Are you investing in value traps?

Aug 19, 2013

In this issue:
» Should we kill growth to save the rupee?
» A need to revamp the monetary policy
» India's PSU banks reflect India's fragility
» Did Bernanke really help the US?
» and more....

00:00
 
In recent weeks the stock markets in India have been dilly dallying almost every day. The gains have been limited while the declines have been severe. There are a lot of factors attributable to this. The foremost ones are of course the sad state of affairs in the Indian economy and the steep decline in the value of the rupee. The economic slowdown and policy roadblocks have led to a dismal financial performance by India Inc. Therefore it is not surprising that the list of stocks trading near their 52- week lows is growing longer every day. In fact many of them have corrected by over 80% since their historic peaks. As a result there are several stocks available at PE valuations close to or at their historic lows. This may make investors wonder if these stocks should be bought simply for their low valuations. If your answer to this is yes, then there are very high chances that you may be falling for a value trap

Value traps are stocks that are trading at very cheap valuations. But they differ from value buys. The biggest difference is that value traps can trade cheap forever and never really recover in terms of stock price performance. There is a reason for this. The value traps are stocks that are trading cheap for a reason. And the reason is related to structural problems with the company. This could be because the company is in a business that is outdated and is no longer in demand. Or because of governance and management issues. It could also be a bad business in a bad sector. In all such cases, the chances of recovery in a stock price may be dim if not zero.

Value buys on the other hand are stocks that have strong fundamentals and capable managements. They have a sustainable moat that can help them weather good times as well as bad. This is not to say that these stocks may not see their prices correct ever. When stock markets are seeing the kind of declines that we see in recent times, value buys too may see their prices come under pressure. But these stocks have the strength to bounce back when the tide turns for the better. Stock market declines provide excellent opportunities to pick up such stocks at attractive valuations.

The lesson for the investors from all of this is that if they want to invest in stocks trading at all time lows, they need to dig deeper into the reasons for these low valuations. They need to segregate the value buys from the value traps. Doing proper homework and investing in value buys is the only recipe for long term wealth generation.

Which companies do you think qualify as value traps? Please share your comments or post them on our Facebook page / Google+ page

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01:15
 Chart of the day
 
Economic Times has recently conducted a study on the stock markets. The exercise aimed to identify the stocks that have lost most in terms of market capitalization between the peak of January 2008 and August 2013. As per the study the top 10 stocks have lost nearly Rs 6866 bn in market capitalization. The top 5 in this includes names like DLF Ltd, Reliance Communication, BHEL, Unitech and Suzlon Energy. While some of these stocks have lost market value due to their own inefficiencies, some have just been the victim of poor economic conditions. Nevertheless, the bottom line is that investors have seen their wealth erode due to such stocks. This brings us back to the question of what should investors do. Stock picking has become even more crucial now than ever before. Picking stocks that can preserve shareholder wealth through their strong fundamentals and business moats is the only way out for investors.

Source: Economic Times

01:50
 
Custodians in charge of ensuring Indian rupee's stability seem to be at their wits' end. They can neither sit quiet nor can they take too many tightening measures as it will only end up hurting rupee further. If their actions are anything to go by, they seem to be doing more of the latter. And as exactly feared, it is only making matters worse. Take the example of RBI's liquidity tightening measures that forced a spike up in short term interest rates and created huge liquidity problems. Or for that matter, consider the recent attempts at controlling capital outflows. Instead of helping rupee strengthen, these measures are in fact sending wrong signals to investors and sparking further meltdown in the Indian currency.

We believe the Government will be much better off taking long term measures and let the rupee find its own near term levels. We agree that this could lead to a lot of volatility in the immediate future. But reforms taken from a long term perspective would more than compensate for the economic loss that could arise out of such a situation.

02:30
 
In recent times, the quarterly monetary policy reviews by the Reserve Bank of India (RBI) have been the subject of much discussion. This in a scenario when the economic growth has been slowing down and the currency has been highly volatile. But ultimately what should a monetary policy aim to achieve? Ideally, the policy should be aligned with the long term growth objectives of the economy. This means that the focus should be more on structural aspects. Is this what the monetary policy so far has been achieving? Probably not. As per an article in the Mint, the reviews so far have been focusing on reducing inflation and the volatility in the forex markets. There is nothing wrong with this per se. But the focus has been more of a reaction to events than a proactive approach. The implication is more short term than taking a taking a long term view. Interestingly, the Prime Minister highlighted the need for a change in the policy reviews and probably redesigning them. But has this suggestion been made because the Prime Minister really understands the reasons for the same? Or is this more of a reaction to the rupee steadily declining against major currencies in the global markets? One really wonders.

03:10
 
The performance of PSU banks in June quarter, in terms of asset quality, has been disappointing to say the least. The non performing assets (NPAs) of these banks have been crawling up for several quarters now. Initially it was the loan waivers on agri related exposures that gave the hiccups. Later, the restructuring of corporate loans started to prove as a big dampener. Instead of improving asset quality, the high slippage rate in restructured loans piled up NPAs for PSU banks. What was shocking was that instead of foreseeing the NPA crisis, the chiefs of PSU banks pretended to be in the bliss of ignorance. They saw nothing wrong with the government's instance on restructuring bad loans as a political measure. Their own financial well being was not really a worry for the chiefs of the PSU banks. Or probably there was little that they could do about it! Either ways, with gross NPAs having nearly doubled in absolute terms within the last year, they have nowhere to hide. As a share of sector loan book, the bad loans have gone up from 1.3% in March 2009 to 3.4% in March 2013. As per Mint, Rating agency Moody's has downgraded three Indian PSU banks. Investors meanwhile are valuing most PSU banks below their book value. The last time these entities were relegated to such a scenario was during the debt crisis in 1992-93. Pity that the entities failed to learn from the past mistakes.

03:40
 
Ben Bernanke. The man at the helm of the most powerful central bank in the world- the US Federal Reserve. Every word he says is scrutinized by investors, economists, policymakers, etc. across the world. His comments are known to drive world financial markets topsy-turvy. Come January 2014 and Bernanke would complete his second term as the central bank chairman. It is still not clear who would be his successor.

One question that comes to mind is- how well did Bernanke do his job? The gentleman himself is known to have asserted that he has had the best inflation record of any Federal Reserve chairman since World War II. As per Money News, during Bernanke's regime since February 2006, consumer inflation in the US has averaged 1.9%. This was despite the unprecedented monetary stimulus. Through the three rounds of quantitative easing, Bernanke enlarged the US Fed's balance sheet size to a record US$ 3.65 trillion.

In our view, it would be stupid to cheer Bernanke's performance just because inflation has been under control so far. Take Alan Greenspan for instance, the central banker who preceded Bernanke. Many hailed him as the greatest central banker. But the US saw the worst financial crisis since the Great Depression of 1929 just after his regime ended. Greenspan was responsible for creating a massive credit bubble that was just not sustainable. We believe that Bernanke's reckless money printing can also prove to be disastrous. It is just a matter of time.

04:35
 
In the meanwhile the Indian equity markets continued to be weighed down by the weakness in the Rupee. At the time of writing, the Sensex was down by about 412 points (2.2%). The other major Asian stock markets did not fare much better. Barring China and Japan, the other markets closed the day in the red as well with markets in Indonesia leading the losses in the region.

04:55
 Today's investing mantra
Owning stocks is like having children - don't get involved with more than you can handle."- Peter Lynch

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4 Responses to "Are you investing in value traps?"

Girish

Aug 20, 2013

Financial technologies is clear value trap.

MCX- ? Not yet known. I would like to know views of others on this stock.

Like 

ANIL SAMAR

Aug 20, 2013

Dear Sir

excellent! worth reading & vaulable informative . i liked it very much . i have never seen such write up in any mazazine focussing on such

Rgds

CA Anil Samar

Like 

sunilkumar tejwani

Aug 19, 2013

in short, when the tide turns B H E L and Reliance Communication can bounce back, but D L F, Suzlon and Unitech???????? God save the shareholders, 'cause the troika are either in a bad sector, or there is a corporate governance issue or the company is on the brink of bankruptcy. to be frank, D L F is managed by a land mafia who is well connected with the powers that be, Unitech is involved in Shady deals, Suzlon will go down under sooner or later.

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Manoj K Mondal

Aug 19, 2013

India's PSU banks reflect India's fragility
-Ask a PSU Bank Manager over a cup of beer and you will know with confidence that the actual NPA percentage is well above 15% and nowhere in the vicinity of 3%. All banks are in the same boat and they think suppressing NPA figure is the order of the day and is natural.

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