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.

--- Advertisement ---
3 Hidden Forces are Converging for the First Time Ever...

This convergence is going to unleash a once-in-a-generation wealth boom.

A wealth boom that could potentially mint countless new dollar millionaires as the stocks at the heart of this event return thousands of percent over the long term.

It's a story of ground-breaking consequences that cannot be ignored.

Our co-head of research, Tanushree Banerjee, is going to reveal all about this historic event on the evening of September 24.

Tanushree believes, those who invest in the companies at the heart of this event could turn a small stake into generational wealth.

Just head to this page to get more details about this historic event...
------------------------------

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?

--- Advertisement ---
SPECIAL REPORT REVEALS: Real Estate Success Secrets of India's Most Respected Traders...

• A Secret 33-Year-Old Pattern That Has Just Remerged to Practically Guarantee a Massive Bull Run in Real Estate Over the Coming Years!

• The #1 Trend You Need to Know Before Investing in Real Estate This Year (Even if You Deal with Traditional Real Estate Investing and Have Nothing to Do with Stocks, this is a MUST KNOW)

• INVESTING IN COMA: Why People Who Invested in Real Estate Before 2019 Didn't Make Any Money (and Why Now is The Right Time to Get Started)

Here's How to Grab a FREE COPY Today
------------------------------

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.

REVEALED: Details of 3 "Super Smallcap" Stocks Nobody Tells You About...

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

Recent Articles

A Great Time to Buy ITC September 17, 2021
Is the worst over for the stock of ITC?
A Rare Buying Opportunity in an Exciting Stock September 16, 2021
Whether agriculture sector goes through a structural transformation or not, this agrochemical stock has a good chance of winning.
To Make 100x Profits You Must Know This... September 15, 2021
Which investors made 100x returns in the stock of Gillette?
Your Backdoor Entry to India's Real Estate Boom September 14, 2021
Home improvement stocks are the perfect way to play real estate today.

Equitymaster requests your view! Post a comment on "Will the Commodity Supercycle Create Another 1,000-Bagger?". Click here!

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

Like (1)
  
Equitymaster requests your view! Post a comment on "Will the Commodity Supercycle Create Another 1,000-Bagger?". Click here!