Power stocks: The good, the bad, and the ugly - Views on News from Equitymaster

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Power stocks: The good, the bad, and the ugly

Jun 17, 2010

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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4 Responses to "Power stocks: The good, the bad, and the ugly"

Milind

Jun 29, 2010

Thanks for updates guys. I always had doubts about Equitymaster's aggressive mail campaign and now get an idea about Equitymaster. I am surely going to think atleast twice if not more to fall prey to their recommendations. I am not sure if there is any other agenda.

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Vivek

Jun 23, 2010

As mentioned by other readers I too subscribed to NHPC IPO and purchased more later on as well.

Another scrip is Tata Steel which has had a poor show. I am disappointed by Equitymaster subscription and have second thoughts on renewing it.

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Yoginder Saxena

Jun 23, 2010

It is very stange that equity master research team, could not evaluate the NHPC-REC-Power Grid stock. These companies are doing well.
Please do reasech in these companies especially Govt manage power sector companies.
Thanks & oblige.
Yoginder Saxena

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George

Jun 21, 2010

Hi

Why is the Research team giving any view on NHPC? I had bought into the IPO based on Equity Master's recommendation. However till date I have not seen any view from EquityMaster on the NHPC scrip.Could you please your stance and projections for this stock?

Regards

George

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Equitymaster requests your view! Post a comment on "Power stocks: The good, the bad, and the ugly". Click here!

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