|»5 Minute Wrap Up by Equitymaster|
On This Day - 18 AUGUST 2011
Do you see 'value' in the most valuable firms?
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What brought us to this discussion was the media coverage on Coal India topping Reliance Industries as the 'most valuable company' on the bourses. For the uninitiated, here most valuable means the company with the highest market capitalization. Prior to October 2006, the crown belonged to energy major ONGC. IT majors TCS and Infosys are the others in the reckoning of the top 5 on the benchmark indices.
Investors often mistake the term 'most valuable' as one offering most value. Stocks with highest market capitalization may certainly have the virtue of being very liquid. Also being bluechips they may have wide media coverage. But whether their fundamentals and long term prospects offer reasonable long term upside is a different story altogether. That is something investors need to study carefully before arriving at a conclusion. More importantly whether the valuations have any margin of safety will determine if the stock is on sale. Only then can investors find any value in the most valuable companies.
We are certainly big fans of safe bluechip stocks. But we prefer to stick to the "ones offering the most value" rather than the "most valuable ones". We would advise investors to do the same.
As per the action plan, Fed is digging deep to know whether the US arms of European banks have easy access to funds to conduct their day today business in the country. The efforts are to prevent the European banks that are facing funding issues from siphoning funds out of their US arms. The European banks are now under pressure to convert their US business into self financed organizations. This will help to contain any crisis at the parent level, thus insulating US arms.
In the recent past, funding of foreign banks was hardly an issue. The latter mopped up huge cash piles, thanks to the dollars flooding the markets under Quantitative Easing measure. However, in the last few weeks, such reserves have diminished. What is bothering Fed is the speed at which funding can reverse direction when funding options cease in the times of a crisis.
Looks like the there is no end to the penalties US will have to pay for bad policy measures taken in the past. It should learn its lessons and handle the current crisis in a way that does not leave any scope for a backfire in the future.
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