The curious case of Crompton Greaves

This is not a post about a court-room thriller, even though the title may sound like one of Erle Stanley Gardner’s page turners. That doesn’t mean that the process of discovery of the real cause behind the serious hammering of the stock price of Crompton Greaves may not be an exciting one.

First, the facts. A less than stellar Q1 result due to significant reduction in the consumer business (mainly electrical appliances) was a shock. That was followed by the revelation that the erstwhile CEO had dumped his entire stock holdings of 180000 shares earlier in the month.

The former CEO took pains to explain that:

(a) he doesn’t like to invest in the stock market but had received the shares as part of his compensation some 11 years back; at that time he had resolved to sell the shares immediately after retirement

(b) he retired on June 1, 2011 and sold the shares within a month of retirement after following due process of informing SEBI and the stock exchanges.

Doubts remained in the minds of investors because of three reasons:

1. Insider selling of large quantity of shares is considered a warning sign

2. Though he retired on June 1, 2011 Mr Trehan is still associated with the company though he doesn’t draw a salary. That means, he had insider’s knowledge about the poor Q1 performance of the company

3. The timing of the sale seemed a bit fortuitous. What if the stock market was in a deeper correction? Would he have sold his shares at lower prices? Alternatively, if the market was in the midst of a strong bull run, would he have waited a little longer to sell at a higher price?

Only Mr Trehan can answer those questions. Bottom line is that a lot of small investors were shaken by the severity of the stock price crash. Since such a crash didn’t occur when the ex-CEO actually sold his shares three weeks back, fingers are being pointed towards a bear cartel that used the fact of the insider sale as an excuse to hammer down the stock price. A fit case for SEBI to look into.

The Joint Managing Director of Havell’s – a competitor of Crompton in the consumer appliances space – does not believe that there is any cause of worry. Retail prices were hiked some time back due to increase in input costs. That may have led to consumers delaying their buying decisions. Another explanation is that distributors picked up more inventory in Q4 to avail of the then lower prices. That is why they lifted less inventory in Q1.

What should small investors do? On a TTM EPS of 10.61, the P/E at today’s closing price of 182.55 is 17.2. Not mouth-watering valuation by any means, but not hugely expensive either. If you are planning to enter, you may want to wait for Q2 results and then decide.

If you are holding the stock and are in profits, use the short-covering bounce up to book a part of it, and hold on to the rest. Remember the old stock market adage: When in doubt, stay out.

Stock Chart Pattern - Havell's India (An Update)

In the previous update to the analysis of the stock chart pattern of Havell’s India, written a year ago, I had recommended existing investors to hold or book partial profits, and new entrants to wait for a correction. The stock had closed at 661.30 – less than 15% below its Jan ‘08 high of 750; it is better to be cautious near a previous top.

The stock went on to touch a new all-time intra-day high of 892 (or, 446 after bonus adjustment) in Oct ‘10, just prior to the issue of 1:1 bonus shares (marked by the blue bell). Was my recommendation ill-timed? It would appear so – unless you take a look at the one year closing chart pattern of Havell’s India:

Note that the prices have been adjusted following the bonus issue in Oct ‘10. All price levels in the previous update should be divided by 2 for comparison. Existing holders – even those who may have booked partial profits – enjoyed the rise from 330.65 (adjusted for 1:1 bonus) in July ‘10 to 437.60 in Oct ‘10.

The MACD and ROC made lower tops, and the RSI made a flat top as the stock rose to its peak in Oct ‘10. The negative divergences gave early warning of a correction, which got exacerbated after the bonus issue.

Why? Often, investors resort to selling the stocks that they bought at high prices prior to the bonus issue. As the stock went ex-bonus (i.e. halved in value), investors sold at lower prices to book short-term losses to avail tax benefits. Many investors also sell after the bonus shares are credited to their demat accounts, to reduce their holding costs.

Whatever the reasons, the stock fell steeply to close at 293.70 on Feb 10 ‘11 – a fall of 34% from the peak, underperforming the Sensex correction of 18%. The 50 day EMA hardly went below the 200 day EMA – despite the steep fall below the long-term moving average.

Take a look at what happened next. Not only did the correction provide a better entry point to new investors, a ‘V’ shaped recovery took the stock to a new all-time closing high of 441 – recovering all its losses, and outperforming the Sensex.

The stock touched a new all-time intra-day high of 451 on Jun 15 ‘11 – a day after it closed at 441 – but formed a ‘reversal day’ pattern that started another sharp correction below the 50 day EMA.

I have drawn three ‘fan lines’ (numbered 1, 2 and 3) to ‘capture’ the rally and the subsequent correction. So far, the third fan line has provided support, keeping the rally alive. However, a break below may signal a deeper correction. A fall below 294 will confirm a bearish double-top.

The technical indicators are recovering from oversold conditions. The MACD is negative and below its signal line, but is turning around. The ROC is also negative, but has crossed above its 10 day MA. Both the RSI and the slow stochastic are emerging from their oversold zones. Volumes have picked up over the past two days. An upward bounce is in progress.

The company is fundamentally strong, with good cash flows and manageable debt. The management is investor friendly – paying regular dividends and three 1:1 bonus issues in the past 6 years. The Sylvania acquisition should start bearing fruit. Margins are under a bit of pressure. A play on the domestic consumption story and a great stock for a small investor’s portfolio.

Bottomline? The stock chart pattern of Havell’s India is in a bull market. One can buy the dips, but with a strict stop-loss. Watch the third fan line closely; a break below can turn into a deeper correction.

Contrarian plays in the Capital Goods sector

The BSE Capital Goods index has been a major underperformer over the past year because of poor performances of investor favourites like Crompton Greaves, Praj Industries, Punj Lloyd, Thermax, Suzlon. Even stocks of stalwart companies like L&T and BHEL have disappointed.

In every sector, there are always a handful of stocks that buck the trend and provide money making opportunities. 15 out of the 19 stocks that comprise the BSE Capital Goods index are in bear markets. The 4 remaining stocks can be good contrarian plays. Given below are their one year bar chart patterns.

ABB

After trading below its 200 day EMA in Aug ‘10, the ABB stock made a bullish rounding bottom pattern and rose sharply to reach a 52 week high of 975 on Sep 29 ‘10. A ‘reversal day’ pattern (higher high, lower close) marked the end of the up move. A strong 39% correction ended with another ‘reversal day’ (lower low, higher close) on Feb 10 ‘11. A ‘V’ shaped recovery culminated with a top at 907 on May 11 ‘11 – correcting 82% of the fall and restoring the bull market in the stock.

The technical indicators are suggesting that the current consolidation may last a little longer. Any dip to the 50 day or 200 day EMAs may be a good entry point.

Havell’s India

The Havell’s India stock chart pattern may look similar to ABB’s, but there are a couple of notable differences. The stock hit a pre 1:1 bonus adjusted high of 446.50 on Oct 5 ‘10 after a 19 months long bull rally. The subsequent correction was exacerbated by the additional liquidity from the bonus issue. The stock dropped below its 200 day EMA for the first time in 20 months, and reached a low of 290 on Feb 11 ‘11 – a 35% correction from its peak. The sharp recovery prevented the ‘death cross’. The Apr 27 ‘11 top of 422.50 retraced almost 85% of the correction.

The stock is consolidating within a symmetrical triangle, and the technical indicators are looking weak. Can be accumulated slowly.

Lakshmi Machine Works

The strong bull rally of the LMW stock ended with a double-top reversal pattern. After touching an intra-day peak of 2920 on Nov 8 ‘11, the stock corrected almost 32% to a low of 2000 on Feb 25 ‘11. A bullish rounding bottom pattern seemed to restore the bull market in the stock. But a sharp correction has dropped the stock below its 200 day EMA again.

The technical indicators are looking oversold, which means the down move may be ending soon. Accumulate slowly.

Siemens

The brief drop below its 200 day EMA in Jan ‘11 did not have much effect on the bull rally in Siemens. The stock is consolidating sideways, and may continue to do so for some more time. Can be added on dips.