Free Reports

Here's What Everyone Is Buying...

Jul 29, 2016

In this issue:
» An undercurrent no one has talked about for years
» Are banks over confident about economic revival?
» Market roundup
» ...and more!
00:00
Tanushree Banerjee, Co-Head of Research

Investors crave activity. The stock markets are built on it. The media feeds on it. The pace of activity makes it seem as if events to great significance happen every day. So hundreds of millions of shares change hands every session. But the rationale for most of the buying and selling is merely that...everyone else is doing it!

Thomas Phelps equated this behaviour to that of a fish...

  • A great deal of investing is on par with the instinct that makes a fish bite on an edible spinner because it is moving.

Investors, too, bite on what's moving and can't sit on a stock that isn't going anywhere. They also lose patience with stocks that move against them. This causes them to make a lot of trades...and never enjoy truly mammoth returns.

Worse still, they buy a long discovered opportunity.

The traded volumes of a stock reach their zenith when they're at the peak of popularity. This may have nothing to do with the quality of fundamentals or the attractiveness of valuations. It may just be that these stocks are being widely written about, discussed at cocktail parties, and endorsed by brokers. The hype is so huge that everyone fears missing the bus. And so they buy the stocks simply because everyone else seems to be buying them.

Now here is what everyone is buying these days: non-banking finance companies (NBFCs).

Stocks of NBFCs were an obscure lot until just three years back. Their traded volumes then were a fraction of what they are today. Not only have they been 'discovered' by the FIIs, fund managers, and brokers. They've enjoyed an impressive re-rating in valuations. Yet, the media still can't get enough. And lay investors are being drawn to the fast-moving stocks like a school of fish to an edible spinner!

Long discovered NBFCs...
Price to book value (x) 2013 Latest
Bajaj Finance 1.2 10.7
Cholamandalam Invest. 1.4 6.8
Bajaj Finserv 0.9 3.9
Shriram Transport Finance 1.4 3.1
Muthoot Finance 0.6 2.6

Source: Ace Equity, Equitymaster

This is not to say that the growth opportunity in NBFCs is over. But investors willing to pay ten times the book value of a financial entity have already priced in obscene and nearly impossible growth rates.

Following the herd's cravings for NBFC stocks will only make it more difficult to fetch the expected returns. And irrespective of the popularity of the stocks in the years to come, they may never fetch mammoth returns if you buy at the current steep valuations.

We're sorry if you were expecting to see a list of stocks that everyone should be buying now. But we believe investing requires homework. It's fine to watch the market and see where all the fish in the school are biting. But it takes work to distinguish the lure from the real opportunities.

Do you tend to buy the stocks that everyone else is buying? Let us know your comments or post them on Equitymaster Club.

02:20 Chart of the day

India's benchmark indices have surged almost by 7.5% since the beginning of 2016. And there is a good amount of feel good factor prevailing. But trends on equity mutual fund side paint a different picture. As reported in Business Standard investment in equity mutual funds has been going down since the beginning of 2016. The chart below clearly highlights this trend.

Mutual Fund Investments on the Decline in 2016


But this is just one part of the story.

An article in Mint reports that about two dozen private equity players are looking out to raise US$ 2 bn to be invested in Indian equities. So the quantum of new FII money coming into Indian equities may again far outstrip the domestic investment. Now this has typically been the case across market cycles. Domestic investors in India are typically late entrants and miss out on the earnings surge and uptick in valuations. In fact they fail to notice the long term trends and miss the analytics that the FIIs have access to.

We want this to change.

Incidentally, a couple of months back, my research team identified an undercurrent in Indian stock markets that no one has talked about for years! For weeks we looked at the numbers thoroughly and reviewed our assumptions before alerting our readers about it.

Our diligence led to the release of a special report -

Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave.

This is still available for download.

The report explains the undercurrent driving the market that 90% of market participants are currently ignoring.

03:10

It seems banks are already quite optimistic about the potential of economic revival. And this is reflecting in their reluctance to sell stressed assets to ARCs at distress prices. According to an article in Economic Times, for the first quarter of FY17, banks have sold a fraction of the bad loans they had put up for sale. Only 2% of the bad loans were actually sold.

With the rise in the non-performing assets (NPAs) of the banking sector, the role of asset reconstruction companies (ARCs) has become bigger. With increase in participation by the ARCs, the asset quality of banks was expected to gradually improve. But hindrance has always been non-agreement on the valuations. Now with the revival in economic activity, banks believe the price at which ARCs were willing to buy those stressed assets may not be viable. Further, with below average performance of ARCs, banks have built up their own teams to handle the bad loans.

While the fact that banks are looking forward to better recoveries is a good thing, this may delay the cleaning up of their books. And given the colossal amount of stressed assets in their books, are they being realistic? With bad loans lingering in their books, banks will have to live with the risk of deteriorating asset quality. And in the process hardly gain any investor confidence.

04:15

Some disappointing set of results led the Indian markets to stay in the negative territory for the entire session today. At the time of writing, the BSE Sensex was trading lower by 157 points with banking and capital goods stock leading the losers. Both BSE midcap and BSE small cap stocks are trading weak today.

04:30

On a different note today I am bringing you a video message from my friend Anisa Virji at Common Sense Living. It is a compelling 5 minute video and trust me you do not want to miss it! Click here for Anisa's message...


04:50 Investing mantra

"If you took our (Berkshire Hathaway's) top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor." - Charlie Munger

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

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4 Responses to "Here's What Everyone Is Buying..."

A V Raj

Aug 18, 2016

Compare these valuations to mainstream full fledged new private sector banks like Yes Bank and Kotak which are trading around 4 times book value. In fact makes you wonder if there's a bubble brewing in the pvt sector banking space itself what with the Bank Nifty at an all time high.

Like 

Omprakash barath

Jul 30, 2016

Pls send the details

Like (1)

Dr Rana

Jul 30, 2016

Dear Sir, please ref your Comments on Nbfc. I donot follow the herd of may be MF itself.but your list of large cap is too big. First time, I followed your directions and bought Cipla few days Back. Whenever I have money I buy Sun pharma, infosis and TCS without your guidance for few years. For last month I fellow your chart.I like HDFC bank, bug find it expensive so no courage. Bharat Forge is not in your recommendation,so cauld not buy for inheretance.
Now a days I regularly read your article s

Like (1)

Nilesh p dedhia

Jul 29, 2016

True story some non banking finace co.are trading at more than banking share

Like (1)
  
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