Fenil's Library

Making equity investments in this market

A look at some strategies that could work in this market

Suresh Sadagopan

“Cheap and bess, leke jao. Hazaar piece beccha hai, koi complaint nahin,” said Patel Bhai, unleashing his clincher. We had heard this pitch from him several times before. Somehow, it was comforting to hear it before he made the sale, every time.

What Patel Bhai probably meant was that the product was value for money and we would be happy to have bought it. Anyway, it connected with us.

Value is something we all keep looking for. The price itself does not matter so much as the right balance of price and performance. There are good bargains now, not just in malls and car dealers, but in the equity markets as well. The deep correction due to the global crisis has made valuations attractive. The weak economic scenario, pullout of money by FIIs, the liquidity crunch and uncertainty in the country — all contributed to the stock market slide in India. Hence, even good stocks are available fairly cheap.

So how does one go about selecting good stocks now? There are a few strategies:

Bluechip stocks: These are typically large-caps and market movers. They have come down not so much due to their poor fundamentals or lack of performance as much as due to poor sentiments. Due to the adverse economic scenario, there has been a lag in performance, too. Still, that does not explain a 60-80% drop in prices. Reliance Industries, L&T, ICICI Bank, etc belong here. Prices are down — time to pick them up.

Industry leaders: Small or big, industry leaders have tremendous staying power. They have built up their brand equity, built up their core and loyal patrons and hence have tremendous pricing power. These are companies that can weather storms much better than the also-rans. They are the all-weather supertankers, which can sail the seas, no matter what. Gillette, Colgate, Parachute (Marico), Bournvita (Cadbury’s), etc have brands which are legends and will continue to sell — boom or bust. Buy them.

Recession-proof businesses: Some companies are comparatively immune to slowdown or recession. The sectors they operate in are like that. Sectors such as FMCG, pharma and telecom will not face much of a problem in a slowdown. Some other sectors, such as insurance, security systems (in the current scenario), education & training could actually do well; as might comfort foods & entertainment. So, it’s not all bad news. You need to just look carefully and select companies from such sectors.

Contrarian investing: Then there are sectors/ companies that are down in the dumps and seem to have major problems. Commodity plays (steel, cement and aluminium, etc), energy, real estate and textiles, etc are sectors that are in the trenches. They are the pariahs of the stock market today. But, they will not stay that way forever. If you have the foresight and the risk appetite and long-term horizon to match, you could end up with a pretty packet in future by stocking them up now.

Dividend yield candidates: Again, there are a whole lot of stocks whose dividend yields have become attractive. These stocks give you the security of some basic level of returns, coupled with the chance of appreciation of stock prices. Also, some of them make the investment cut in other ways - in the sense, they are good blue-chip stocks in the first place, or they are good contrarian picks, etc. Great investments, anyway you look at them.

Looking to the future: Then there are those expected to be boom sectors in future — hospitality, healthcare, water, agriculture & agro processing and pollution control, etc. Some of these companies are again available for a song - Indian hotels for instance. Invest with several years’ horizon.

Like Patel Bhai, I would say, “Cheap and bess, abhi time hai khareedne ka.”

 

The author is a certified financial planner who runs Ladder 7 Financial Advisories and can be reached at ladder7@gmail.com.