The Markets are Still Bumpy: But You CAN Find the Right Safe Stocks

Dec 7, 2018

Editor's Note: Dear readers, the markets are still not behaving very well. It is in times of such volatility that we all forget about being aggressive and start remembering to be safe, right? Wee, here's one person who ALWAYS remembers safety, and will always remind you too... Tanushree's recommendations guide her subscribers to permanent, long-term wealth - the kind that legacies are made of... Read on for the sake of your own legacy...

Tanushree Banerjee, Co-Head of Research

Dear reader, can you answer this question?

First, imagine two people working in an office.

One, a very skillful and dedicated guy and very good at his work. Let's call him Employee 'A'.

The other, not so skillful at his job but very good at creating a good impression in front of his boss. Let's call him Employee 'B'.

Who do you think would progress well in his career? The competent one or the one who looks competent?

If you ask me, over a 1-2 year period maybe employee 'B' might get ahead.

But over a period of say 10 years, chances are that Employee 'A' will do much better.

In the Indian stock market, you could say 2017 was a year of Employee 'B's'.

As per data from Ace Equity, over the last 10 years, corporate India's earnings have grown at CAGR of 4.1%.

During the same time, India's nominal GDP has grown at 12.9% per annum. So, corporate earnings have clearly not kept pace with economic growth.

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The stock market, though, painted a different picture altogether. Why?

You see, a stock price is a function of two things...

  1. Earnings Per Share (EPS - What a company earns); and
  2. Price to Earnings Ratio (P/E - What the market perceives).

You could say EPS is Employee 'A' in this case and Price to Earnings Ratio is Employee 'B'.

Majority of the price increase in 2017 was on account of market perception rather than earnings.

Optimism regarding macros, government policies, and India's long-term growth story, ensured sky high valuations across large caps, mid caps, and small caps.

The days of 2017 are well behind us. The days of share prices touching lifetime highs irrespective of fundamentals, earnings potential, or corporate governance... are over.

Call it the law of gravity or mean reversion in stock market terms, what goes up has to come down.

Long term-capital gains tax was the first shock for Indian investors.

Then we had corporate governance issues leading to auditor exits.

Then came a giant impact in the form of IL&FS and brought with it the risk of contagion. NBFC's and housing finance companies bore the brunt of this event.

Meanwhile, on the global front, crude oil prices were rising triggering further fears of a global correction.

While the past month has seen a cool off of sorts for the Indian market, what lies ahead though?

With the general elections around the corner, I expect volatility to get worse.

How will that impact you, dear reader?

If you're looking from a short-term perspective, there are high chances it will hurt you.

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But if you're picking stocks, like I do at StockSelect, by staying focused on the long-term, this volatility can be a great opportunity to pick up good businesses at fair prices.

Look at businesses that have been growing earnings in this tough period.

Businesses that have inherent strength to pass on input costs (e.g. crude) to its customers.

I strongly believe, the next bull run, unlike the previous one, will be led by earnings growth rather than market perception.

As their earnings grow and market pessimism heightens, you'll be able to find strong businesses at attractive prices.

For StockSelect, I look at companies that are growing on the strength of their earnings. Improvement in perception would be the icing on the cake.

With the next few months expected to be volatile, the time to act is now.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee (Research Analyst)
Editor, The 5 Minute WrapUp

PS: Tanushree Banerjee is Equitymaster's co-head of research and editor of StockSelect. She has a long and illustrious track record of picking safe stocks. For over 16 years, StockSelect subscribers have received safe stock recommendations that delivered double and triple digit gains. You can receive Tanushree's safe stock recommendations by signing up here.

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