These are the stocks you should buy right now! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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These are the stocks you should buy right now! 

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In this issue:
» Is RBI to blame for India's low growth?
» Sensex may head towards 12,000 and rupee towards 60 a US$
» Food security bill becomes a reality
» Power stocks or penny stocks
» ...and more!

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00:00
 
Like it or not, we are all descendants of our earlier hunter gatherer ancestors. And this clearly shows in the different level of skill sets that we possess in areas such as language and math. In the pre historic times, when survival was the sole aim, what mattered was how fast we could run and how loud we could call out for help. Thus, if one was a math whiz kid back then but had very poor running and communication abilities, the chances of him being chewed up by some hungry predator were very high indeed. And since the math whiz kid wouldn't have lived long enough to pass his genes onto us, our math and analytical skills have turned out to be pretty limited.

However, we live in a different world now. And in a lot of areas today, especially investing, what matters more is the ability to think clearly about long term horizons and an endowment of strong math skills. But are we doing enough to acquire those skills? Not really we believe. Research shows that even super quants and math PhDs find it difficult to appreciate the enormity of the concept of compound growth. Ask someone to what amount will Re 1 doubling every day for a month will rise to and you may get answers ranging from a few thousand to few lakhs. However, at the end of the 31st day, the total amount accumulated could be as high as Rs 107 crores!

The enormous power of compound interest works its magic in the field of stock markets as well. But on account of our mental hard wiring, most of us fail to take advantage of the same. Take the current market environment for example. Thanks to the correction, quite a few stocks have become attractive from a valuation perspective. And investors would thus be tempted to grab the cheapest among them. But is this the right strategy to have? Certainly not we believe. Rather than going for the one that is the cheapest in valuation terms, we should go for the one that has very good return on capital and is reasonably priced. This is because over the long term horizon, thanks to the power of compounding, a stock with a 25% return on capital will give much better returns than a stock with a 15% return on capital even though the latter is available at a huge initial discount. Of course, what will make or break our outperformance is the ability to determine whether the 25% return on capital stock is able to maintain those high returns for a very long time. In other words, the stock should possess a very strong moat. Follow this rule religiously and you may not have to follow any other investing rule for the rest of your life we believe.

Do you think buying a good return on capital stock with a reasonable valuation makes sense over the long term? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:34  Chart of the day
 
It was perhaps a foregone conclusion that India's subsidy bill would spiral up and comfortably exceed the Government's target like it has done consistently in the past. But by how much was anybody's guess? Now with the food subsidy bill likely to become a reality, the magnitude by which the actual subsidy will beat the target could be as much as 1 lakh crore. As today's chart of the day shows, it is the biggest such gap in recent memory and could also push the fiscal deficit in the vicinity of 6%. More inflation anyone?

Data source: Economictimes.com
* Assuming slippage of Rs 1 lakh crore

02:02
 
Central banks in the West have been accused of being lax in liquidity management. They have also cooperated with governments wanting to go easy on fiscal balancing. Others are still struggling to boost employment by printing currencies. In India, the accusations against our central bank are quite the reverse. The RBI, with a reputation of being conservative, has been accused of turning a blind eye to growth concerns. In its singular attempt to rein in inflation, experts believe, that the Reserve Bank of India (RBI) ignored the gradual slowdown in India's GDP growth rate. The accusation is underlined by the fact that the RBI has not had a runaway success in inflation control. It is yet to bring the inflation number within its comfort zone. Thus it is not the government but the central bank that is at fault for allowing growth rate to taper and stock markets to crash!

We completely disagree with this illogical conclusion. The central bank's job is not to ensure that growth rates or stock markets keep booming. Its most important job is to ensure that the epidemics in global financial markets relating to debt and currency crisis do not touch Indian shores. And we believe that the RBI has done a commendable job at that. As far as growth rates are concerned, even if the RBI were to adopt easy monetary policies, it is unlikely India would have attained double digit growth at a time when the world economy is slowing down.

02:47
 
Without any doubt power remains an eternal story in India. But the stock prices of power companies seem to contradict the opportunity evident in the sector right now. Majority of the power companies have lost significant value during the current year as policy concerns have rattled investor confidence. In fact, the fall is so significant that many of these have turned into penny stocks! And the reasons are manifold. Environmental issues, policy paralysis and shortage of coal as a source of fuel has delayed the off take of power projects. Merchant power rates have also dropped significantly while many companies have not even signed power purchase agreements with their electricity boards. Thus, a sector which was once coveted to be a darling of fund managers seems to have lost its sheen. And this is because the bureaucracy is slow in the critical decision making process. It is true that the government has to consider the pros and cons of all stakeholders (displaced people) in general. However, unless the speed of decision making improves, you might see a few more companies being added to the list of penny stocks next year.

03:22
 
Is it possible that the rupee could touch the 60/US$ mark and that the Sensex slides to 12,000? Such a scenario may play out especially if India's GDP is downgraded from above 7% to 5-6% and if bad loans among banks increased, according to a report by CLSA. The irony is that if such an event does indeed take place, the government, which is otherwise paralysed now on the policy front, will actually pull up its socks and do something to break this deadlock. In the meanwhile, the Reserve Bank of India (RBI) on its part has given signals that further rate hikes are not on its agenda. It maintained status quo in its latest policy. And with its focus now shifting from inflation to growth, rate cuts are expected in the coming months. But will this be enough to prop up India's slowing economy? The problem is that growth may not necessarily pick up on cutting rates as a depreciating rupee and rising oil prices pile on the pressure. Moreover, dilly dallying on reforms is really not going to help India's cause. There is no doubt that the Eurozone crisis has had some impact on India. But the government has also to be held accountable for many of the country's problems and the sooner it realises this and swings into action, the better are India's chances to once again march on the growth path.

04:06
 
The government has decided to approve another one of its pet policies. We are referring to the food bill. The bill had been a major canvassing point along with the guaranteed employment scheme for the current government. The NREGS (National Rural Employment Guarantee Scheme) was approved earlier. But the food bill had been pending for a while. Finally the same has been cleared. The bill would ensure statutory entitlement of cheap food grain to the country's poor people. The population would be divided into two categories - priority and general. The priority segment would get 35 kg of food grain per month at subsidized rates and the general would get about 3 kg at the minimum support prices. The scheme would be funded by the Central Government of course and is estimated to come at a cost of Rs 9.3 trillion. This would be the added burden that the rest of us, who are not covered under the scheme, would have to bear through higher fiscal deficit. But the government has made its point clear. It will continue to arrive at 'quick decisions' on populist policies. But not on the policies like power reforms, land reforms, etc. that would help the overall economy.

04:43
 
Meanwhile, the Indian stock markets continued to sink lower today what with the Sensex down by around 130 points at the time of writing. Heavyweights like Reliance and L&T were seen exerting the maximum pressure. Other Asian markets however closed mixed today. Europe though has opened on negative note.

04:55  Today's Investing Mantra
"Chains of habit are too light to be felt until they are too heavy to be broken." - Warren Buffett
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47 Responses to "These are the stocks you should buy right now!"

Nikita

May 14, 2012

I am a new in this field and would like to do some investments in equity. But before that would like to know the market.
http://bit.ly/IQPvVZ

Like (1)

mracharyulu

Jan 4, 2012

no analasis is usefull to know the real trend

Like (1)

jaspal

Jan 2, 2012

i want to purchase some shares for long teram
can u suggest me where i can invest my money..

Like (1)

partha

Jan 2, 2012

which stock

Like (1)

YOGESH SHAH

Jan 2, 2012

Please send me the list of 2012 stock buys

Like (1)

janardan desai

Jan 2, 2012

what about l&t share

Like (1)

Namita Nayak

Jan 2, 2012

All the time the add was was coming but the result was nothing.Is there any relevance of the title given ?

Like (1)

vinod

Jan 2, 2012

ok

Like (1)

Y.VENKATESWARA RAO

Jan 2, 2012

Sir/Madam,
Kindly suggest the STOCKS which i should buy.

Like (1)

arvind chandak

Jan 2, 2012

which sector should be kept.

Like (1)
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