Pick good stocks even if costly
Here's what the 2007 Sensex chart summary reads like: “Starting at 14200 in January, the Sensex drifted down to 12500 by April as Budget disappointment took its toll on sentiment. Thereafter, a slow and measured pullback took it up to 15800 by the end of July, as foreign money continued to pour in.
Save a few worrisome days in August, the Sensex trotted away to 19k by October, after which bear factors like P-notes, subprime risks, politics, oil and commodity prices battled it out daily with the bulls who were chasing the India story.” As the year draws to a close, we are still not clear as to where the markets are headed. If there is one big lesson to be learnt from 2007 it is that the market lurches from one emotional peg to another.
This means that I must buy with a good “margin of safety”, an increasingly difficult proposition in today's costly market. That brings us to lesson two. If it is difficult to find cheap value, chase good stocks even though they might look costly. Anyone who bought HDFC Bank (or HDFC, Yes Bank, Kotak Bank) at a high P/BV would have made good money by just holding on during the year. Ditto for high PE stocks like Bhel, L&T, DLF, NTPC, ABB, Areva, Crompton Greaves, DLF, Suzlon, Bharti and RCom.
Visible growth at a reasonable price was, indeed, available for most of the year. Corollary: it is always possible to find hidden nuggets. But chances are that you will need to dive down the depths of the market-cap ocean and will find this value only in mid caps or small caps. This demands extra dollops of patience and the ability to sit through blood-curdling falls occasionally.
Lesson three is that not all bellwethers may be able to withstand climate change. Note how Infy and TCS drifted down for most of the year as the rupee found its way up to historical highs. More than earnings contraction, it is the perception of lower profit growth and consistently lower margins in future that has pushed down PEs in this once-sexy sector. Then again, some bellwethers may re-ignite their passion in the changing climes. Some action is visible already in FMCG.
After several quarters of hibernation, blue-chip stocks like ITC, Nestle, HUL, Gillette, Glaxo Consumer, Britannia and Colgate are awakening. Another lesson was the rags-toriches transformation of some stocks in a way that defied explanation. The list is impressive: RNRL, IFCI, Nagarjuna Fertilisers, RPL, REL, Jai Corp, Walchandnagar, GMDC. I think Reliance should figure in this list.
Find me another refining stock that's quoting at an adjusted multiple of over 25 anywhere in the world! But the biggest lesson in 2007 has been that the best money is going to be made chasing the “national theme”. The national theme for the year was clearly “Building India”.
Whether it was roads, bridges, real estate, wind or thermal power, ports, airports or SEZs, pipelines or refineries, steel mills or Metro systems, India was building new infrastructure and continues to do so. If I had chosen this one theme for my portfolio, I would have invested in L&T, DLF, Aban, GMR Infra, Jaiprakash, Suzlon, Punj Lloyd, PFC, IDFC and Bhel. Will this theme continue over 2008, driven by its own momentum and its inherently long-term nature? Or will there be a new theme for the new year?
Dipen Sheth, Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
