These Are the Kind of Stocks You Should Sell

A journalist from a leading business daily asked me for my views on the top value stocks in the market.

My reply was that there were barely any. The lady was amused. She pointed out to me that a couple of leading brokerages had recently published their list of value picks.

A few of these lists apparently went into dozens of stocks. When she rattled off the names, my worst fears came true.

Among the so-called value buys were...

A steel producer that has struggled to produce positive free cash in a decade.

A textile company with more debt that it can ever repay.

A mining company with pitiable return ratios.

A bankrupt telecom company.

A fragile e-commerce company.

A NBFC with double digit bad loan ratio.

A power producer that has struggled to generate profits for long.

And several more troubled companies that have recently come into the limelight.

Each had its own set of problems that investors were happily willing to ignore.

There was only one thing common among them. They were all statistically cheap based on the price to earnings ratio (PE).

It turns out that PE is one of the most exploited indicators to lure unsuspecting first-time investors in every bull market.

A statically cheap stock can never be a good investment. But so called 'market experts' and talking heads find the PE multiple to be the most convenient and compelling number to endorse.

After all, it's not the investors interest that worries them. They're only keen to sell popular narratives.

Do you remember the story that Buffett's partner Charlie Munger once narrated about false narratives?

It goes like this...

Munger was once in Minnesota buying a fishing lure. That the lure was coloured pink and green surprised him.

He asked if the fish were truly attracted to the colourful lure. The old-timer behind the counter replied, 'Well Mister, I don't sell to fish'.

Munger narrated this story to explain market exuberance. It spells out why the market forecasters offer misleading views.

And what their incentive is to do so.

The PE ratio neither captures the real risks in the businesses nor the real long-term upside potential.

Thus, it becomes the easiest tool for mis-selling.

This is undoubtedly one of the worst indicators to buy or sell stocks in the current bull market.

In fact some of the so-called value stocks today are among the top stocks to sell in this rising market.

Not because of their valuations but because of the poor quality of balance sheet, cash flows, and management quality.

So the next time you are tempted to buy a 'cheap' stock by a brokerage report, be aware that you're probably a target for mis-selling.

I firmly believe getting rid of the wrong stocks is an important stepping stone to an eight-figure fortune.

I've selected three such stocks to sell for my Great Indian Wealth Project.

Last week, I wrote about this in the context of Electric Vehicles.

Most investors are completely unaware of the huge electric vehicle opportunity in the offing.

You see, the market believes the biggest automotive names are the ones to bet on in the EV space. They couldn't be more wrong.

Investors sifting through current PE ratios of stocks can never identify this hidden opportunity.

Nevertheless, StockSelect subscribers are already positioned to ride the massive EV opportunity in this underrated stock (requires subscription).

Like I wrote earlier, a few years back, the largest oil refiner, electricity producer, and combustion vehicle manufacturer were the key wealth creators.

But following the heavyweights could leave you thoroughly disappointed this time around.

The companies that are just cogs in the wheel of the green energy ecosystem could create huge wealth in the years to come.

Energy storage is a great example of a potential wealth creator.

Energy storage is the main component of EVs both in terms of cost and performance. The thrust for electric mobility relies on reliable energy storage systems.

These systems, used on a large scale, can offer India a huge advantage in electric mobility adoption.

Energy storage can play a very important role in the integration of India's power grid. It can increase the system's overall flexibility, improve power quality, reduce peak demand, enhance transmission, and avoid wastage.

Large battery storages that store and reconvert electricity can help India's electricity grids. In fact, this can completely allay the risk of intermittent supplies from clean energy sources such as solar and wind.

This is why it's important to look beyond the obvious when it comes to picking value stocks. Don't buy stocks that are statistically cheap based on the price to earnings ratio.

Focus on high quality companies with the potential to create massive wealth in the years to come.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)