Beware, world's best stocks are cheaper than Sensex!

Sep 18, 2010

In this issue:
» India losing US$ 45 bn annually due to poor logistics
» The peak oil theory is largely misunderstood
» Gold and silver continue with their dream run
» Cheap stocks not able to lure investors
» ...and more!!

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 Chart of the day
Rapid growth or quality? What should an investor look into a stock? Count us in the latter camp. We are firmly of the belief that the company where one wants to invest should have a very strong moat. In other words, the company should have the capability of generating strong returns on capital year after year. Thus, even if the growth is on the lower side, the power of compounding will ensure that one ends up with far more money than one would have ever imagined.

Now, think of names like Johnson & Johnson, Microsoft, Coca Cola and Wal-Mart. If you wanted to build a portfolio of stocks with strong moats, it cannot get better than these companies. Been around for ages, they truly are world dominating franchises. They can crush competition at will and can also keep raising their prices year after year. In short, they have this enormous ability to keep generating tonnes of cash flow year after year.

Given this backdrop, you think it makes sense for Sensex to trade at valuations that are much superior to the above world beating franchises? Coca Cola trades at more than 20% discount to the Sensex whereas Microsoft is trading at virtually half of Sensex' valuations? Thus, is it a case of investors discounting the true worth of these franchises or are paying a huge premium for the India growth story? We think it is more a case of the latter than former. Let us know what do you think about the same or post your comments on our Facebook page.

Source: BSE, Google finance

Broadly speaking, there are only two ways to grow an economy. One can grow the total workforce or one can raise productivity. There is a limit to which the total workforce can grow. Thus, a big portion of the responsibility for growth falls on productivity. A recent report by globally renowned consultancy firm McKinsey highlights how raising the productivity in the logistics space in India can save US$ 45 bn annually and which can then be used for more productive purposes. This is not all. McKinsey further adds that losses due to inefficient logistics distribution in India could treble to US$ 140 bn in the next decade. This is if increased usage of rail and optimal utilisation of waterways is not achieved.

It should be noted that India's current freight traffic movement is dominated by roadways. And if the trend persists, roads will become even more overburdened. Thus, it is imperative that India shifts more than 45% of its freight traffic to the railway segment by 2020 from around 36% in 2007. It is then the losses would come down to 4% of GDP as opposed the projected 5%. Furthermore, the losses could come down to even 3% of GDP if planned investments in the sector go up to US$ 700 bn from the current planned US$ 500 bn. Looks like a tall order indeed.

Gold remains on its upward run. And it is being followed by its closest cousin silver. The yellow metal has gained around 17% this year so far. Silver has jumped an even higher 24%. Both these metals have outperformed stocks, bonds and many commodities. This is given that concerns regarding sovereign-debt and an uneven global economic recovery have continued to spook investors.

India's mining laws are set to become easier for companies that are looking to acquire rights to mine precious resources. The government has passed a new mining law that is expected to ease investments by foreign and domestic private companies in the country's mining sector. Among the most important provisions of this new law, it seeks to cut the time taken to allocate mines. It will also simplify the process that currently requires companies to pass through a maze of approvals from central and state governments.

Anyways, the law also has a social angle to it. It proposes that 26% of the profits from mining should be shared with people who are displaced because of the projects. And if the miners do not make profits, they will need to pay an amount equal to mining royalties to displaced people.

Those who believe crude oil prices will go up often cite the peak oil theory. The theory is misunderstood to mean that the world will imminently run out of oil. Peak oil actually refers to the ceiling beyond which global oil production will not grow. In any case, all attention should not be paid to the supply of crude oil. As important is the growth in demand. Especially, with over 2 billion Chinese and Indians likely to consume far more oil per capita in the future. This gap between supply constraints and growing demand will result in higher crude oil prices. The oil industry seeks more sources of supply. But the world at large will have to seek ways of reducing demand and increasing efficiency. A single pronged approach will simply not address the issue.

There is a wise saying that the one permanent emotion of man is fear - fear of the unknown, the complex, and the inexplicable. What he wants above everything else is safety. This saying is holding true in the stock markets of the developed world, especially the US, as well. Investors are wary of investing as fears of recession and market dips cloud their thinking.

Yes, maybe broader markets are overvalued and there are chances of dips. However, there are still stocks that are available at attractive valuations. These are stocks generating stable cash and paying out good dividends. And the best part is that these are available at really cheap valuations. These are the stocks that could be multi-baggers in times to come. But again fear is pulling investors back from these stocks.

Indian stock markets have emerged as the biggest gainer this week, up 4.2% and crossing the 19,000 mark on strong FII inflows. This is the second straight week when India has led the world markets. The biggest loser was China, down 2.4% as a result of the monetary policy outlook and slowdown in overseas demand.

Other than China, the remaining Asian markets closed the week in the green with Japan, Hong Kong and Singapore up 4.2%, 3.4% and 1.8% respectively. In the Americas, US closed the week up 1.4% while Brazil was up 0.4%. In Europe, the markets were flat with UK closing marginally up at 0.1% and Germany and France marginally down at 0.1% each.

Source: Kitco, Yahoo finance, CNN

 Weekend investing mantra
"There's a clarity that comes with great ideas: You can explain why something's a great business, how and why it's cheap, why it's cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level. You're never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not." - Joel Greenblatt

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23 Responses to "Beware, world's best stocks are cheaper than Sensex!"

sandip kumar navadiya

Feb 28, 2011

I like it.


manohar patwardhan

Oct 1, 2010

you are suggesting very nice tips which is helpful for us .also giving good guidence


Atul Kapoor

Sep 28, 2010

I agree to my fellow readers and to the author to a greater extent. But, the agony of the world capital or stock markets is that we retailers are never making any money from the markets unless we wait patiently and hold the stocks for longer periods like 5-7 years. FIIs who are pumping the money here in India that money is free for them as US interest rates are all time low and these are the guys who made huge profits while everyone was looking at sensex climbing from 8000 to 14000 in no time. After spending almost 9 months of consolidation they are the ones again who pumped in huge money to take the sensex back to the old highs and I won't be surprised to see the markets crossing even 21000 before Christmas this year.
HNIs and DIIs are investing retailers money slowly and inteligently into the markets. The figures which we saw in last few weeks of selling from DIIs was due to redemptions set in by entangled retailers who wanted to get rid of their losses at minimum. But, now they are looking at themselves as they feel a little wait would have been worth millions.
Indian economy and growth story is great and we will see new and even greater highs on sensex in 2011 but not at this pace, courtesy FIIs and Warren Buffet.


K. Chandrasekaran

Sep 27, 2010

While traders to purchase shares, they are asked to quote a little more of the trading price. Then how the shares are being sold lower, even while opening of the trading session?
I also sincerely feel that the companies themselves purchase their own shares in lower market rates and book profits!!!!!!!!! and they are truly depending on their own businesses??????


Dr H. Achyutha

Sep 20, 2010

First of all, it is not fair to compare individual foreign stocks to Sensex P/E ratio. The overall P/E ratio of DJ Index will be lower than that of Sensex's. FIIs are pumping in money to rise the prices. One day they may suddenly sell heavily. The retail investors should book profit continuously like Domestic Mutual Funds.



Sep 20, 2010

What you say is absolutely true. After burning our fingers a few times, we have learnt our lessons. After more than 3 years of purchase, we are sitting on losses of 25 to 50%. The advisers were such reputed people as HDFC, Capital Market etc. We now trust our own research on the lines mentioned by you.


Peter Patel

Sep 19, 2010

I have been following your recommendations using your subscription services for the last two years. I have been very satisfied with the recommendations. I wouldappreciate it very much if you could recommend or start a service for US stocks.




Sep 19, 2010

Rapid Growth or quality? to this query you have answered after another four paras."
Investors are wary of investing as fears of recession and market dips cloud their thinking"
When an investors starts investing invariably, his intention is to recover his funds at the earliest and therefore he looks for rapid growth.the fear of the markets going down and hence a'notional loss' is also not acceptable to him.
difficult to change investor mind-set.



Sep 19, 2010

I don't think its great idea to compare Sensex P/E against individual compaines like Coca Cola or MS - As far as I understand, its like comparing sensex based ETF against individual companies...better approach may be to compare valuations for individual companies that are comparable


V S Gurumani

Sep 19, 2010

I have just finished reading a most interesting and gripping story on how India countered the fall out of the 2008 crash in the US. Reading your column above, it seems to me that the worst thing that is happening to us as a people is the rising Sensex. It is lulling the Indian middle class into believing that "aal iz well". The mess in logistics is no more evident than in food where we have lost billions over the years due to poor supply chain management. Sadly, in India, when one talks of infrastructure, we do not go beyond building roads. This is a bit like saying that if you have a good operating theatre, you have a world class hospital! As an aside, listening to every two penny minister and bureaucrat use the words "world class", there should be a ban on their use in the media or in press conferences.

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