Spike in volumes and spike in share prices may not necessarily spike your bank balance

As assured by me yesterday, I am providing a brief about two scrips whose volumes and prices have risen but unfortunately one is sure to make a nice big hole in your pocket while another may probably bring home lots of money over the years.

Picking up FACT on shocking volumes and rising price can give investors a hard shock

FACT [ Fertilisers & Chemicals Travancore Ltd ]

Spurt in volumes in FACT happened on 3 November 2010 when days volume soared to 2748653 against 2 weeks average volume of 100988, an astounding spike in volume to the tune of 2621.76 per cent! The closing price on 2 November was Rs.49.40 and on 3 November it shot up to Rs.53.10, an increase of 7.49 per cent in just one day! To my mind neither a great monsoon nor any great decontrol buzz relating to agriculture inputs deserves such astounding spike in volumes in respect of a company whose fundamentals will infuriate a Warren or Graham for that matter. Forget about going into the history and geography of this scrip – just look at a few figures provided below and then perhaps you may be inclined to conclude that whoever is chasing FACT is doing so at the risk of losing money in the easiest way possible. The fact of the matter is that though FACT is India’s leading fertilizer and chemical manufacturer, it is in fact a white elephant whose volumes and share price seems to be increasing for no rhyme or reason.

BookValue Rs. 3.03 against CMP of Rs.52.25/share

Debt Equity Ratio 3.87

Interest Cover 0.13

Total Revenues in fiscal 2009-10, Rs. 2134.10

Total Loss in fiscal 2009-10, Rs.103.80 crores

Taking a call on GMDC based on high volumes and rising price can give investors a great profits

Spurt in volumes in GMDC happened on 4 November 2010 when days volume soared to 13447101 against 2 weeks average volume of 372818 an astounding spike in volume to the tune of 3506.88 per cent! You bet this is a good stock whose price has started increasing pretty rapidly as shown under :

Closing Price on 3 November Rs.139.50

Closing Price on 4 November Rs.164.40

Closing Price on 5 November Rs.169.50

Where in the world can you expect to make 21.5 % flat in 3 days flat!

Gujarat Mineral Development Corporation Limited (GMDC) is a mining and mineral processing company in India. GMDC operates in two segments: Mining and Power. The Company produces lignite, bauxite, calcined bauxite, fluorspar and manganese ore. GMDC is also engaged in the generation of power.

Book Value Rs. 48 against CMP of Rs.169.50 and PE of around 16

Debt Equity Ratio 0.30

Interest Cover 16.5

Total Revenues in fiscal 2009-10 Rs. 1065 crores

PAT in fiscal 2009-10 Rs.279 crores, post tax margin being around 26 per cent.

Conclusion : If volume increases are accompanied by rise in share price, the chances are that the share price may continue its north ward journey in which case one can take a calibrated risk and take a good position in the stock if the fundamentals are good. Else, better stay away or wait for the price to rise to its 52 week high and dump the scrip lock, stock and barrel!

So, friends without going into much details I trust you were enlightened on how to use volume shocking news to your advantage. And yes, be very careful when you see increasing volumes accompanied by rapidly decreasing price – it could be an opportunity to buy a good stock which is being beaten down due to some bad news [ like when Aban’s Pearl sank to kiss the ocean floor ] or it could be a another Satyam.

After all, stocks can at times don the role of a fairy giving you sweet dreams and more often than not, stocks can don the role of a monster giving you nightmares in the process. So, you need to pick stocks intelligently in order to be the Don of the Markets.

Happy Investing!

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd