Does the 'hidden value' in this stock entice you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Does the 'hidden value' in this stock entice you? 

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In this issue:
» The biggest buyers of gold are...
» Yet another instance of Too Big To Fail
» US home loan borrowers default again
» The trillion dollar bomb ticking in China
» ...and more!!


00:00
 
How many times has your broker 'tipped' you to buy a stock that is expected to quickly 'unlock value'? How many times have you read about the 'value unlocking' story in business papers? Probably every other day until mid 2008 when the subprime crisis hit global markets. Well, it is back again!

As valuations remain northbound, companies and promoters get greedy for more. While some look at listing their subsidiaries to unlock value, others look for buyers of their brands and product portfolios. Until 2008, investors were lured by all of these. Be it telecom companies listing their tower businesses. Or banks listing their insurance and mutual fund businesses. Brokers took it upon themselves to churn out reports on value unlocking story of every possible company. 'Sum of the parts' became the most sought after valuation tool to justify astronomical prices. But when markets crashed, they never had an answer for the lost value!

Now, we do not have anything against valuing a hidden potential in a business. After all, a business can have a profitable segment or a subsidiary whose value is not reflected in its share price. It is only fair that analysts bring that out to the notice of the investors. That is why they are paid in the first place. But what matters more is how the valuation is arrived at.

Infact, we were taken by surprise when a business daily today quoted the value unlocking potential of a company we admire the most - HDFC. While HDFC is planning to sell stake in its unlisted investments, brokerage houses have already put a price tag to the unlisted entities. HDFC's intent to unlock value in non-core businesses may be in the best interest of its shareholders. But the brokerage houses' intent in luring investors to buy the stock without a realistic estimation of the 'hidden value' seems rather disturbing.

Let us know your views on this.

01:22  Chart of the day
While banks in India continue to complain about a very slow offtake of credit, there is something they are missing out on. The trend of growth in retail housing credit. The demand for home loans from retail customers which had lagged the overall demand for credit since mid-2007 is showing signs of resurgence. This is certainly a good indicator of inclusive growth in the economy, as loans to builders and real estate companies do not form part of this. Also, as per the biggest home loan providers, a third of incremental home loans are given to first time buyers. We believe this is the most encouraging sign for a growing economy, unless the retail buyers are overleveraging.

Data source: RBI Financial Stability Report

02:05
 
Gold is certainly enjoying its place under the sun. After all, the global economy has yet to completely shake off the ill effects of recession and the reputation of paper currency (read the US dollar and the euro) is being torn to shreds. Little wonder then that the allure of this precious metal has now become too hard to resist. Otherwise what would explain the fact that central banks around the world added 425.4 metric tons of gold to their reserves last year. This is the biggest increase since 1964.

What is more, central banks in India, Russia and China were among those that boosted their gold reserves last year. As a result, the yellow metal jumped 24%, hitting a record of US$ 1,226 an ounce in December 2009. And so, central banks now possess 18% of all gold ever mined. Indeed, the way governments are printing paper money and the prospect of inflation in the future looking very likely, gold has definitely donned the mantel of being 'the asset class to be in.'

In the recent Equitymaster Investment Summit 2010, Bill Bonner, founder of Agora Financial shared some interesting perspectives on investment in gold during his presentation on The New Trade of the Decade.

02:40
 
Death, in one line, is nature's most powerful strategy for the continued evolution of all life on earth. It filters the weak, and the ones who have made stupid mistakes. So that only the smartest and strongest make it to the next generation. But the western world seems to have become obsessed recently with impeding this centuries old strategy of nature. Even commodities guru Jim Rogers seems to agree with this view. 'Greece should have been left to die', he is known to have said recently. This comes on the back of leaders of the European Union settling on a plan assisted by the IMF to bail out Greece.

Greece has gotten itself into quite a mess over the past few years by running fiscal deficits well above limits prescribed by the European Union. The result has been that it is now on the brink of sovereign default. But this bailout will ensure that nothing nasty happens to the country. We believe that the most dangerous aspect of such bailouts is the incentives it creates for overt risk taking. And that can be quite detrimental to the global economy over the long term. No wonder then that Rogers chose to use such strong words.

03:15
 
The real estate and mortgage market in the US is still submerged in murky waters. As per Bloomberg, more than half of US borrowers whose home loans were restructured in 2009 defaulted again after nine months. The US government had insisted on the loan restructuring in a bid to reduce the number of properties lost to foreclosure. But that move appears to have backfired. Infact, the re-default rate of loans modified in the first quarter of 2009 was 51.5% by the end of the year. This certainly paints a gloomy picture. Home owners in the US have been caught on the wrong foot as they are finding it difficult to make payments in an environment where what they owe is much more than what their properties are worth. This coupled with a high unemployment rate means that the US still has a long way to go before it can say with confidence that it has left recession far behind.

03:42
 
Here is some interesting trivia. As per a business daily, China has about 8,800 investment vehicles set up at the local government level to take up massive infrastructure projects. All this with the intention of propping up GDP growth to make up for the export slowdown. But this frantic rush to boost GDP growth can prove quite costly indeed. Specifically, the risks arise out of Chinese local governments' ambiguous finances and Chinese banks' reckless lending to them. The reason for this is that these investment vehicles use land as collateral. Thus, if there is a change in the assessment of the value of the land that these entities pledge to banks as collateral, there may arise a serious problem. Some economists call this 'a trillion dollar time bomb ticking in the Chinese economy'.

In fact, Credit Suisse's chief regional economist in China is of the view that this problem has the potential to completely wipe out Chinese banks' equity base. Consequently triggering another round of equity market panic when it bursts. With China's policy making shrouded in mystery, it is quite a real possibility that problems boiling under the surface do not show up until it is too late.

04:20
 
In the week gone by global markets reacted to concerns over rising prices, interest rates as well as the approval of the bailout package for Greece. Germany was the top performer among world markets this week with a gain of 2.3%. Barring India and Japan, most Asian markets closed in the red. Among Asian markets, Japan was the top performer with gains of 1.6% while India closed the week with gains of 0.4%. The remaining Asian markets closed lower with China, Hong Kong and Singapore leading the pack of losers. In the Americas, US markets closed with gains of 1% during the week while Brazil ended with a marginal loss of 0.2%.

Data source: Yahoo Finance, Kitco
Note: Countries are representative of their respective benchmark indices

04:50  Weekend investing mantra
"One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as 'marketability' and 'liquidity', sing the praises of companies with high share turnover... but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise." - Warren Buffett
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19 Responses to "Does the 'hidden value' in this stock entice you?"

ameet parekh

Mar 29, 2010

looks like we are in a classic bull market when all sort of explanations are given for fancy stock prices.but with equitymaster at our side we are lucky.

Like 

DEEPAK SARAF

Mar 29, 2010

yes you are right. that why the holding company are discounted heavily in stock market

Like 

Pankaj Goel

Mar 28, 2010

The Value of Equity investments are not much higher when compared to annual profit of HDFC.Further with increasing competetion in Home Finance,the stock needs
careful evaluation of its further business strategy.

Like 

S Ramgopal

Mar 28, 2010

Hi,

You guys at Equitymaster are doing a fantastic job in educating novices like me! I am very glad to be part of your mailing and subscribers. Yes, on HDFC's subsidiaries, one should be wary because that's possibly the fundamental reason HDFC wants to get out of!! Maybe they do not see spending quality time in it useful and purposeful and hence those invetsments are likely to suffer in long run - so better get rid of them sooner than later!
Hat's off to you guys in disseminating information and I would like to compliment you guys on well researched reporting. You guys were bang on Tata Motors stock which I too inadvertently repurchased after selling them at a high of Rs.809!
Keep up the good work and I enjoy reading them daily!

Ramgopal

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UDAY MEHTA

Mar 28, 2010

DEAR SIR, READERS, i KNOW ONLY ONE THING. PRICE IS KING. BHAAV BHAGWAN HAI. JUST FOLLOW THE PRICE. DO NOT ANTICIPATE. FOLLOW THE TREND. ALL NEWS ARE FACTORED IN THE PRICE.IF ONE USES STOP LOSS ONE WILL NEVER BE A LOSER IN THE STOCK MARKET. ALL NEWS COMES TO THE PUBLIC IN THE END. we the public MUST REMEMBER WE ARE NOT IN THE TOP 1 OR 2% TO KNOW WHEN THE NEWS IS COOKING. IT IS OUR MONEY AND WE MUST LEARN TO PROTOECT IT OURSELVES RATHER THAN OTHERS TELLING US WHAT TO DO OR WHAT NOT TO DO. MAY GOD BLESS US ALL

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brijesh

Mar 28, 2010

i agree with your all research and informations. kindly tell me ,why the support price of food grains are not increased as per dearness allowances,increase in fertiliser prices, increase in disbalance in water resourses, a lot to write but disturbance .

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pravin k modi

Mar 28, 2010

What about crude oil & nickle.

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Mehboob M Shaikh

Mar 28, 2010

Well to be very honest, there was no "HIDDEN VALUE" that was unvieled for us by Equitymaster to really know whether it has the potential to entice or not. Or even to understand whether an enticing act was intended. Equitymaster just made some cursory comments and left it at that - no real views, no real gems and no "values" indeed.

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SAYED AYUB ALI

Mar 27, 2010

In the rising market every person try to become an expert in markets fundamentals, but the true is no one knows what lies ahead HDFc no dought is good but it also has som limits, one should not get caried out by such reports or news. think secebilly, invest in business not in stock thats the key for sucess

Like 

Devendra

Mar 27, 2010

I have noticed that stock value goes down considerably after it is recommended as hidden tresure or midcap recommendation by equitymaster.Is someone else also smelling some foul play in the recommendation strategy please?

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