In the Next Market Crisis, Buy 'Branded Stocks' - The 5 Minute WrapUp by Equitymaster
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In the Next Market Crisis, Buy 'Branded Stocks'

Sep 14, 2018

Kunal Thanvi, Research analyst

I have come across several Apple loyalists. I have yet to win an argument with them over how expensive Apple products are.

I talk about price and cheaper products in the market.

They talk about the ease of use, user interface, and security. Once a person is hooked onto an Apple product, the price seldom matters.

Steve Jobs' comeback post 1997 thrust Apple in the global limelight. Be it digital music players, laptops or smartphones, Apple has created a strong brand in almost every segment they've entered.

It was no surprise to me when Apple recently became the first publicly traded company to hit the US$ 1 trillion market cap.

In the Indian context as well, companies with such strong brands have dominated our stock market.

A look at the top brands forming the Sensex will give you a better picture.

I call this the Branded Sensex.

Branded Sensex Table

Stock Price to Earnings*
Asian Paints 58
Bajaj Auto 20
HDFC Bank 31
Hero Moto 18
HUL 68
ITC 33
M&M 16
Maruti 33
Tata Motors 21
Data Source: BSE India
*TTM - Trailing Twelve Months

Average 'Branded Sensex' Price to Earnings Ratio: 33

Sensex Price to Earnings Ratio: 24

Markets have always valued branded stocks at a premium. And rightly so.

Brands established over many years give companies pricing power. The quality that consumers associate with their brand (like my Apple-loving friends) differentiates these companies from competitors who play on price.

For an investor too, it is the 'branded stocks' that provide comfort when the markets are volatile.

A decade post the Lehman crisis, there is uncertainty in the global markets these days. Oil prices are on a constant rise.

Many emerging markets are facing a currency crisis. India has not been spared. The rupee fallen to a record low. Rising oil prices are likely to widen India's current account deficit. Combine this with the general elections next year and we could be in for a bumpy ride.

What should you do as an investor?

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I believe this formula has the best chance of success: Branded Business + Maximum Market Pessimism = Great Stock Picking Opportunities

If you get a great branded company at the right price, rest assured you've got a multi-bagger on your hands.

When markets correct, there is a tendency to look at stocks that are beaten down the most. The logical assumption is that these stocks will rebound the most.

My belief is different. Branded businesses which are expensive most of the time are available only when the market is going through extreme pessimism.

And, I've got living proof here at Equitymaster.

Back in 15 January 2009, BSE Sensex was close to its point of extreme pessimism. It was trading at 9,000 levels from its highs of 21,000 that it touched just a year back.

The Hidden Treasure team zeroed in on a stock that turned out to be a 100-bagger and is still going strong.

My latest Smart Money Secrets recommendation is in the process of establishing a strong brand in the Indian market.

For my next Smart Money Secrets recommendation as well, I have two strong companies with established brands on my radar.

The recent natural calamity in Kerala has led to correction one of the stocks I am looking at.

With the recent uncertainty surrounding stock markets, I might soon get my favorite combination of an established brand in a pessimistic market.

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Chart of the Day

10 years back, one of the biggest stories unfolded in stock market history. Lehman Brothers filed for bankruptcy on 15th September 2008.

The Indian Stock Market wasn't immune to the global meltdown. In the next month, the BSE Sensex would fall a further 40% to close around 8,000 levels. This from the all-time high of 21,000 made in January the same year.

If ever there was a time of maximum pessimism that was it.

I mentioned above how branded businesses are the best option in times of maximum pessimism.

Outperformance of Strong Established Brands in the Indian Stock market

A look at the performance of the best brands post the Lehman crisis certainly strengthens my belief.

The top five established branded companies part of the BSE Sensex back then have comfortably out-performed the overall index.

Their stable business models and strong brand power have ensured the dual benefits of stock re-rating as well as improved earnings.

With the macro environment turning volatile, well established branded businesses might just be the right place to look.


Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: Kunal Thanvi, editor of Smart Money Secrets, is the Sherlock Holmes of investing. He is on a mission to reveal the top picks of India's best investors to you. For clean, high quality stock recommendations that won't put your wealth at risk, subscribe to Kunal's Smart Money Secrets.

PPS: Ajit Dayal, our founder, will be talking at the Indian Merchant Chamber, Churchgate, tomorrow 15 September 2018, on the Lehman Crisis. If you're interested in attending this event, can sign up here.

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