Best & worst stocks for investors... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Best & worst stocks for investors... 

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In this issue:
» Will RBI find a way to mobilise idle gold?
» Where is the Indian rupee headed?
» Reebok India's auditor denies any wrongdoing
» RBI tells Fin Ministry not to micromanage banks
» ...and more!

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Why do investors risk their hard-earned money into share markets instead of safely tucking them into fixed deposits? The answer is simple - to earn a return that is higher than what they can avail on deposits. Then why is it that most retail investors fail to build any substantial wealth by investing in stocks? There is one extremely critical fact that most investors seem to be unaware of.

The truth is that not all businesses are great value-creators for shareholders. What does this mean? Let us elaborate a bit. Every business has several stakeholders. The major ones are shareholders, employees, lenders, customers, government and society at large. Given the complex economic dynamics, businesses cannot pass on equal benefits to all stakeholders. Depending on the nature of the industry, some businesses may prove quite beneficial to certain stakeholders while creating little value for shareholders.

Take the case of Goldman Sachs. In the last one year alone, the stock of Goldman has dived by about 30% and is currently trading at just 0.7 times its book value. Simply put, the stock is available at a 30% discount to its net worth. Many shareholders of the giant investment bank have lost a lot of money. On the other hand, its employees have grown richer and richer through ever-larger compensation packages. But is Goldman Sachs an exception? Not at all! In fact, most investment banks tend to transfer most benefits to their employees rather than shareholders.

Take the case of the airline industry. The invention of the airplane has indeed been a great boon for society. But what has it done for shareholders? Warren Buffett has very aptly said, "The net wealth creation in airlines since Orville Wright has been next to zero."

The list of such instances is endless. What investors should do before investing in a prospective stock is ask this simple question: Whom does this business really reward? Businesses that have been the best wealth creators for shareholders tend to share some basic characteristics. Such businesses usually operate in industries that are not intensely competitive, have minimal government interference and do not face the risk of technological obsolescence. They possess brands that have strong pricing power. They are able to grow without huge capital outlays and generate a lot of free cash that can be returned to shareholders. If you find a stock that fits this description at a lucrative price, then you stumbled upon nothing less than a gold mine.

According to you, which are the best and the worst businesses from a shareholder's perspective? Share your comments with us or post your views on our Facebook page / Google+ page.

01:26  Chart of the day
Today's chart of the day shows India's gold imports since 2006. Gold imports have been a sizeable part of India's current account deficit, the main reason for the rupee decline. The Reserve Bank of India (RBI) is now considering ways to reduce the current account deficit without directly putting curbs on gold imports. One way under contemplation is to bring out the gold lying idle inside the country and putting it to productive use. The K U B Rao committee set up by the central bank is trying to create financial instruments that can mimic the return on gold. Gold imports in the year 2012 are likely to drop to 650 m tonnes on account of the increase in the import duty.

Data source: DNA Money; E: Estimates

IT biggies including TCS and Infosys recently declared their results for the first quarter of the current financial year. Both these companies had contrasting performance, however one thing was common. The freefall in the rupee helped buoy the margins for both these software majors.

Now the biggest question is where is the rupee headed? Let's see Mr Ajit Dayal's view on the topic, in his latest webinar on the Indian stock markets. In November 2011, Ajit was of the view that the rupee would appreciate. This prediction was bang on, as the stock markets moved up and the rupee strengthened till Feb 2012. But, post the Union Budget 2012, people got nervous and scared. The uncertainties with regards to taxation tossed the rupee up completely. Speculation was abundant and the rupee crashed, reaching its lifetime lows. Going forward Ajit has no idea where speculation will take the Indian currency. But, long term foreign investors will be well advised to convert their dollars into rupees if they want to buy into India's long term story. We echo Ajit's view that over the long term India is growing and like any growing country it should have a strengthening currency. The rupee is expected to reach the Rs 45-48 to a dollar levels, similar to what was seen in July 2010. Economic growth and a stronger currency go hand in hand, and we believe that the recovery is on the way.

In what could be the second biggest corporate scandal after Satyam, Reebok India has alleged a fraud to the tune of Rs 8.7 bn by its former Managing Director Subhinder Singh Prem and former Chief Operating Officer Vishnu Bhagat. Both had allegedly rented four warehouses without informing their seniors and used them to store goods and claimed they were supplied to genuine dealers. They also allegedly siphoned off goods to ghost companies and distributors across the country, claiming they were defective pieces. The auditor of Reebok India has denied any wrongdoing on its part in the audit of the firm. But a reading of the 2010 annual report of Reebok India shows at least two accounting red flags.

The first issue relates to inconsistencies in the calculation of the money due to Reebok India - or, in accounting parlance, 'sundry debtors'. In 2010, Reebok India saw a spike in the money due from its customers - distributors and retailers - for goods supplied to them. The second issue relates to the accounting of bills discounted with banks. In 2010, of the Rs 6.9 bn its customers owed it, Reebok India discounted bills worth Rs 3.8 bn with banks. That year, even as money owed to Reebok India increased substantially, the company changed its accounting policy on bills discounted with banks. It is indeed shocking that a renowned brand such as Reebok would be culpable of such fraud. Such instances tend to rupture the trust of investors in Indian corporates, leaving very few groups that are transparent and shareholder-friendly.

According to you, which is the most trustworthy corporate group in India? Cast your vote now!

Most readers agreed with our views on what a commendable job India's central bank has done so far. The RBI has won accolades world over due to its truly independent and prudent decisions. But as always our policymakers have a problem with that. The relations between the RBI and the Finance Ministry can be best described as a love-hate one. Despite being inter-dependant, each entity cannot seem to come to consensus on most issues. RBI's complete control over the country's banking polices is particularly not acceptable to the Ministry. Hence, every now and then, it tries to vest control over the functioning of PSU banks. More so, because the government has a majority share holding over them. But the RBI believes that too much interference by the Ministry is a violation of corporate governance norms. That the government's diktats have often destroyed shareholder value in PSU banks is also no mystery. Hence the RBI's disapproval of the same is not misplaced. However, we wonder if things will change anytime soon.

There are quite a few economists out there warning against the ill effects of money printing. Now add a gentleman named Bill Fleckenstein to the list. Bill, also a hedge fund manager, is of the view that central banks around the world are in a state of panic. And they are thus printing obscene amounts of money to pay down the excessively high levels of debt. But this is not going to last long as per Bill. This whole drama will end with the realisation that investors are being doled out nothing but negative interest rates. Thus, there will soon come a time when the bond market or the currency market or the combination of two will take the printing press away from the policymakers. In other words, they will start dumping currencies left, right and centre and eventually make them worthless. Thus, the biggest risk right now as per Bill is not deflation but inflation and that too, of the kind we just highlighted. Are you prepared for such an eventuality?

The Indian equity markets have been trading firmly since opening of trade today. At the time of writing, BSE Sensex was up by 75 points (0.4%). However, consumer durables, realty and metal stocks were on the losing side. Barring Taiwan, all Asian stock markets were trading firm and Europe too opened trade on a positive note.

04:45  Today's investing mantra
"Snickers has been the #1 candy bar for the past 40 years. If you gave me $1 billion to knock off Snickers, I can't do it. That's the test of a good business." -Warren Buffett

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    1 Responses to "Best & worst stocks for investors..."


    Jul 13, 2012

    Companies which satiate basic human needs (that will not go out of demand) are likely to give great stock returns. But recognizing such produce/companies is only first part of story. The investors must also look at the competitive environment, management quality, past record, govt. intervention, future growth potential among other things before considering investing in a stock.

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