like buying a car