Jun 17, 2010|
Power stocks: The good, the bad, and the ugly
Remember early 2008? Those wonderful days when any stock you touched turned to gold...literally! The stock market rally then seemed outstanding, and never ending! And then everything came crashing down. Leading the crash were stocks from the power sector, those darlings of the preceding rally. These stocks had reached unbelievable levels prior to the crisis. Interest towards them were led largely by the IPO of Reliance Power, a dream issue for the promoter and investment bankers, but grapes gone sour for investors.
Anyways, valuations of power stocks then touched all time high levels. Market started factoring in earnings that were not really there. Even earnings that were not supposed to come over the next 5-6 years were factored into the prices of some power stocks. A look at the chart below would say it all!
| Data Source: CMIE Prowess
Well, the markets corrected sharply post January 2008. And power stocks led that correction. As against the Sensex's fall of 60% till the lows of March 2009, the BSE-Power index fell by over 70%. And most stocks within this index fell even more!
In the subsequent rally that started in March 2009, the index has gained 92% as against the Sensex's gains of 114%. In short, while bulls have come back to the power pack, they have been relatively cautious this time around. Even when one looks at the price to book value multiples of several power stocks, these still lie at much lower levels than in the heydays of 2008!
So, are power stocks attractive investment opportunities at the current levels? Well, it depends!
There are a whole host of power companies that still have zero income from the business and nothing will come even in the next 2-3 years. Staying away from them is still the best thing to do. After all, one needs to look at the execution track record of a power company before even considering it for investment. This is because the sector involves a whole lot of risks. And companies that have been there and grown past these issues are better investment opportunities at the current juncture.
In short, look at the past
track record of a power company before allocating your money to its stock. Just because a company is planning to add huge capacities must not be a reason for investing in it. After all, in a regulated business like power, it pays to be safe than sorry for investors.
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