As Buffett says, “you should be fearful when others are greedy and greedy when they are fearful.”
Our advice: Hold the greed and begin nibbling at stocks slowly from here on.
Perhaps you will think us as contrarians, asking yourself, are they really recommending buying stocks when everyone else is saying don’t touch the stock markets with a barge poll? But then you can’t build wealth by going with the herd, can you?
By now almost everyone is sure stock markets are not going anywhere in a hurry; at least not up in a hurry. We could also be in for a prolonged period of slowdown and dull stock markets- yet, we are saying, if you have the cash you are king and it’s time to start building a portfolio which could return serious wealth in 5 years from now.
And 5 years it will take for any good stock strategy to work.
That does not mean that you put all your money into the stocks we are recommending tomorrow. But begin to track these stocks. Start understanding their businesses, read all the news you can get and then buy in small bites.
Buy 10-15-20 shares at a time- put a small fraction of your money into the shares you like and go on buying till there is value or you feel you have invested a large enough slice of your share pie. So the mantra today is small meals frequently.
So, to begin with, how have we chosen the 7 stocks. These are the parameters:
# Market cap greater than Rs 250 crore
# 10 per cent year on year growth for 3 years in net sales
# 10 per cent year on year growth for 3 years in net profit
# No dip in profits or sales in the last 2 quarters
# Steady or growing Operating Profit Margin in the last 3 years
# Steady or growing Operating Cash Flow in the last 3 years
# Other ratios kept in mind: Return on Equity, EPS, Cash EPS, PE
So which are the ones which have passed this stringent test?
Here’s a Stock List:
# Indraprasta Gas
# Bharti Airtel
# KS Oil
# Mphasis
# HDFC Bank
# Bank of India
# Titan Industries
Indraprastha Gas
All that is gas, need not always be bad. Indraprastha Gas has proved it. This is the company that makes CNG available to you and me in and around Delhi. Those who use piped gas in Delhi and those who see and stand in long lines at CNG stations know the product- gas as fuel. It’s time you looked at the stock. For long lines that irk the consumer causes the investor in you to grin.
A few facts about the company:
# Aggressively increased its gas distribution network in and around Delhi
# Squeezing efficiency out of the company which shows up in the rising margins
# This shows up on the returns on the equity- one of the key ways to look at the fundamental strength of a company- that has been growing and is now at 33 per cent. Obviously IGL is not growing by throwing in more capital, but is using its capital more productively
Stock Pick : IP Gas
# Net margins are rising : 20 per cent in FY 07-08 - that means on Rs100 of sales you make Rs 20 pure profit.
# Cash EPS is rising: at almost Rs 15- each share has Rs 15 cash free for the company to spend on reinvestment, dividend or investment.
# ROE is rising and is now at 33 per cent.
# At a price of Rs104, we get a PE of just 8.
This is an amazing story- go get it!
Bharti Airtel
This is India's largest telecom company which has created serious wealth for investors. What we like about Bharti particularly is the increasing net profit margins; the company is getting more and more efficient and its shows in the net margins which have gone up from 17 per cent to 24 per cent in the last 3 years. And any company which is efficient will stand well in times of a slowdown and emerge stronger at the end of it.
Alas, telecom penetration in India is low and volume growth will continue in rural India and Bharti is best poised to take advantage of that. So summing up, why Bharti?
Stock Pick: Bharti Airtel
# High operating margins: 40 per cent in FY07-08
# Increasing net margins
# High cash EPS: Rs 55
# At Rs 667 its PE is Rs18
Considering the high growth of the company and the overall sector, we are confident that it will command higher valuations in the future and makes an attractive buy now.
KS OIL
Peter Lynch says that the more boring the business, the shabbier the corporate HQ, the better the business. He in fact would hold it against the company to spend huge amounts on doing up corporate offices.
In the edible oil business, KS Oils sells branded mustard, soybean and palm oil. If you live in the northeast and eastern region of the country, there is no way you would have missed this brand. Central and north India will see it on the shop shelves soon.
Incidentally, the company is also an OLM NDTV Profit award winner for investor returns in 2008.
# Sales growth more than 90 per cent in the last two quarters as a result of its focus on retail push and bringing efficiencies in supply chain management.
# To keep the input prices from giving sudden shocks, KS has backward integrated into buying oil seed plantation abroad.
Stock Pick: K S Oil
# Return on equity is still high at 30 per cent
# Sitting on cash of Rs 150 crore
# The price of Rs 45 discounts earnings by 11 times
# Little known company, but obviously this oil is greasing some portfolios with profits
Clearly, there is money in oil.
Mphasis
In the IT space, we like Mphasis; it’s a global IT outsourcing and BPO company. The company has grown in excess of 40 per cent for last six quarters, while profits have grown in excess 50 per cent in last six quarters, expect for March 2008 where appreciation of rupee affected the margins. The best part is the stock is currently available at 12 times earnings.
Stock Pick : Mphasis
# Expanding operating margins from 16.83 per cent in Q4 March 08 to 22.32 in Q2 of FY 09
# Growing return on equity : from 13.5 per cent to 22 per cent in last 2 yrs
# Depreciating rupee should help improve margins....
# At Rs181 trading at PE of 12
HDFC Bank
Reasons for liking this stock:
# Net profit growth of more than 30 per cent for 32 straight quarters
# FII stake up to 27 per cent from 25 per cent September 08 over 07
# As ROI falls, bond portfolio will give a return kicker
# Prudent norms will prevent a big hit on defaults
PE of 23 still high, but it is holding its head over water.
Why HDFC Bank?
# Net margins at 13 per cent still good for FY 08
# Net profits growth 37 and 45 per cent in the last 2 Qs
# Cash EPS at Rs 590
# ROE at 18 per cent
# Price of 1,048 gives a PE of 24 time, bit expensive, but looks good
PSU Bank of India looks great too. The results that came earlier this week were very good- net profits are up almost 80 per cent in the September quarter.
# Solid performance: 30 per cent growth in net profits in the last 13 straight Qs
# Bank has held its head above water in the market meltdown
# Fall in interest rates will benefit bond portfolio
# As funds are difficult to get in the global markets, demand for credit will go up for domestic banks
Pull Points:
# Net margins rising and at 14 per cent in FY 08
# Cash EPS of Rs103
# Net profits have grown 24 and 60 per cent in the last 2 Qs
# Return on equity of 24 per cent
# Is available at a mouthwatering PE of 5 at Rs181
But do remember that there is still a downside in the market, so go carefully and don’t even think about doubling your money in a month.
Titan Industries
This home grown consumer brand has corrected over 40 per cent in the meltdown now making it affordable for stock portfolios.
All the segments that Titan is present in are growing in strong double digits- watches, jewellery and precision engineering and eyewear. These have grown at 30-50 per cent in the last six quarters. Its net profit grew at higher rate indicating that the company has improved its margins on the products that it sells. This gets reflected in its operating margin which has grown significantly over last six quarters from 4.87 per cent to 11.68 per cent. It will be surprising if all of you out there don’t visit a Titan or a Tanishq store when looking for a watch or jewellery. So the company has build a formidable brand. So we recommend it at even at a PE of 20 due to its strong business fundamentals, efficient management and future growth outlook.
Stock pick: Titan Industries
# Double digit sales growth in all 3 segments
# Growing operating margins over 6 quarters
# At Rs 930 stock trading at PE of 20
Now as an investor you need to have a stock strategy which essentially defines the kind of stock investor you are.
Strategy 1:Buy and hold forever investor
# This strategy has worked very well for some of the best investors in the world like Warren Buffett.
# You do need excellent and expert choice in companies and managements
# You also need to monitor annually the performance of your company
# But you will need to steel yourself to ignore temporary fluctuations if you are this kind of an investor
# Closer look needed when nearing end of term
Strategy 2:Profit booking
# Have a target price in mind
# Revise target if needed, up or down
# Don't hold on, be ready to sell
# Try to minimise losses
# Needs frequent monitoring
So do your check and get going.
So in summary, you can delve into good value stocks in small quantities and of course we have said buy only if you can keep them for 3 to 5 years because markets could take that long to recover and give adequate returns.
Now, what if you've never been a stock investor at all?
What do you need to begin investing?
Demat account
# How do you open a demat account: select company, fill form, submit documents
# Depending on where you open with a bank or broking house your charges could be Nil- Rs400 to open an account
# There are other annual and transaction charges which you need to look into
# What do you need to be careful about. High maintenance charge, 'other' charges, website speed, service quality
Next you need a trading account
# How to open: several registered broking houses, ensure of course it’s registered and preferably go with the reputed one
# What it costs: Varies. Can be nil, or a fixed amount or a percentage of trade value
# Do watch out for the fine print which varies quite a lot from broker to broker
- Service assurance
- Broker's liability
- Charges
Where to buy from:
# Yourself or through broker
-Through a broker
# Can be done offline
# Actual buy/sell order may be placed at a different price
# Not much control on time of buy/sell
# A broker can help as well as unduly influence decision-making
Apart from these stocks another thing a first time stock buyer can do is to focus on sectors that they are familiar with. For example, if you are a doctor, you would have a view on the hospital and pharma stocks. Those in software can possible see a company that is doing well.