Investments – Page 27

Value Traps

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Value traps are stocks that have been beaten down in price to the point where they start looking like a bargain — only, to remain stagnant for a long period of time. Basically, you get trapped into a stock that looks undervalued.

When Does a Stock Look Like a Bargain?

A stock looks like a bargain when its P/E Ratio, P/B Ratio has fallen considerably below its peers and historical averages. On the other hand, when the dividend yield or sales to market cap ratio rises above its peers and historical averages — this is also an indicator that the stock is cheap. Value traps look like great buys in the first look; especially in bear markets. Investors who are used to see a company trade at 20 or 30 times earnings suddenly see that the stock is trading at just 5 times its future earnings and it looks like a great bargain.

There is no formula for detecting value traps, but, there are some common sense guidelines that can help investors watch out for value traps.

Investor Bias

The most tempting value traps are those stocks which you already own and that have fallen considerably. Something that looked the right price when it was $20, looks like a great bargain, when it comes down to $10 and of course, there is the added incentive of dollar cost averaging.

Losing Market Share

During recessions — the composition of key players in most markets change. The best example of this is the financial sector across the globe.Â If a company has lost market share in the ongoing recession, has piled up debt, lost its key talent to competitors — then, when the recession ends and the economy eventually turns around — such companies will not be able to grow at the same pace as its competitors and their stock price will be stuck.

Is the Management Willing to Unlock Shareholder Value?

There are some companies that are willing to pay decent dividends, be transparent about their results, issue conservative earnings estimates and generally don’t manage the company from one quarter to another. On the other hand — there are certain managements that are not as investor friendly. When the rebound comes — investors are likely to flock to companies that have investor – friendly practices and are willing to demonstrate them.

Past Performance is Not an Indication of Future Performance

Going by historical numbers is not enough; it is inevitable that the landscape in which companies operate changes.Â Is the company keeping up with the changing times? A good example of this is the newspaper industry. There are managements that acknowledge that the landscape has changed and they have to innovate accordingly, and there are managements that believe that the landscape has not changed enough to warrant a change in their core strategy. Which management would you prefer?

These were some qualitative measures that point out a value trap. There is no fixed formula to define a value trap, so it is impossible to avoid them all the time, but, understanding changing business models and environments — helps screen out dud stocks from your portfolio.

Photo Credit: Dave_7

Management Discussion and Analysis

Company annual reports are long and boring documents that contains numbers, pictures and tables that can put you to sleep — right at the start of your day.

However, there is one section in an annual report that is concise (less than 10 minutes reading time) and you almost always end up knowing a little more about the company than you started out with. This section is the — Management Discussion and Analysis.

This section contains a brief description of the year gone by and some of the key factors that influenced the business of the company in that year. You should read it with a healthy dose of skepticism, as the management is talking about its own business and are usually optimistic. It is a quick read and often reveals interesting bits of information about a business that trigger important questions.

Where Can You Find The Management Discussion and Analysis?

Let’s take the example of New York Times to see where we can find its management discussion and if we find anything interesting in it.

Go to NyTimes.com
Look for a link called — Investors. This should be a small link hidden somewhere at the top or the bottom. In this case, there is no such link, but, if you scroll down to the bottom of the page –Â you will find that there is a link called — The New York Times Company. This seems to be the parent company, click on this link.
On this page, you will see the — Investors — link right at the top. Click it.
On the right side of the page that opens up — you will see a link called — Financials. Click it.
You will see the link for Annual Reports & Forms 10 – K. Click on 2008 Annual Report & 10-k
This will open up the PDF, look for the section of Management Discussion and Analysis in the Index or Table of Contents and go directly to it.

This is the section that you are interested in.

The first thing that I noticed in this section was the company structure and which parts were contributing to the revenue of the $2.9 billion dollar revenue. I also didn’t know that About.com was part of the same company as NYT.

nyt-structure

revenue-break-up-nytimes

Source: 2008 NYTCO Annual Report

As you read on — you will find other bits of interesting information about the company — its business environment, challenges it faces, measures it plans to take etc.

Almost all companies have their annual reports located in the same way as NYT and the Management Discussion is present in all of them.

Reading this in ten minutes won’t make you an expert stock picker or a star fund manager, but, it is an excellent start for people who have never picked up an annual report and want to learn more about the companies they plan to invest in or are already invested in.

Tata Motors FD: Questions

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Tata Motors Fixed Deposit Plan has aroused a lot of investor interest and people have been quite interested in getting more information about this FD plan.

One of the things that I had missed about the Tata Motors FD plan when I wrote about it earlier was the increased rate of interest you get, if you are a shareholder.

Additional 0.25% for Shareholders, Employees and Senior Citizens

You get an additional 0.25% if you fall under the following three categories:

You are the company’s shareholder
You are an employee of the company or its subsidiary
You are a senior citizen. (Over 60 years old)

You just get an additional 0.25%, even if you fall under more than one category. So, if you are a 61 year old employee who happens to be a shareholder of Tata Motors — you still only get an additional 0.25%.

Since, you can’t age overnight and it’s not that easy to become a Tata Motors employee — you could buy a few Tata Motors shares; become a shareholder and increase the rate of interest by 0.25%.

What If I Break the FD?

If you invest in the Tata FD and have to break the FD or withdraw your money prematurely — the investment form says that the withdrawals will be allowed on the sole discretion of the company.

The form goes on to say that there will be a reduction in the interest rate to the extent permissible by the Companies (Acceptance of Deposits) Rules, 1975. And finally, that Tata Motors will deduct the brokerage they paid at the time of issuing the debt.

Here is what the form says:

Premature withdrawal will be permissible at the sole discretion of the Company. All such prematured refunds shall be subject to such terms, including reduction in the rate of interest as prescribed in the Companies (Acceptance of Deposits) Rules, 1975, as applicable. Further any Brokerage paid by the Company at the time of acceptance/renewal, will also be deducted on any premature repayment .

I looked up the Companies (Acceptance of Deposits) Rules, 1975, and it says that if someone breaks a fixed deposit after six months (at least) — the company issuing the fixed deposit can reduce the rate of interest by up to 1%.

So, there are three things you should remember, in case you break the fixed deposit plan before its maturity:

Tata Motors holds the sole discretion to allow you to withdraw your funds.
They will deduct the brokerage they had to pay for setting up the fixed deposit.
They may reduce the rate of interest by up to 1%, if you have at least completed six months with the fixed deposit plan.

These were two questions that I found interesting about this scheme and was interested to find out what the form said about them. You can read the basic details about the plan in a post that I wrote earlier and can be found here.

This site has regular features about IPOs, FDs and other investment ideas, if you would like to get that content by email, pleaseÂ click here.Â

Tata Motors Fixed Deposit Plan

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Tata Motors recently announced its Fixed Deposit plan, which is open for subscription to Resident Indians, NRIs, HUFs and Registered Societies, among others.

The fixed deposit plan has generated quite a bit of excitement, as it gives a yield of 12.83% on its 3 year — Cumulative Deposit Plan. Remember, this is the yield and not the interest rate. The interest rate remains 11%, which is still pretty high for a fixed deposit.

I think the frenzy generated by the launch of Tata Nano — the cheapest car in the world has easily over-shadowed the credit downgrade of Tata Motors to B+ by S&P (second one since last December).

From FT:

“S&P cited deteriorating cashflow stemming from Tataâ€™s $2.3bn acquisition last year of Fordâ€™s Jaguar and Land Rover marques as among the reasons for the downgrade â€“ the second by S&P since December.”

Tata Sons is the parent company of Tata Motors and is one of the oldest, biggest and most reputed Indian conglomerates. So it is difficult for most Indians to even consider the idea that Tata Motors will default on its debt — S&P or no S&P, and of course the recent crisis where large banks and insurers are stuck holding toxic / legacy — AAA paper — has raised a lot of questions on the credit rating agencies themselves.

Tata Motors Fixed Deposit Plan Schemes

Here are the two schemes that an investor can choose from:

Scheme A

Quarterly Income Plan

Scheme B

Cumulative Deposit Plan

Tata Motors Fixed Deposit Plan – For NRIs

NRIs can invest in the Fixed Deposit Plan if they deposit the amount from their NRO Account and this amount doesn’t represent an inward transfer from a NRE / FCNR (B) account. Interest will be deposited in this NRO Account and NRIs need to submit their Indian address while making the application.

Tax Deduction at Source

Tax will be deducted on source from the interest of this Fixed Deposit Plan according to the provisions of the Income Tax Act 1961 for residents and NRIs.

For NRIs — the tax will be deducted at source, as the current provisions of Income Tax Act 1961 doesn not allow interest exemption on interest earned from deposits with companies.

Subscription to Tata Motors Fixed Deposit Plan

You can subscribe to this plan through your broker.Â ICICI Direct has a link to it where you can subscribe to it online. If your broker doesn’t have the facility to subscribe to this plan — then you can also submit the application form at select bank branches.

Tata Motors Contact Page

This site is not related to the Tata Motors FD in any way, and if you applied for the FD and haven’t received any acknowledgment, please go to the Tata Motors page for investors.

Link for Tata Motors Investors Page

On this page, there is a phone number that you can call, and an email address that you can use to write to them about your concerns. Please use those resources to get an answer to your question.

Image Source: Tata Nano Gallery

Disclosure: I have not applied to this fixed deposit plan at the time of writing.

This site has regular features about IPOs, FDs and other investment ideas, if you would like to get that content by email, pleaseÂ click here.

Update: Tata Motors Investor Relations link included at the end of the page.