Short Call: Will ‘buy-on-panic’ strategy work in CanFin Homes, permabear Shah on market fatigue; RVNL in focus

Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world. ~ Charlie Munger

The Fed has reiterated its message of higher-for-longer approach to interest rates. Not long back, that would have set alarm bells ringing in India over a possible tightening of liquidity. Players don’t seem too concerned this time. Also, most players do not expect the RBI to hike rates just to keep with the US Fed. Overall sentiment remains upbeat, but the flurry of mid and small cap earnings to be announced over the next fortnight will need to be closely watched

CanFin Capers

CanFin Home crashed over 9 percent on Wednesday after it reported a Rs 38.53-crore fraud by  three employees at its Ambala branch post-market hours the previous day. The decline was on top of a 5 percent drop in Tuesday’s session even before the company had formally announced the fraud. This is the second fraud that has come to light in 15 months. In April last year, a whistleblower had flagged a fraud of around Rs 4 crore which caused a 36 percent drop in the stock price from Rs 658 to Rs 418 in less than two months. The stock recouped the losses shortly after, but again tumbled around 25 percent in September after its MD Girish Kousgi quit abruptly. But time seems to have been an effective healer on this occasion too and the stock touched a record high of Rs 910 just a couple of days back before selling off sharply. This may seem to suggest that buying into CanFin Homes during a panic usually pays off. But bulls would do well to note that the latest fraud is 10 times the one that surfaced in April last year. That will have an impact on current year earnings. Also, two frauds within a space of 15 months may have investors wondering about the internal systems and processes of the mortgage lender. At three times price to book value and the likely hit to earnings, CanFin shares are not exactly cheap. Stocks like LIC Housing Finance, PNB Housing Finance and Repco Finance are quoting at less than book value. It is possible that investors may weigh their choices.

Bears have piled on to the stock, and CanFin home is on the verge of entering the F&O ban list on the NSE with open interest climbing to over 90 percent of the market wide position limit.

But the August series points to an interesting tussle between bulls and bears. The 800 strike call and the 700 strike put for August both saw heavy activity. Sellers of the call option are convinced that the stock will not top 800 and put writers appear equally confident that the price will not go below Rs 700.

Bear tales

Permabear Sharad Shah feels the market now looks tired after the run-up since March this year. “People are reluctant to buy at these prices, and when market climbs to a certain level, lack of buying is good enough to cause a correction,” he told Short Call. According to Shah, most high networth individuals are trimming their positions as they are not comfortable with the valuations. “They are selling stocks and taking up low risk positions in the options market,” he said.

But what about foreign institutional investors? They are buying aggressively, aren’t they?

“I wouldn’t take FII activity too seriously, the market has become too big and a couple of thousand crore of purchases by FIIs won’t have an impact beyond a point. Domestic money is the big driver now and they have been selling,” Shah says.

RVNL

One more reason why veteran investors are wary about long term bets on PSU stocks: when the prices rally, the government shows up at the table with shares to sell. A strong response to the HAL offer-for-sale issue has encouraged the government to repeat the act in Rail Vikas Nigam as well. Usually, more floating stock because of public issue can be a potential dampener for stock price performance in the short term, but that was not the case with HAL where the stock rallied 63 percent after the OFS. The railway story looks promising, as evident from the recent order wins. Backers of rail stocks say they look optically expensive because of the recent run up. And the higher valuations don’t seem out of whack because there is better earnings visibility now than there was till a year back. RVNL shares had been struggling over the last month over uncertainty on the fate of the company’s JV with Russian Transmashholdings. The issue has been resolved, but RVNL’s demand for a higher stake has not been considered. A near term trigger for the stock will be the response to the OFS issue and the profile of investors signing up for it.

Low spirits

The excitement over United Spirits’ strong first quarter earnings performance appears to be wearing off. Positioning in the next month contracts show there are twice the number of call writers than put writers, indicating that near term gains in the stock could be capped. An impressive June quarter notwithstanding, valuations at roughly 60 times trailing 12-month earnings captures most of the positives analysts feel. Two key challenges as noted by Motilal Oswal analysts Pratik Prajapati and Tanu Jindal:

“In the near term, there are challenges ahead in the form of cost inflation. Additionally, there will be persistent pressure in the Popular categories due to high inflation.”

Food for thought

A similar story is being played in Jubilant FoodWorks, albeit for different reasons. A 74 percent drop in net profit due to high input costs and weak demand, has bulls running for cover.

Next month contract data shows dominance of bears with 7000 open call contracts against 4500 puts, an indication that its tough time may last longer than anticipated. On Wednesday, the counter saw more call writings.

Jubilant’s key troubles according to Phillip Capital analysts Vishal Gutka and Binay Shukla: a) Persistent taw material inflation, weak consumer demand b) aggressive store expansion despite demand slowdown and c) hyper competition from regional players with leaner balance sheets

Warning Signs

Most Wall Street analysts are crying themselves hoarse about how the lion’s share of the gains this year has been due to just seven companies -- Apple, Microsoft, Amazon, Tesla, Nvidia, Meta and Alphabet. But on the other side of the spectrum, can you guess which is the most heavily-shorted stock on the S&P 500 as a proportion of its free float?

It’s luxury retailer Ralph Lauren. The top 10 most targeted stocks also include American Airlines, two cruise lines and a swimming pool maker, reports FT.

Why this almost Marxist animosity towards luxury consumption?

Analysts say investors have been particularly wary of companies that cater to richer consumers, on account of signs that customers are already trading down to cheaper brands. There is a ‘complete lack of conviction’ about the breadth of the economic recovery, and the risk of recession is as real as it gets.

(Abhishek Mukherjee and Shubham Raj contributed to the article)