INSURANCE: THINK ABOUT IT AGAIN

Few months back when I asked my friend whether he has bought any life insurance for himself, he replied, Why do I need life insurance now? I am still in my mid 20s. I don't need insurance at this age. I know most people think this way but for me the surprising thing was that my friend was a business graduate with a major in finance.

The logic behind this thinking is that at young age probability (chance) of death is very low so one does not need to buy life insurance. One needs life insurance when one is old because at that age probability of death is relatively high.

Now I tell you that financial theory tells us exactly opposite to this thinking. At young age you need life insurance and as your age increases the need of life insurance decreases. How?

EXAMPLE:

The best way to describe "Personal/Behavioural Finance" concepts is through example. Consider Mr. John who married at the age of 26 and have 2 children. He will retire at the age of 60.For simplicity we assume that his salary will remain constant throughout his career. His annual income is $200,000 (in short 200K where K stands for thousand).

Now suppose Mr. John is now 59 years old and today is his birthday. He will work for one more year and hence will earn $200k if he does not die. At this age there is a strong chance that he must have saved enough so his bank/balance would have been good. Secondly, his children must have been independent of him, I mean they would be having their own job. So, if Mr. John dies now what will happen? He has good bank balance which will be more than enough for his wife. Since his children are also independent, their will be no significant financial impact on their future because of his death. So I am coming to the point, if Mr. John has life insurance then it would be good for his family since they will get "more money" but if he has not bought life insurance no one suffers because his wife can depend on his "bank balance" and his children are also having jobs so they would not suffer from not having life insurance of their father.

Now, suppose Mr. John is just 30 years old. One of his children is 3 years old and other is just 1 year old. Since Mr. John is still early in his career he hasn't saved enough so he doesn't have a good "bank balance" at this stage. If Mr. John want to retire at age 60 and if he does not die before retirement he will earn (200K * 30 = 6000K) 6 million. Now it is from this "future income" that he will pay for the "health, education and other basic life expenses" of his family. Now suppose if Mr. John dies at age 30 and he does not have life insurance then what would be the consequences? Do I need to explain? Now, the same 6 million that he was supposed to earn and spend for "life necessities" of his family is lost. His family has nothing but a small bank balance. Remember, the purpose of life insurance is to save all or at least part of the 6 million, in other words, life insurance save your future income even if you don't earn it because of early death.

Let me tell you that this is true that probability of death at age 30 is low, but the problem is consequences of death are disastrous at this stage for family. Family has a double blow, first it lost it's loved one and financial consequences is a second blow. Insurance saves the family from the second blow, the financial one. The situation is not much different when Mr. John is 40 years old, at this stage probability of death has increased further and his family is still dependent on him.

Finally, keep in mind that death can also be because of accident. So when you are buying life insurance you are hedging yourself against death either by disease or accident.

CONCLUSION:

At young age, the need of life insurance is great and as your age increases the need of life insurance decreases and this is exactly opposite to what most of the people think.

HOW MUCH LIFE INSURANCE TO BUY?

Well, it depends on your salary level but financial theories say that one needs to have a life insurance of at least 6 years salary. For example if Mr. John want to buy life insurance than the face value of his life insurance should be at least 1200 K or 1.2 million. I am not saying that this is the optimal but one must have "at least" this much.

I would be extremely happy for any feedback.

Thanks,

Tahir Adeel

DISCLAIMER: Please note that all the concepts regarding Insurance have not been explained. I have described what I believe is enough to explain the "basics" of life insurance. I am not an Insurance agent and not soliciting clients.

Global Financial Crisis: Is it really like 2008?

Global stock markets are tumbling after S&P downgraded the American Treasury bonds from AAA to AA category. Investors are putting their money out of stock markets and prefer to held cash or cash equivalent securities. Investors are having the same attitude regarding Pakistani stock market as well. I can explain to you that the stock markets (both Pakistani and International) have just responded too much. There are four reasons for this view. These reasons are described below:

1) First, S&P had already regarded the American Treasury bonds as having a “Negative Outlook”. What does that mean? When S&P regard something as having a negative outlook it means that it believes that there is strong chance of downgrading. All “Investment Gurus” and investors knew that Treasury bonds could be downgraded. This means stock markets must have taken this factor into account already; most of the world markets are very much efficient, isn’t it? If they are then current situation could be just a temporary phenomenon.

2) S&P is just one of three major credit rating agencies. Moody and Fitch, the other two credit rating agencies still regard treasury bonds as “AAA”.

3) Check out the profitability of American Companies, they are showing a very good progress.

4) The fourth reason is specifically for Pakistani Stock Market, many investors here believe that we could see what we have seen in 2008. Well, I would ask them does inflation stand at 25% as it was in 2008. The answer is certainly no; it is at around 13%. Is Rupee depreciating as it was in 2008? The answer is no; it is stable at 85-86 rupees/dollar and has been there for a year. What about foreign reserves? Is it depleting? Certainly not, they are at historical levels, around 18 billion dollars. External account is safe and remittances are increasing. Secondly, corporate profitability is still intact and growing. Where do we have a situation like 2008? I am not suggesting at all that Pakistani economy is having a satisfactory performance. We are still having a very poor run and going through a very ordinary phase but that does not mean that we have reached a position where our stock market does not deserve any further investment. Third and most important point, our economy is very much isolated from international markets as most of our financial institutions are locally invested.

Now let us come back to the Pakistani stock market, it has gone down by almost 13%, for me it is a good time to invest. Because of the above four reasons I believe current turmoil in International stock markets and especially Pakistani stock market is temporary and providing us a good opportunity to invest. My favorite stocks that I believe have gone down just a bit too much and have a great upside potential are:

1) Engro (Current Price= 123)

2) NML (Current Price= 38)

3) DGKC (Current Price= 20)

4) APL (Current Price = 321)

5) FFC (Current Price = 152)

6) Lotte Pak (Current Price= 10)

Thanks and Good Luck!

ENGRO: A VERY GOOD INVESTMENT OPPORTUNITY

During the last few weeks the share price of Engro Corporation has plunged a lot as you can see in graph. On June 1, 2011 the price was 197 and today on 19 July, it closed at 154 which means a decline of 22%. Actually, this plunge is because of gas curtailment issue as government curtailed it’s gas supply to the new urea plant of Engro.

As per my research, this issue is short term and in the medium term should not affect Engro Share price at all, so what it means is that this decline of 22% means that investors can get this share at a very cheap price. Analysts are giving different target prices to it and all above 200 so even if we consider the minimum target price, the upside potential of 33% is there and with the dividend yield of almost 4%, the total expected return is 37%.

Remember this year company earnings is expected to be around PKR 20, so the P/E of share is just 7.5, you can well imagine if the company like Engro is trading at this multiple, how profitable and safe your investment can be at this time.

I believe it's a good opportunity. In fact, a very good opportunity.

Thanks

WHY SHOULDN'T YOU INVEST IN YOUR EMPLOYER

Before proceeding I will like to pose a simple question. If you are obligated to invest in only one company and you are given following two companies, which company would you like to invest:

1) Procter & Gamble
2) SOH Manufacturing

I actually know your answer; majority of readers would have selected Procter & Gamble, Why? Actually in behavioral finance (or finance psychology) it is called familiarity bias, i.e. when given an opportunity to invest, people usually choose companies with which they are familiar. Everyone knows about Procter & Gamble as it is an international company and has a very strong and probably the strongest brand recognition. There is a very good chance that SOH Manufacturing share might give you a more profit as its share may be undervalued. Remember, every good company does not translate into a good investment, even a poor company if its share is undervalued. If a share of good company is worth 100 and it is trading at 110 it might not be a good investment. On the other hand, if the share of poor company is worth 10 and it is trading at 5 then this poor company might be a better investment.

Now since most of the people are most familiar with the company they are working for, they usually invest in their company when given an opportunity (familiarity bias also comes into play when people invest in companies situating in their locality). They fail to recognize that by investing their “financial capital” or “saving capital” in their employer they are actually making their financial position vulnerable. Suppose if your company gets into trouble you might loose your job because in bad time company layoff its worker and go towards downsizing. However just when your job is in danger your saving portfolio would also be diminishing in value because the share price of “troubled companies” goes down. When you loose your job, you will depend on your “savings” for the time you are unemployed so your “savings” diminish just when you need it the most.

Solution is very simple; diversification should be the principle of investment. If you have invested 100% or even more than 20% of your saving in your employer, you might be very vulnerable. I mean financially off course.

I am not saying that one should not invest in their employer at all, if you really know you company and your company share is a good investment, you should invest in it. But don’t “over invest” in your employer, after all “over investing” in any company can be harmful but “over investing” in your employer might harm you more as I described earlier.

HUMAN CAPITAL: THE UNRECOGNIZED ASSET

Before preceding I would strongly encourage my readers to read my article "How much Risk can you afford?" at http://pakinvestment.blogspot.com/2010/12/how-much-risk-can-you-afford.html if you have not read it beforebecause this might help you to understand this article better.

The purpose of this article is to reveal the presence and importance of an asset that most of us do have but have not been able to recognize it. We call this asset “Human Capital”. However, before describing it let me first briefly introduce some necessary concepts that would help you to understand what I want to tell you.

FIXED INCOME VS NON-FIXED INCOME

Most of us make investments in our life. We can divide these investments into Fixed Income and Non Fixed Income investments. In a fixed income investment you know what you will get after a specified period of time. For example if you invest 80,000 in a bank at 12% rate per year for 30 years then you know that you will get approximately 10,000 after every year for next 30 years. To be very precise in a fixed income you know what you will get after making an investment. In a non-fixed income investment you do not know with certainty what you will get after a specified period of time, you may even end up with less than what you invested. For example if you bought a land for 80,000 you do not know the price of that land after 30 years, it may be 500,000,800,000 or just 200,000. Similarly stock market investment is also a non-fixed income investment. However, the non-fixed income investment provides a much higher long term return as compared to fixed income investment.

BASIC RULE OF INVESTMENT:

The basic rule of investment is very simple; when you are young you should invest more of your “assets” in “Non-Fixed Income” investments because this type of investment can provide you with much higher returns. Since you are young and can wait and can also tolerate the ups and downs of your investment you should invest in these types of investments. However when you get older you should increase your investment in fixed income because now you have less time and ability to tolerate the ups and downs and when you eventually get retired you are entirely dependent on income stream and non- fixed income is not suitable for you because it doesn’t provide much income on a regular basis whereas you need income after every month.

WHAT IS HUMAN CAPITAL?

Suppose you are 30 year old and have saved 50,000 so far. You want to work for 30 more years and plan to save 10,000 per year. What is this 10,000? You will add this 10,000 to your portfolio of 50,000 every year and your portfolio will increase both by return and by this contribution of 10,000. You will be wondering where is Human Capital in this picture. The only asset that you have right know is 50,000 which you have invested some where. Actually there is a much bigger asset that you have and that asset is invested in fixed income i.e. it will provide you 10,000 every year for 30 more years. This is the income that you will get from your saving. Recall this is similar to my earlier bank example where you could have got 10,000 every year; the only difference is earlier you were investing “100,000” to get 10,000 per year and now you are working to get 10,000 per year. The present value of this asset is (I skip the detail of present value concept however understand it simply as the present value of you income stream) around 80,000 if we assume an interest rate of 12%. Put it simply, if you had 80,000 and invested that amount for 12% per year you would have got 10,000 per year. So this 80,000 is your human capital and your portfolio of 50,000 is your financial capital. So you total assets are:

Total Assets = Financial capital + Human capital = 50,000 + 80,000 = 130,000

You might argue that you do not have this 80,000 s0 how can you treat this as an asset. However this argument is false because you will surely get 10,000 per year for 30 years and that amount should be included to make your investment decision.

WHAT ARE THE IMPLICATIONS:

If you tell me that you are 30 years old and have a portfolio of 50,000 and have invested 60% of this portfolio in stock market/real estate then I would not be very impressed. Because majority of your assets are invested in fixed income and not non-fixed income which is more suitable for you as it provides much higher long term returns. Remember 80,000 of your asset is already invested in fixed income and 40% of your financial portfolio is also invested in fixed income which means 80,000 + 20,000 = 100,000 is invested in fixed income so actually 100,000/130,000 = 77% is invested in fixed income and just 23% in non-fixed income which is not that good for 30 years old young professional. The only solution is to invest more of your financial capital in non-fixed income, even if you invest all 50,000 in non fixed income it still means that only 50,000/130,000 = 38% is invested in non-fixed income, however this is better than earlier situation 38% is better than just 23% allocation.

RELATIONSHIP OF HUMAN AND FINANCIAL CAPITAL:

Just see the attached figure, as you get older you have less years to work and save which means your human capital (which is fixed income) as a proportion of total assets decreases which means you should invest more of you financial capital in fixed income and this is exactly what the “basic” rule of investment says.

However, please remember that I assumed in this analysis of Human Capital that you got a stable job and there is no great threat to your job and even if you lost your job you have an ability to find another one easily.

You can post a comment if you have any question or you can send me an email at tahiradeel001@yahoo.com.

P/E: THE BASIC INVESTMENT TECHNIQUE

P/E represents the “relative form” of investment valuation. In other words it says that same assets should trade at same prices.

Many people consider stock selection in stock market as a very difficult job, something that is beyond their understanding actually this is true that stock selection is difficult but it is in no way beyond a “layman understanding”. Don’t believe me? Just read this article completely and see for yourself.

What does P/E mean? It is simply a ratio of Price/Earning. Price is the quoted market price of share in the stock market and Earning is the Earning per Share (EPS) easily found on company’s financial statements. The best way to understand this concept is to consider an example. I will simply use the numbers without quoting any currency.

Suppose there are two companies of cement industry:

Company 1: X
Company 2: Y

Now consider their share prices on stock market:

Price (X): 100
Price (Y): 50

If I ask you which company is expensive you might say Company X because its share is selling for 100. But I didn’t show you the complete picture. Consider the earnings (EPS) of same two companies:

EPS (X): 20
EPS (Y): 5

Now have your changed your mind? Let me explain this. Share of Company X is selling for 100 and it is earning 20 for every share. On the other hand share of Company Y is selling for 50 and it is earning only 5. Since price of Company Y is exactly half of Company X so its earning should also be half of Company Y’s earning but that is not the case. The earning of Company Y is 25% of earning of Company Y. Company Y is certainly expensive. Let me describe the same thing in different and more intuitive way.

Suppose you have 100 to invest. You are wondering whether to invest in Company X or Company Y. If you invest in Company X then you will buy one share and at the end of year you will get 20 (we are supposing that company is paying all of its earnings). Now if you decided to buy Company Y you will buy two share of Company Y at 50 and at the end of year you will get 10 in earning/dividend, 5 for each share. As you must have realized you invest 100 in both scenarios but end up with 20 in case of Company X whereas in case of Company Y invested the same amount but get only 10. Company X is certainly attractive and cheap.

Now finally, in finance we usually don’t see investments like that because we use a “tool” which exactly tells exactly that in much simpler way. This tool is called P/E (Price to Earning ratio):

P/E of Company X:

P/E = 100/20= 5

P/E of Company Y:

P/E = 50/10 = 5

Now finally let us summarize the things:

P (X) = 100
P (Y) = 50

From analyzing prices only it seems Company X is expensive. Now look P/E.

P/E (X) = 5
P/E (Y) = 10

Now P/E is actually telling the true story as the P/E of Company X is lower and the company with lower P/E as compared to similar company is cheaper. The lesson is very simple, do not see the prices only, after considering the earning expensive share might turns out to be cheap.

THINGS MAY NOT BE THAT SIMPLE IN REAL INVESTING:

I am sure you must have understood the concept and now I can briefly dwell to the “complexity” side.

Our analysis is valid only If two companies are exactly similar. Consider the following variations:

1. What if company Y is planning an expansion that will double its capacity in two year. Is company Y expensive now? May be not or may be yes we need some more detail.

2. What if Company X is having some operational problems and there is a chance that it might need to shut half of its production capacity? Is Company X cheap now?

Let me stress that point again, if you find two companies in a same industry with different P/E and there is no “particular issue” with any of these companies then you may have got a very good opportunity in your hand. But don’t forget to analyze that “particular issue”. In fact it is this “particular issue” that we financial analyst have comparative advantage to find out and this is exactly what our job is.

KSE 100: LOOKING VERY BEAUTIFUL

Many institutional investors are worried about the lack of volumes in KSE 100, however as far as levels are concerned I think they are very attractive for small investor who can accumulate many cheap stocks. Volumes is a problem of large investors and not small investors.

As market is hovering around 13,500-13600 level, there are many stocks availabe with attractive dividend yield. I would like to briefly discuss just two of them, HUBCO and KAPCO.

HUBCO:

Price: 37

Dividend: 5

Dividend yield: 13.5%

Target Price: 45

Upside: 22%

Total Return: 35%

KAPCO:

Price: 42

Dividend: 6

Dividend yield: 14.28%

Target Price: 54

Upside: 28%

Total Return: 32%

As you can see how attractive the dividend yield is. So even if because of some unexpected reasons on the political or economical front the share prices of HUBCO and KAPCO do not appreciate you can still get a decent cash return of 13%-14%. In a country of power shortage what can be more good than investing in power companies.

As I have described in my last few posts, market levels are not that important at this moment of time, what is more important is that you invest in right shares. Besides these two shares I am also recommending following shares as well:

1. Attock Refinery (ATRL)

2. Pakistan State Oil (PSO)

3. Attock Petroleum (APL)

4. Engro

5. Fauji Fertilizer (FFC)

6. Pakistan Petroleum (PPL)

Good Luck with your investments!

CAN YOU LOSS ALL OF YOUR INVESTMENT IN STOCK MARKET?

I have seen many people showing a concern that they have heard the stories of investors who have lost all of their investment in stock market i.e. loss of -100%. For them stock market is all about losses. People need to understand that the true question to be asked is not how much they have lost but it should be how did they loss. What strategy they were using? What investments they were making?

In order to elaborate my point further, let me tell you three primary risks through which investors loss all of their invested capital:

1. The company in which you invested gets bankrupt.
2. Use of leverage (loan).
3. Counterparty risk.

The first risk can best be explained through an example. Suppose you have 100,000 PKR and you invest all of your money in a hypothetical company Best Company Ltd. After one year, the company gets bankrupt and you lost your entire invested amount. Now, that investor may complain that market is a “bad” place for investment but the thing that we need to realize is that it was the company that was “bad” and not the market. There are 100 companies in KSE 100. Can you loss all of your investment if you invest 1000 in each company (1000*100= 100,000). Can 100 companies go bankrupt? They surely can but the probability of this event is almost negligible. Put it simply, if you divide your investment in many companies (say 15) and even if one of them gets bankrupt you still are safe and lost only 6.67%(1/15) and given a fact that market average return is around 20-25% you still must be making a good amount of money. There is no chance that you can loss all of your investment if you diversify your portfolio.

The second risk can also be explained best through an example. Suppose you have PKR 25 and you borrow PKR 75 from your broker so you invested capital is PKR 100. Suppose market goes down by 25% and as a result, your invested capital lost 25% as well meaning you invested capital now decreased to PKR 75 now. At this time, your broker will take his money back or ask you to invest additional capital and if you do not have additional capital he will surely take his money back. What do you have now? Actually, you have lost all of your investment. Even though market lost just 25% but you lost 100% of your amount. Why? Because you used the leverage. If you had not used the leverage you would have lost only 25% and your invested capital would have been PKR 18.75. As you can see, the sole reason of “100% loss” was leverage. If after this loss, you say, “Market is bad” then you are wrong. The true comment should be “leverage is bad” or more appropriately “you did not realize the risk of using leverage”.

Now we come to the third risk and this is the risk most relevant to an emerging country like Pakistan. Counterparty risk means your broker do not have an ability or intention to pay back your money. These frauds have occurred in KSE (although KSE has paid back some of the lost amount to investors) in past, however rules and regulations are now being enforced and the advent of “CDC” is the proof of this. In fact, stock market has become the most heavily regulated industry of this country and this means that counterparty risk has been minimized. However, in order to avoid this risk investor should open his account in a renowned brokerage house and which has the history of best ethical practices.

After reading this article if any one tells you that he has lost all of his investment in stock market you should ask these three questions of him:

1. Did you invest majority of you investment in just one company?
2. Did you use leverage?
3. Did you have an account with a small brokerage house?

If the answer of any of these questions is yes, then whose fault is it? Of market or of investor? Believe me 99% of investors who have lost all of their investment did not diversify their portfolio, or did use leverage or did not have enough knowledge about their broker.

Good luck with your investments!

VOLATILE MARKET PROVIDING OPPORTUNITIES

KSE 100 after having a very poor month of February recovers very quickly. Just a month back, market was trading at 12,700 level and in no time it reached 11,100 level which is a decline of around 12.6%. However, in just two session of this week market has jumped from 11,100 to 11,600, an appreciation of 4.5% in just two days shows how volatile our market is.

As I have stated many times, I am a fundamental investor and for me the most important thing is "Corporate Profitability" so anything that impact it either directly or indirectly causes a concern for me. However on-going political issues did hurt the market but I continued to buy blue chip stocks and my strategy paid off as market finally rebounds. I am in no way saying that political issues should be neglected completely but we need to know the true "intensity" of these issues and how and whether they are linked with the market or not.

Rising oil prices is something concerning me a lot, a county like Pakistan can not afford this level of oil prices (hovering around 110-120), one needs to keep a close eye on oil prices as some analysts are predicting that it may even touch 200$/barrel which could be devastating for a country like Pakistan already going through an economic slowdown with high inflation (which we call as stagflation).

There is one good news in the market, actually this is the news that helped the market to rebound, official date of leverage product has been announced and it is 7th March, 2011.

Good Luck with your investments!

PSO: ANOTHER GOOD RESULTS

Middles East crisis has impacted market but the most important aspect of market "Corporate Profitability" is still there. Once the issues get settled down in Middle East, market will show its strength again.

PSO, which occupies the largest share of "Oil Marketing Sector" has posted its result. Profit is PKR 7.13 billion (EPS: 41.58) as compared to PKR 5.08 billion (EPS: 29.64) over the corresponding period last year, which translates into an improvement of 40% however, this includes a one time reversal of turnover tax which GoP reduced from 1% to 0.5%, the impact of this reversal is around PKR 23.46/share which means if we deduct this reversal then EPS becomes PKR 18.12. But the result is exactly as per expectations and this is what counts. The company also announced an interim dividend of PKR 5 as well. Full year EPS is expected to be PKR 71 with accumulated dividend of PKR 10.

The good news is despite the healthy results the stock of PSO is sliding downwards because of overall market correction as discussed above. The relevant data is as follows:

Current Price = 268

Target Price = 340-350

P/E = 3.77 (if you include one time tax reversal then P/E = 5.6)

Dividend Yield = 3.73%

Total Expected Return = 27% + 3.7% = 31%

KAPCO has posted its results for 1H 2011. The resutls are exactly as per expectations but before proceeding to results just see what I posted on Jan 10, 2011.

"The company pays out all what it earns, however due to circular debt issue, it is not expected to continue this 100% payout for the next year but still the payout is expected to be much better than most of the stocks in KSE 100. Its next year expected EPS is 7.5 - 8, and dividend is expected to be PKR 5.5 - 6 which means payout of around 75%. The current price of share is around PKR 44 and the target price is expected to be PKR 52, so the P/E of share is 5.9 (market has a P/E of around 8), dividend yield is around 12.5% and an upside of 20%. I think it is a good share to buy right now."

As per the result, company earned PKR 3.85 billion (EPS: 4.37) as compared to PKR 2.72 billion (EPS: 3.09) over the same period last year. The results improved by 61%, but this improvement was expected as can be seen above that full year expectation of EPS is 7.5-8 and after the half yearly results, we can see that company can achieve these expectations. However, there is a good news about dividend as well as company announced an interim divident of PKR 3 which means pay out of 69% not bad given the fact that company is having exposure to circular debt issue. There is one more good news, company's share is still trading at around PKR 42 so what you need to do is grab this share as soon as possible. The relevant data is as follows:

Target Price = 52

Current Price = 42

P/E = 5.25

Divident Yield = 14%

Total expected return = 23.8%+14% = 38%

DGKC: POOR RESULTS BUT NOT A BAD COMPANY

There are just four profitable cement companies in KSE, namely:

1) Lucky Cement

2) Attock Cement

3) Dera Ghazi Khan Cement (DGKC)

4) Fauji Cement

Today, I am briefly discussing DGKC. It has posted its result for 1H 2010 and earned PKR 192 million (EPS: 0.52) which is 59% lower than last year earnings of PKR 470 million (EPS: 1.29). The results are below expectations and its share is now showing a declining trend as you can see in graph.

However, we need to keep in mind that increase in fuel cost, winter season and floods have deteriorated the earnings of cement sector. As we all know coal prices are now getting stable, we are now at the end of winter season, and reconstruction activities in flood affected area have started. All of these things showing a positive and improved performance in 2H 2010, therefore I would advice all my readers to accumulate position in DGKC.

Company has also announced 20% right shares at PKR 20. Most of the analyst are not that bearish about this stock in the long term and current bearish trend is just an opportunity to grab this stock at lower levels. However, the stock might go even further down so investor should accumulate the position gradually. Research houses are giving a target price of around 32-46 so minimum return of 25% is possible from current level of PKR 24.

RAYMOND DAVIS ISSUE: COULD BE DANGEROUS FOR MARKET

Even though I consider myself a fundamental investor and usually don't get into panic or confusion on small political issues but I think the issue of Raymond Davis is not that "small". Pakistani Government is facing a dilemma, if they let go Raymond then they have the face the strong demonstrations and protests from opposition parties especially religious parties. Media off course will take the side of opposition as well and if they do not let go Raymond then their relationship with their biggest donor (who are also supporting stock market since they are leading the market for six months or so) might go to jeopardy. I guess the implications of any decision of government are very uncertain but unpleasant for sure. On a long term basis, satisfying America either through a release of Raymond or convincing them to face the court might be a better option. I think it will not be possible for market to appreciate under these conditions so investors should invest with caution at this moment.

ENGRO: RESULTS FAR BETTER THAN EXPECTATIONS

ENGRO has announced its results for FY 2010; the company earned PKR 6.79 billions which is 78.36% higher than the earnings of previous year. EPS for 2010 is PKR 20.72 as compared to last year of just PKR 12.24. Company also announced a final dividend of PKR 2 which translates into a total accumulated dividend for the year 2010 of PKR 6. Company also announced 20% bonus shares as well.

As I posted earlier that company was expected to post an EPS of PKR 18 but company managed to post 20% more than expectations plus company also announced surprise bonus shares as well. The company is expected to perform well; some research houses are quoting a target price of PKR 280, which means an appreciation of around 30% is possible from current level of PKR 216.

LUCKY CEMENT: ANNOUNCES RESULTS AS PER EXPECTATIONS

Lucky Cement (LUCK), my most favourite company in cement sector has posted it's result for 1H 2011. The company made an after tax profit (PAT) of PKR 1461 million and an EPS of PKR 4.52 as compared to last year EPS of 5.90 for the same period which means earnings have declined by 23%, however, this decline was already expected in market as we all know dispatches have been affected very badly because of floods. Situation at the export front is not that worrisome right now. Prices of cement are not showing any declining trend which is also a good thing for cement sector. Rising coal prices are a major threat to cement sector and one needs to keep a close eye on it.

The company is expected to post an EPS of PKR 11 and dividend of PKR 5 for full year 2011. With the current price of PKR 70, company is trading at an attractive P/E of 6.4 and dividend yield of 7% is also not that bad. The target price of Lucky Cement is quoted at around PKR 85 which means capital gain of 21% is possible. Total expected return amounts to 7%+21%= 28%. I regard it as a least risky and the most attractive scrip in cement sector right now.

ATTOCK PETROLEUM: AS PER EXPECTATIONS RESULTS

Attock Petroluem probably the strongest company in the Oil & Marketing sector right now has posted its half yearly results ended on Dec 31, 2010. The PAT is 1.743 billion which translates into EPS of 25.22 which is 17% higher than EPS of 21.55 posted last year for the same period. The company also announced an interim dividend of PKR 11.5.

The company is expected to post an EPS of PKR 50 for full year with accumlated dividend of PKR 30. Considering the fact that APL is trading at PKR 380, it's P/E is 7.6 with impressive dividend yield of 7.9%. The target price of company is quoted at around PKR 420 which means capital gain of 10.5% is possible from current levels. Total return that could be achieved is 7.5% + 10.5% = 18%. I believe it's a good stock to buy and as you can see in the graph company has been doing good for the last 30 days and currently due to the correction is sliding downward which is a good opportunity to grab this strong scrip.

ATTOCK CEMENT HALF YEARLY RESULTS: BELOW EXPECTATIONS

Attock Cement has posted it's half year result ended Dec 31,2010. The PAT is 235 million and EPS is 2.72 which is 62% lower than same period EPS of 7.2. The result is disappointing and company target price has now reached 72 which earlier was given around 80-90 range. Rising energy cost along with declining brand premium has caused this decline. The company is expected to perform better in 2nd half though as coal prices are now going down from it's peak of 130$/ton and given the fact the winter season is now ending further drop is possible in coal prices which will help cement manufacturues. Remember ACPL has the strongest balance sheet in cement sector i.e it has a lowest debt. Because of disappointing results share price has decreased but company is still worth investing and investors can get this share at lower prices. The expectation for FY 11 EPS is now revised, as now the company is expected to post an EPS of PKR 7 (previous expectation was PKR 13) along with dividend of PKR 5. With the current price of 65, dividend yield is 7.7% and P/E is 9.3, not that bad still.

FAUJI FERTILIZER: OFFERING 16% EXPECTED RETURN

Fauji Fertilizer (FFC) is one of the giants of KSE 100. The good thing about it that it belongs to a non-cyclical industry. However, even better thing is that it pays out all what it earns it the form of dividend. Yes, it usually has a 90% payout ratio. It is also the biggest company in this sector after ENGRO. However, it is not directly comparable to ENGRO because ENGRO is a conglomerate which predominant business is fertilizer.

Like it peers, FFC is also facing a gas curtailment issue. However, manufacturers are responding this issue by raising urea prices so no one is expecting any great impact on its earnings.

The company is expected to post its results for annual year 2010 (the companies in this sector present their financial statements on calendar year basis) somewhere between Feb-March. The expected EPS is PKR 16 with the cumulative dividend is expected to reach PKR 15. With the current price of around PKR 150, the company is trading at a P/E of 9.4 and a dividend yield of 10%. As you can see in the graph, the company has performed well in the last few days, it is due to this sudden upsurge the dividend yield and P/E is not looking as attractive (market is trading at a P/E of 8 – 8.5). However, investors should watch this share carefully and once they got an opportunity to buy it somewhere in the range of 130-140, they should buy it. The analysts are giving a target price of around PKR 160, which means an upside of 6.6% is achievable from current levels. 10% dividend yield and 6.6% upside means total expected return of 16.6%. Not that bad even at current levels. However, many analysts are expecting a correction in the market so if the price of the share goes down in future investor can get an expected return of more than 16.6%.

MONETARY POLICY: NOT USEFUL BUT HARMFUL

The CPI inflation for the month of Dec 2010 is recorded as 15.46%YOY slightly decreased from 15.48%YOY recorded on November 2010. Analysts are now eying on monetary policy statement to be announced on 29 Jan, 2011. The expectations are that central bank will keep its restrictive monetary stance by increasing the discount rate by further 50bps, which means discount rate will reach 14.5%.

However, what I want to say is that in every monetary policy statement, the reason of restrictive monetary stance is mainly attributed to heavy government borrowing. However, we know very well that government has not responded at all, in fact, government borrowing has now reached PKR 459bn for this year, which is 100% higher than a previous year. The purpose for which restrictive monetary stance was adopted has not been fulfilled so why keep raising interest rates and slowing growth of “efficient private sector”? Surely, central bank needs to understand that discount rate as a tool has not been effective in curtailing government borrowing but it is certainly very effective in slowing economic growth so why keep using it and slowing our already weak economic growth. Central bank’s current stance is aggravating our economy.

In short, discount rate as a tool for curtailing government borrowing has not proved to be “useful” but it is certainly proving to be “harmful”.

There is one more way for central bank that if it really wants to make it hard for government to borrow than it should now increase the discount rate by 100-200bps. This will give a much stronger message to government. Increasing the discount rate by mere 50bps in every monetary is just not working and this is something that we all have seen, government is just not taking it seriously. So, if central bank is again thinking to increase discount rate in next monetary policy than it should increase it by 100-200 bps or either not increase it all because increase of 50bps will not serve anything as I have discussed above.

HOLDINGS AS OF JAN 14, 2011

My Holdings as of January 14, 2011 are as follows:

Stock	Proportion
APL	10%
BAFL	4%
DGKC	8%
ENGRO	8%
FAUJI CEMENT	2%
HUBCO	10%
ICI	10%
KAPCO	11%
PACE	27%
PSO	8%
SHELL	1%
SILK BANK	1%

You may be wondering why do the small cap stock like "Pace Pakistan" is the heavy weight item of my portfolio. The reason is that I am a young investor and can afford to invest in small cap stocks which if invested after due and dilligence can provide a huge returns over a long term. Secondly, I shared my portfolio holdings with you just to give you some idea. I am not suggesting at all that you should have a portfolio like mine since it depends on many factors like your age, income etc.