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INFOSYS- A “Fundamentalist” view

Tuesday, June 26, 2007 Leave a comment Go to comments

I have received a good feedback on the Infosys Trend Analysis article. Thanks to readers who took time to read it and also were kind enough to post their comments. The intention was to “show” how trends work and how big can they become.

Having discussed a trend trader view of the Infosys stock from 1997, now let us look at how a “fundamental analyst” would have looked at the same price movement.This is also how majority of people in the market behave or react to stock price movements.For those who have not read the previous article, I would request them to read that post first in the “Education” section before proceeding further.

Lets go back to 1997,when Infosys would have first made a high of Rs. 8 and then again a high of 11. Whereas a trend trader would have entered the stock, no fundamental analyst would be even looking at the stock. Why? because nobody understands IT and its potential.Obscure company-obscure sector. Who cares?

Now again stock starts to move up in 1998 from 50 odd levels and slowly reaches 300 levels in July 1999.Some people start to notice it and people start asking their brokers about the stock! They are in a hurry because they know some “trend traders” are already profiting from the move.Now fundamental analyst starts to look at the stock and tries to find “reasons” for the stock move.People won’t buy it till they know the “exact” reason and the analyst provides that “reason”. By that time, the stock has moved further to 600-700 levels. So our Mr. Analyst says that the stock has good “growth potential” but it is expensive, so buy on correction.

But interestingly, the stock does not correct and continue to move to 1000 levels. The “analyst” keeps on “upping” is buy target but is not able to catch the stock. Meanwhile, the stock is flashing everywhere in the press and everybody is gungho about the stock. In this phase of irrational exuberance,the stock reaches 1700+ levels and the analyst advises people to wait. The climax happens and the stock starts to make sharp downward moves. As soon as the stock reaches 1300-1400 levels, the trend traders start to exits as according to him the trend is “reversing”.

The Analyst at this point of time feels happy because his buy price is coming . He asks people to start “accumulate” the stock at 1300-1400 levels. The stock price falls further to 1000. The analyst feels even happier and asks people to “add” more. The stock falls further to 700 and analyst says “buy” more. The clients borrow money and add more. After all what was good at “1000” levels must be extremely good at 700 levels. Although people who bought the stock at 1400 are facing “huge ” losses, they trust our “analyst” and he is still keeping them on “hope”.

At this point the downward trend accelerates and the stock goes to 300-400 levels. Now Mr. Analyst brings a “new” recommendation saying that “IT sector” doesn’t look good because of slowdown in the US. so INFOSYS gets a “sell” call.This is the time people can no longer stand the pain as they are already leveraged and can’t stand the losses.

Thats when they decide not to enter markets again. Meanwhile a trend trader is keeping his calm because he has not only made money when the stock was going up but also made some money while it was going down!

Moral of the story- buying low doesn’t work all the time.It can compound your problems.

When will it bounce back? Will it ever bounce back or not? What will happen to rupee dollar equation?What will happen to US economy? Will there be an IT slowdown?What will happen after IT tax holiday ends in 2009? If you can accurately predict all of these,then you can decide to buy/sell Infosys based on that.

Meanwhile, I will keep it a little simple and just look at the current trends and follow them. Currently, INFOSYS is in a sideways/downward trend. I will buy only when an upward trend appears.

Categories: Education
  1. MaheshP
    Wednesday, December 19, 2007 at 5:42 pm

    Really very informative articles actually, I read “INFOSYS- A study in “following trends” before going thru this (as suggested). I learnt a different way of looking at investment!!! Thanks.

    Sage can you give some buy calls which will start uptrend NOW?

  2. Srinivas V
    Wednesday, November 28, 2007 at 9:22 am

    I think this is a brilliant article for those (especially me) who are starting to wet their feet in the investing world. Thank you so much for writing this, sage.

  3. Gautham
    Wednesday, November 21, 2007 at 12:39 am

    Nice article. I got your link couple of weeks back & now going through all the gyan 🙂

    I’ll sink up with you on your products!

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