Rely on Reliance

Historically, one of the very interesting stocks to watch out for in the trading sphere is Reliance Industries. The stock is quite cyclical in nature. Even when it has hit a trough and stayed sideways for a long period of time; it has always rewarded patient long term investors. This makes it a favorite among the investors. Investments made in this bell weather scrip during lull periods like the present one have always proved fruitful in the long run.  This is owing to its strong fundamentals, efficient management and heavy weight age in the market index.

If we study the above chart closely, we observe that there is a near perfect correlation over the years between increase/decrease in profits and the rise or fall in stock price of this company. In the year ’05 when the company witnessed the ownership division between Ambani brothers- Anil and Mukesh, we observe a wide gap in the company profits and the stock price. The stock was trading at the levels of 260-270. This phase was quite short-lived. Immediately on resolution of the family dispute the stock moved up sharply to join the profit growth curve, thereby regaining the investor’s lost faith. At the current levels we see a good buying opportunity in the stock. This is owing to the fact that there is a wide gap between the profitability of the company and the share price. Seeing the previous trends, this gap is bound to narrow down in due course. Even if the profitability growth remains subdued, an analysis of the historical trend shows that the stock price should at some point in the near future come back close to the profit growth line. Combine this with the strong fundamentals and aggressive future plans of the company in oil & gas, power, retail and telecom sectors and you get a screaming buy call in this heavy weight counter.