Free Report: Multibagger Stock Ideas 2020

The One Stock I Like in this Market

Oct 10, 2019

Tanushree Banerjee, Editor, The 5 Minute Wrapup

The Equitymaster office is in South Mumbai. Mumbaikars know what that means: a long commute in a crowded local train.

But the location has its perks.

A spectacular view of the Arabian sea greets you every morning. A short walk around the sea leaves you with a sense of calm amid the hustle and bustle of Mumbai. I do that every day. I take a 10-minute walk on Marine Drive.

A few days back, I noticed something unusual. A commotion at one of the shops near the sea side. I was curious. I went around to the place. A large board greeted me outside the shop - 'Branded Sale up to 70% Off'. The shopper in me couldn't resist. I went in to have a look.

I noticed most branded items from apparels to shoes were on sale at throwaway prices. In fact, the prices would even beat online sellers' like Amazon and Flipkart hands down.

But my excitement did not last long. I understood the reason for such steep discounts.

Most of the items had some defect or another. The stitching had come off in one of the shirts. I noticed a hole in a pair of shoes.

Disappointed and just about to leave, I noticed a piece of branded apparel that was perfect. I checked it thoroughly for any defects. There were none. The price was well below market price. That piece was the only thing I bought but it was worth it.

I had to sort through a lot of junk even before I saw it.

The experience reminded me of what I'm seeing in the markets right now. I have to sort through a lot of junk just to find one good stock to recommend.

As I see it, there are three types of stocks in the market today...

Type 1: Quality stocks which are recognised by the market.

These are like the top-quality brands you see at shopping malls. High quality no doubt but pricey as well. Most fund managers have kept on buying these 10-12 stocks. Despite the fall in the broader market, the prices of these stocks have gone higher and higher in the past 1-2 years.

Are these quality businesses? Yes, for sure.

But are these 'safe stocks' based on the prices they are trading at? No, I don't think so. There's just no margin of safety in them.

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Type 2: Junk stocks and rightly recognised by the market.

These are the stocks that have seen the most pain in recent times. And for good reason.

In these stocks there are issues related to the both the management and the business. It is like the defective pieces you get in a sale. These businesses face an uncertain future. They look cheap but can remain cheap for a long time. They may even go bust in the future.

These are the type of stocks retail investors should steer away from. There is safety neither in the quality of the business, nor in the price of the stock.

Type 3: Good quality stocks which have been bunched together with the junk stocks by the market.

These are the type of stocks I'm most interested in. It's like the piece I found at a steep discount. These are businesses where the fundamentals are intact but has seen a price correction due to the uncertainty surrounding the broader market.

These businesses have shown resilience even in this difficult market. I believe they are trading at a discount.

These are what I would call 'Safe Stocks'.

I have written to you about my pick of the top 7 safe stocks in the market. These stocks rank high in both quality and the valuations. One of these stocks has fallen in price over the past year due to the pessimism in the overall market.

Have the business fundamentals deteriorated? No.

Does the current price correction make the stock attractive? Yes.

A further kicker for this company was the Rafale fighter jet India just received.

It shows the Modi government's focus on the defence sector. I believe the government's spending on defense will increase going forward.

And this stock will definitely benefit when that happens.

StockSelect subscribers can read my recommendation report here.

If you don't have a StockSelect subscription, you can sign up for the premium safe stock recommendation service and access the report.

Chart of the Day

India's military spending as a percentage of GDP was at 2.4% of GDP in 2018.

This is low compared to the big spenders like Saudi Arabia, Israel, Russia, and the United States.

Is the Rafale Deal a Sign of a Turnaround in this Sector?

For long, the Indian military was focused on the strength of its personnel rather than the equipment that they had at hand.

However, recent government policy changes hint at this number increasing in the coming years. The changes are aimed at modernising weapons and reducing imports.

The recent Rafale procurement is a step in the right direction.

Going forward, we can expect a substantial increase in India's military spend. The opportunity for the sector is huge. Two of my 7 stocks to buy cater to this segment.

I believe these two stocks will be big beneficiaries of the Modi government's increased focus on defense.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor and Research Analyst, The 5 Minute WrapUp

PS: Dear reader, out of my pick of the top 7 safe stocks in the market, I believe one of them is best placed to ride the boom in India's defense industry. Click here to know more...

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