Will the Commodity Supercycle Create Another 1,000-Bagger?

May 21, 2021

Rahul Shah, Editor, Profit Hunter

Did you know that the mining behemoth NMDC was a massive 1,000-bagger back at the start of this century?

Yes, that's right.

Not a 10-bagger or a 100-bagger but a massive 1,000-bagger.

Trading at less than a rupee in 2001-02, it rose exponentially and touched a high of Rs 500 in a short span of 6 years.

That's phenomenal in my view.

NMDC was not the only commodity stock to do well between 2000 and 2007 though.

Here are some other notable gainers.

Agreed that these returns are not as great as NMDC's.

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But I would take them any day. Especially when they are much better than the benchmark index.

However, there's also a dark side to this whole multibagger story.

Just as these stocks were phenomenal wealth creators, their performance post 2007 is nothing to write home about.

With the exception of ONGC, none have come anywhere close to their 2007 highs.

In fact, even after all these years - 14 to be precise - all are trading significantly lower than their 2007 prices. That's more than a lost decade and counting.

It's a tale of two halves to put it another way.

And completely contrasting ones at that.

Here's the moral of this story according to me.

If timed correctly, commodity stocks can be fantastic wealth creators. They can give the best quality stocks a run for their money.

However, if you get your analysis wrong and you end up investing near the top of the cycle and not bottom, you might as well say good-bye to your hard earned money.

Not only is there a brutal price correction, but there is also a significant time correction.

Now I want to ask you a very important question...

As it's always the darkest before dawn, are we at the bottom of the commodities cycle?

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Is the worst over for commodities and are we at the cusp of a new bull run where we can again see multibagger returns from commodity stocks?

If the experts are anything to go by, this certainly seems to be the case.

JP Morgan analysts believe that the commodities rally will be a story of the roaring 2020s post-pandemic economic recovery.

Then there's also the climate change angle. A lot of metals will be needed to build renewable energy infrastructure, manufacture batteries and electric vehicles.

Besides, commodities are also viewed as a hedge against inflation, a concern that's threatening to grow with each passing day.

So, all of these combined can certainly light a huge fire under commodity prices.

In fact, if you look at the price performance, you will feel that a commodity bull run is already underway.

NMDC is up 2.5x in the last one year. SAIL has done even better with almost 5x gains.

And at 4.4x, Tata Steel isn't far behind either.

So, if a new commodities supercycle is well and truly underway, it's not late to join the party. In fact, given how things panned out last time, the party may have only just begun.

Let me make an honest confession though.

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As a value investor who believes in the concept of intrinsic values of a stock and earnings power, I don't have a reliable way of playing this supercycle, if at all it materialises.

In the last boom, SAIL managed to take its earnings from a loss of Rs 19 bn in FY02 to a profit of a whopping 76 bn in FY08.

To be honest, I would have had no way of predicting that SAIL's profits would take such a leap.

In fact, given its leveraged balance sheet back then and loss making operations, I don't think I would have even invested in the stock.

I would have rather preferred NMDC, that not only had a squeaky clean balance sheet with zero debt but was also trading at a significant discount to its book value.

I consider book value a good proxy for intrinsic value of most commodity stocks.

You see, back in March 2001, NMDC was trading at around Rs 70 paise per share, a huge 60% discount to book value.

And I would have most certainly exited the stock by 2004, when it touched a price of Rs 10 per share and traded at a premium to book value.

So, I would have got a 14-bagger, not a 1,000-bagger, but that isn't too bad.

The point I am making is that we may be at the cusp of a new commodity supercycle...or maybe not.

But if we are, there is no dependable way of knowing how high the profits of these companies will go and consequently their prices.

The idea is to always stick to your circle of competence when it comes to analysing and valuing companies and take your buy and sell decisions based on the same.

My circle of competence I believe is to try and arrive at a fair estimate of a company's intrinsic value based on its past earnings power and the quality of those earnings.

I have no way of knowing how future prices of key metals and consequently profits of companies, will look like in a commodity supercycle.

Therefore, for me, a 2-bagger or a 3-bagger commodity stock may do just fine. In rare cases, may be a 10-bagger.

But a 100-bagger or even a 20-bagger is extremely difficult.

I can, of course, speculate and so can you.

But then call it speculation and not an investment. Also don't bet too much on it and keep it separate from your core investments.

What do you think, dear reader. Let me know your thoughts.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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1 Responses to "Will the Commodity Supercycle Create Another 1,000-Bagger?"

Ravi shah

May 22, 2021

Dear Rahul I have also been torched by commodity stocks for last 4 to 5 yrs but we look up to you and yr team for guidance.Pl keep guiding.if you started sounding helpless than we are doomed.thanks

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