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India's Own FANG Stocks

Jan 29, 2016

In this issue:
» Will India's forex reserves continue to improve?
» Smart cities plan take a step ahead
» Round up on the markets
» ....and more!
0.00
Tanushree Banerjee, Co-Head of Research

That Indian stock markets are decoupled from global crises is a myth that was busted way back in 2008. The fundamentals and valuations of companies here may differ greatly from those in the US and other developed markets. But investor behaviour is the same everywhere. Buffett has told us for decades that greed and fear are the only two emotions that guide investors the world over.

Now, the performance of the S&P index may or may not influence the Sensex, even with a lag. But we like to see the behaviour of US stocks, especially of established companies, to find out what investors are thinking. Incidentally, over the last two weeks, I came across an interesting acronym in several publications. Apart from publications like Forbes and Fortune, even Agora publications in the US and UK seem to be using it more and more. It is FANG.

FANG stands for Facebook, Amazon, Netflix, and Google (now Alphabet). In other words, the darlings of Wall Street and Silicon Valley. Fortune points out that these companies gained US$485 billion in market cap (average gain of around 66%) in 2015. Last year, the other 496 companies in the S&P 500 actually lost more than half a trillion dollars of investor money!

Another acronym that seems to be popping up everywhere is LSS - Last Stocks Standing. Investors believe mayhem in the broader markets can't hurt the FANGs thanks to their unique business models and solid fundamentals. So the FANGs will be the last stocks standing. The fact that their lofty valuations mathematically reduce the chances of further upside is conveniently ignored.

My key takeaway from all this is that one of the biggest fears on Wall Street is that the FANGs will suck the blood out of the US markets in 2016.

How about in India? Do we have our own FANGs to fear? Well, we certainly don't have any big innovators among the listed companies. But growth machines like Flipkart in the e-commerce space are already eliciting lots of investor interest...even though they are far from producing profits. But these notwithstanding, some solid high-growth companies did see astronomical valuations in 2015.

Remember when I pointed out that some Dalal Street darlings were trading at astronomical valuations in June 2015?

I think those stocks are the FANGs of India. Sure, these companies have great business models and solid fundamentals. But it was foolish for investors to assume their valuations could defy gravity forever.

At a time when almost every other stock is being punished for below-expected earnings and vulnerable balance sheets, these appear offer a safe haven. This is the LSS syndrome in India. But markets won't be able to cocoon these stocks when the overall valuations have a reality check. Over the past few months, investors have learned the hard way that even the best companies can erode investor wealth.

Instead of getting carried away by the FANG-like market darlings or reading too much into the LSS syndrome, investors should play it safe. Having a strict discipline in not overpaying for any stock, however enticing, could safeguard your portfolio in difficult times.

Did you invest in India's FANGs in 2015? Let us know your comments or post them on Equitymaster Club.

Incidentally, I and Rahul Shah had the chance to discuss the potential for innovation and creative destruction in India's Consumption space at the recent Equitymaster Conference. In case you have missed the event and would like to know more about these stocks, you can get online access to the video recordings of the Equitymaster Conference 2016.


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3.15 Chart of the day

Just few days back we wrote about the declining trend seen in the Indian Rupee. The declining trend is evident from the chart here.

India's improving Forex Reserves

But on the positive side, India's foreign currency assets have improved at an encouraging pace. This increase of foreign assets reflects a strengthening of the reserve position. Having said that, the falling crude prices have been an important contributor for this improvement. The oil prices have crashed by more than 40% in approx. last 20 months. And India being heavily dependent on oil imports, the country's fiscal position and currency rates could worsen as and when the cycle turns.

Attendees of the Equitymaster Conference -2016 would recall Mr Ajit Dayal, laying emphasis on this aspect.

4.10

The government's '100 Smart Cities' plan finally takes a progressive step. The policy makers have released the names of first 20 cities for the initiation of this plan. Now if you recollect, we have talked on several occasions about how a good execution of the smart cities plan can be game changer for the economy and companies. In fact, this was one of the key topics discussed at the Equitymaster Conference - 2015 .

Of course, the building of smart cities could unleash several Megatrends across various sectors. According to an article on Firstpost, the realty sector will be an important beneficiary. As will sectors like housing, cement, infrastructure, financial services and so on, So, execution remains the key here. Allocating and managing resources, handling urbanization, skilling and employing labour could be few of the several challenges that government will have to deal with. There is no doubt that India Inc will see a healthy jump in earnings if and when this project takes off in a big way. But will all the companies from such sectors reap the rewards? Not really. So while we are closely looking out for the companies that will benefit from such trends, investors should also bear in mind not all companies will benefit from these Megatrends. The key here will be to evaluate every company on an individual basis, its track record, its execution skills, management bandwidth and its business model.

4.45

After opening the day on a positive note, the Indian indices continued to rise. At the time of writing, BSE Sensex was trading higher by about 350 points. Barring stocks from the telecom space, all the sectoral indices are trading firm.

4.50 Today's Investing mantra

"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." -Warren Buffett

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

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