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For 3 years, in 3 weeks - Views on News from Equitymaster
 
 
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  • Oct 22, 2007

    For 3 years, in 3 weeks

    That is for a stock we had recently recommended with a target price of almost three years ahead. The stock has reached this target in less than three weeks! And if that were not all, there are others that have breached their three year targets in four weeks, six weeks, eleven weeks and thirteen weeks!

    So, does that make us feel elated considering the correctness of our assumptions with respect to these companies? Maybe. And are we thrilled with the stock price performances? Maybe not. Rather we fear this 'outperformance', as we might have people calling us in, either accusing us of 'insider trading' or asking us of the 'next hot tip'! That comes from what we have heard and have been requested for in the past. But considering the independent nature of our research and our pledge to clients, neither do we influence stock prices nor do we believe in hot tips (that have the potential to be too hot to handle). So, these rapid movements in stock prices (and the consequent re-ratings assigned to such stocks by 'market experts') really disturb us.

    How expensive is too expensive?
    The sharp rally in the Indian stock markets that we have witnessed since the Fed-led rate cut infused more of cheap money into the markets, has been with complete disregard to valuations. As a matter of fact, the most expensive stock on the Nifty - ABB - currently trades at a multiple of 72 times its trailing 12 months earnings. Sounds good? Well, that simply means that if the company were to maintain its EPS of the last four quarters in the future (i.e., assuming no growth in EPS), it shall take you 72 years to recover your investment in the stock, if you are an investor at the current price. Or take a case like Suzlon - 57 years - way past your retirement, probably!

    But then one shall ask why do we talk about a 'no growth' situation when these companies seem to be growing their earnings at a rate of over 40% to 50%? That is for the margin of safety, the core of value investing. This 40% to 50% growth might be there for the next 2 years or maybe 5 years. On a long-term sustainable basis, a company that grows earnings at a faster rate than the economic growth will become larger in size than the economy itself! So, keep track of what you are paying for a company's growth.

    As for the correction that we have witnessed over the past three days, a commentator on a leading business channel announced, "Strange things are happening in the market nowadays which are not quite understood." Well, if the market crash is a strange thing, so were the sharp rises that we were witnessing post mid-September, which were actually celebrated in the same studio - at 16k, 17k, 18k and then 19k. Were 'we' concerned? Yes we were.

  • Concerns at 19k
  • Of liquidity and madness
  • It's the expectation, stupid!

    Stock market history suggests that the actions of those who control the vast bulk of investments (institutional investors) guide the overall belief of where the markets are headed in the future - up or down. You do not know what they are up to. Neither do you know what Mr. Market has under his sleeves. In that case, the only choice we have is to guard ourselves if 'all hell were to break loose'! And the mantra is - Whatever Mr. Market does today, we need not follow suit.

    Note to subscribers: Since the number of recommendations are fixed in a year, we do not recommend a particular stock more than once in a span of atleast 6 months. As such, subscribers who wish to know our latest view on the recommendations that have been outlined in the first paragraph should view our updated analysis for these companies in the research report section.

     

     

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