Stocks for a Twenty-Year Drought

Jun 17, 2016

In this issue:
» Pharma exports immune to global slowdown?
» Is name changing a market trend?
» Round up on markets
» and more!
Tanushree Banerjee, Co-Head of Research

Brexit. Fed rate hikes. Forex crisis at the RBI. PSU employees going on strike. Bad monsoons. Surging food prices.

Phew! This list can go and on...

I mean there are too many reasons for the markets to blow up in the coming months. And none of them are small enough for you to completely ignore.

As a reader of The 5 Minute Wrapup, you don't expect us to worry you sick over near-term risks. And you may be confident that your stocks will be able to withstand short-term market volatility. But deep within, there may be a lingering doubt. Should you await a crash that may never come...or invest now?

The answer lies in the way you think about your stocks.

When in doubt, think of yourself as part-owner in businesses that will be around even after a twenty-year drought. Look for the wealth that the ownership could create for the next generation.

Buffett was prepared to stay invested in his stocks even if the market shut down for ten years. That may seem like a distant possibility today. In an age of rapid technological obsolescence, you may wonder if any business will be around for another decade or two. But then you'd be ignoring the critical traits that make certain businesses indispensable.

Let me explain with the example of one of Equitymaster's earliest safe stock recommendations - State Bank of India (SBI).

We first recommended SBI in November 2004. Since then, we have recommended India's largest bank - a proxy to the economy - six times in the last twelve years. The only time we recommended investors to book profits, in 2010, was when the valuations looked obscenely overpriced.

The stock of SBI has offered returns of 417% since our first recommendation. An investment in the Sensex would have fetched 454%. So no doubt the stock has underperformed the benchmark index. But don't ignore the fact that several other behemoths have come and gone over those years. Meanwhile, SBI has firmly retained its place in the index. And we see no reason not to expect to find it in the index in 20 or even 30 years.

Markets are currently speculating that SBI will underperform over the next twelve months. They see the cost of merger with associates dampening profits.

The stock may get punished as the quarterly numbers fail to meet market expectations.

But if you think of stocks that can survive a twenty-year drought, SBI should qualify. Of course, you should only consider it at the best valuations.

And our experience says that, for stocks like these, there is no need to wait for - or fear - a market blow up. Either way, your next generation will be thanking you for the foresight of owning a share of such an indispensable business.

Do you look for stocks that can survive long market droughts or only ones that offer near term returns? Let us know your comments or share your views in the Equitymaster Club.

03:10 Chart of the day

India's exports have been on a major slide. You could blame it on global slowdown or plunge in oil prices. Export performance of India for top ten segments during calendar year 2015 has been a disappointing one. However, the Pharmaceutical sector, which is an important contributor to India's exports, stood out in terms of export performance.

Pharma Exports Fare Comparatively Better

The US is the prime destination for Indian generic drugs. Geographies such as Europe and emerging markets like Brazil, Mexico, Russia, South Africa and South-East Asia regions too are important buyers of Indian drugs.

But majority of these geographies posed critical challenges for the pharma companies in the year gone by. If crackdowns by the US FDA were not enough, slowdown in emerging markets and currency risks have added to the woes. But despite the headwinds the pharma pack could manage growth in exports. So how should investors benefit from the opportunity in pharma space?

The India Letter team has an answer.

Recently, the team recommended a stock which is a leading supplier for generics in the global markets over several years now.

And they have reasons to believe that the best pharma companies will not lose their edge anytime soon.

While we cannot reveal the stock, here is a short except from the report...

  • The Indian companies have been under pressure off late to get their acts together. The crackdowns by US FDA is something that Indian companies need to adapt to. This is particularly true, given the increasing frequency of inspections occurring at their manufacturing facilities. Traditionally the US FDA used to visit the plants every two years. This frequency has now gone up. Now, the regulators tend to visit the facilities every six months.

    But we believe this concern is not long term in nature. India has the largest number of FDA-approved plants outside of the US. With abilities to meet US FDA norms, stronger R&D and big acquisitions in the US, the tailwinds favouring long term prospects of Indian pharma remain intact.

What's in a name? Well ask that to companies willing to shed their corporate identity at the beginning of every hot sectoral trend. Over past few months several Indian corporates seem to undergoing corporate reincarnations. Not necessarily in their business fundamentals but only in their names. As per Economic Times, almost 50 companies have changed their names so far in 2016. There were 35 companies which have already changed their name during 2015. In few cases the name change is by virtue of shift in their business focus. But most of them are interested in in conveying their trendy presence to investors.

Remember the peak of the previous bull run between 2004 and 2007, when infrastructure was in spotlight? Many companies had added the word 'Infrastructure' to their names. Similar way the dotcom trend in the late 1990s and 2000. And more recently, defence, renewable energy and bio-tech, are the buzzwords.

The irony is that irrational markets are rewarding these companies with a rise in share price as a mark of their entry into these hot spaces. But once the market gains sanity, the stock prices may nosedive as changing name doesn't change their fundamentals which are far from good.


After opening on a positive note, the Indian indices have pared part of their early gains, albeit trading above the dotted line . At the time of writing, the BSE Sensex is trading higher by 127 (up 0.5%) and the NSE Nifty is trading up by 28 points (down 0.4%). The BSE Mid Cap index is trading up by 0.06%, while the BSE Small Cap index is trading higher by 0.33%.

04:50 Investing mantra

"Invest Only in Companies You Know and Trust" - Warren Buffett

Editor's note : Please note there will be no issue of The 5 Minute WrapUp on 18th June, 2016.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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Equitymaster requests your view! Post a comment on "Stocks for a Twenty-Year Drought". Click here!

6 Responses to "Stocks for a Twenty-Year Drought"


Jun 28, 2016

As common people how can we guage positive and negative of jpassociates?
Why mrf company is not splitting ihe stock? If it is split we also can buy


Christopher carneiro alphonso

Jun 25, 2016



Like (1)


Jun 21, 2016

Very surprising to find highly debt ridden Jaiprakash Associates in the list. Does it deserve a place in the Joel Greenblatt's Dream Team?

If indeed so, it can offer a tremendous investment opportunity at this price.
Pl. share your opinion on the same.

Like (1)

M K Agarwal

Jun 19, 2016

In my TCS, M&M Dr reddy are also the companies fit the criteria

Like (1)


Jun 18, 2016

why quotes only from warren buffet?
there are many investor gurus
try them
warren sounds too familiar but monotonous.

Like (1)

Ravi shah

Jun 18, 2016

Ms Tanushree,
Thanks for giving us SBI Stock as stock for twenty yrs which can survive any drought period.Pl give more of such overvalued,undervalued but safe stocks which can be passed on to next gereration and can be slept on.

Like (1)
Equitymaster requests your view! Post a comment on "Stocks for a Twenty-Year Drought". Click here!
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