When buying shares of a company, you follow one of the two approaches:
Be greedy about these stocks,
as others are fearful
One, you are greedy, when everyone else is too
You buy into a "hot tip" and expect to book profits just before greed turns to fear. The downside here is that everyone else too expects to do the same. Ultimately, someone is left holding the stock when fear returns, and there are losses. If you are not great at timing your exit, that "someone" will probably be you.
Two, you are greedy, when others are fearful
You buy into a stock of a well-managed company that investors are fearful of for factors that have little impact on the company's long-term performance. And then, you wait for the markets to take note of this fact. Once rationality returns to the markets, you would have made your money.
The debate on which approach works best is endless. But as far as we are concerned, this issue is long settled, and that too by the world's most successful investor - Warren Buffett.
This is what Warren Buffet had to say about investing:
"Be fearful when others are greedy, and be greedy when others are fearful."
If you thought this was just another statement to be read and forgotten, then be prepared to lose out on opportunities that are staring you in your face!
Read on only if you are a long-term investor
In India, presently, almost all the investor interest is focused on a handful of stocks. These are the so-called "hot tips" which everyone appears to be buying into. It's greed at its best.
But just as greed has gripped these stocks, fear has surrounded others. A case in point is stocks in the software sector. And this is where we believe investment opportunities can be found.
So, what is triggering this fear about the software sector?
The adverse impact of an appreciation in the value of the Indian Rupee vis-à-vis the US Dollar. Simply put, every time the Rupee appreciates against the US Dollar, earnings of a software company, which has a large exposure to the US market (most companies do), take a hit as the US Dollars it earns translate to fewer Indian Rupees. And to that extent the overall revenue and profit growth takes a hit.
Investors in the stock market are worrying too much about this currency issue. So much so that stocks of well-managed companies in the sector are either at their 52-week lows or are close to those levels!
Since there is fear all around, we asked ourselves, is there any long-term benefit to be derived by being greedy about the stocks of these well-managed companies?
Well, based on our research, it appears that attractive investment opportunities are to be found in the software sector. Indeed, the opportunity is not sector-wide. But the few stocks that offer value at current price levels shall stand to deliver returns of as high as 80% to 100% over the next two to three years.
Yes, that's right. The stock price of these very-solid companies could double from current levels over two to three years!
The exchange rate concerns notwithstanding, the companies we like continue to do very well. In fact, both in terms of volumes and billing rates, these companies have shown that strong growth persists. Importantly, the businesses of these companies are de-risked considerably in terms of geographies.
Of course we expect the overall profitability of these companies to take a hit if the Rupee continues to appreciate and the pressure on wages persists. However, even after factoring in this, these companies are still poised to deliver over 25% growth in profits over the next two financial years.
The short-term investor is ignoring all these facts. He is pre-occupied with buying momentum stocks and worrying too much about the impact of an appreciating Rupee on the software sector.
This is exactly the kind of an opportunity long-term investors yearn for!
But what if the Rupee continued to appreciate vis-à-vis the US Dollar?
Well, for our 'buy' view on these stocks to change to a 'sell', other things remaining unchanged, the exchange rate will have to appreciate all the way to Rs 30 per US Dollar! And that, though not impossible, is highly unlikely. The risk-reward trade off is firmly in favour of the investor.
So what are these solid companies we are referring to?
The first company is among the earlier adopters of the offshore delivery model, and finds place among India's most respected companies; probably the country's best selling corporate brand as well. With its strict entry requirements (only 1 of every 100 applicants make it to the company's payrolls), it has carved a niche in terms of execution capabilities and offering a wide bouquet of software services. We expect its net profits to grow at a compounded annual rate of 26% during the period FY07 to FY10, after a stupendous FY07 wherein the bottomline grew by 57% Year-On-Year (YoY).
The other company is a pioneer of the global delivery model for technology offshoring. The company began its operations three decades ago, when not many knew about software services, forget offshoring. Since then, on the back of its delivery capabilities and management vision, it has come a long way to emerge as one of the more respected companies in the global circle.
Despite its size of operations, managing growth is what has been the forte of this company considering that it boasts of one of the lowest attrition rates in the industry. FY07 saw this company growing its net profits by 46% YoY. While we expect growth to slow down a bit in the future (consider our estimates of 25% compounded annual growth in earnings during the period FY07 and FY10), we believe there exists tremendous value in the stock at current levels.
These are just two of the ideas! At any point in time there are several ideas out there, which a rational investor can benefit from in the long-term!
Here's how you can get such ideas regularly...
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