Sectors and Stocks that are "Out of fashion" but on my buy-list

Stock Opportunities
1

In the coming years, I intend to put together a portfolio with my life’s savings hence I want the best value for my money.

I trade Nifty Futures for a living. It has been a long journey and a very interesting one. The most important realization I have had is to:

Plan the Investment and then Invest in the Plan

Therefore, all the decisions taken here will be out of a strategy which pays heed to:

  • Principles of Value Investing
  • Importance of Diversification
  • Importance of Restricted Allocation to a given scrip, sector or a price level.
2

Purchased SBI at Rs.1798.

Banks always generate income, unless they are offset against losses from Bad Loans. The logic is simple, the borrow from RBI at x and lend at x+2%. The instruments are different the base is same.

In the tough times ahead, we need a bank which is diversified in operations, which is the only way to offset the inevitable NPAs.

I believe the current rate of SBI takes into account the NPAs. It is a stalwart and not the one to be blown away by the wind.

There are other banks too: like Axis, Yes that are good. But, they are too light to weather the tough times ahead and still keep upto valuations. There is HDFC which is reliable but too expensive. Hence, SBI makes perfect sense.

It is possible that SBI reaches lower levels, even sub-1000. Then it will be a better buy. It is the largest PSU bank and I feel safe.

Amit.

3

I have always found that the banks are very difficult to value. The primary reason is the lurking fear of some hidden bomb - a large group in the portfolio/ general economic downturn and a significant chunk of the portfolio going bad.

SBI is diversified, has large retail base, has brand equity and huge connect with corporates. SBI will no doubt weather the storm. But would it generate sufficient retruns is the question we need to address.

I believe we should look for companies with qualities of HDFC in beaten down sectors. They would be available cheap and would prosper at good times.

4

I have always found that the banks are very difficult to value. The primary reason is the lurking fear of some hidden bomb - a large group in the portfolio/ general economic downturn and a significant chunk of the portfolio going bad.

SBI is diversified, has large retail base, has brand equity and huge connect with corporates. SBI will no doubt weather the storm. But would it generate sufficient retruns is the question we need to address.

I believe we should look for companies with qualities of HDFC in beaten down sectors. They would be available cheap and would prosper at good times.

5

Everything will soon go bad. Therefore, till Nifty reaches 4500 we won’t know for sure what price will hold for a stock. This basically means excel sheet valuations (be it DCF, Dividend model, PE or P/BV ratios) are not even a point of reference because price will soon go much lower than them. It is almost guaranteed.

(4500 Nifty is only Low of 2011; not a distant past. I believe that Corporate Performance has not improved since then, but only gotten worse.)

So, fall in share price of HDFC, Gruh finance is inevitable; Now it is a matter of patience.

I have learned that unless Gov cos are available at a huge discount, private Cos are much more reliable. Hence, I have a list of Cos that will make my portfolio when Nifty reaches 4500. Till that time, I will deploy a very small amount, just to get warmed up but not washed out. :slight_smile:

And yes, SBI will get max allocation into my portfolio at Rs.900 and not a penny more. :slight_smile: Now, isn’t that a good price ! :slight_smile:

6

Bhel crashed 18% yesterday!

It is a good stock and is on my buy list. But the million dollar question is: When to buy it?

The leading independent stock advisory in the nation gave a buy recommendation near 300-levels and then again at 180. I have always believed that Excel Sheet calculations are good only for reference. But, for putting hard earned money on the line one has to know the prevailing circumstances. He must gauge the momentum.

I called them up, and vehemently objected to their approach. I even opposed their most recent call of Power Grid, which later fell 15%.

I suggest the same to you, that I suggested them. Do not be in the perpetual mode of Buying at low rates, like you were after 2008 where everything worked. Now the times are different… the definition of “low rates” has changed!

Investing is tough. One has to be tougher.

7

Am moved to make a purchase in Banks. Have studied the following options:

1). Hdfc: Very expensive. EPS/Price is the poorest: only 5%; But highest on Quality.

[Quality = NIM/(NPA*PE)]

2). SBI: Largest Bank. Hence diversified and gives stability.

3). Axis: AT CMP somewhat better than SBI… but due to size SBI is better.

4). Union,PnB,BoB: Are low on quality but very good EPS/Price; 33%, 28%, 24% resp !!

7). Yes: To Risky. Court case. Promoters Fighting. Block deals.

8). Indus: Too small and not that impressive. Big on growth, but now is not the time.

So, instead of buying HDFC… I think I will go for Union, PNB and BoB at lower prices!

8
Name Crore EPS Price % PE NiM NPA nim/npa nim/(npa*pe)
HDFC 6870 30 584 5.1 19.5 4.2 0.2 21.00 1.08
Indus Ind 800 20 342 5.8 17.1 3.1 0.3 10.33 0.60
Axis 5234 116 1201.45 9.7 10.4 2.9 0.4 7.25 0.70
SBI 15343 200 1798 11.1 9.0 3.3 1.8 1.83 0.20
Yes 1300 39 240 16.3 6.2 2.4 0.1 24.00 3.90
BoB 4800 109 450 24.2 4.1 2.2 1.3 1.69 0.41
PnB 4954 135 480 28.1 3.6 3.2 2.4 1.33 0.38
Union 2157 37 109 33.9 2.9 2.5 1.6 1.56 0.53
9

Hi Amit,

can you please point out the link of data source.

Thanks, V

10

Hi Amit,

Recently I have come across analysis on banks in two parts. For the first part see the linkhttp://valueoperations.com/index.php/entry/how-to-analyze-banks-quickly-5. This may be of interest to you

Regards

Satvarad

11

Most Banks particularly the PSU lot will have negative earnings this yr. So the ratios will change drastically. I've always preferred to buy the best when prices crash. WHen rate cuts actually happen & macro's start to improve then the 'not so good' financials outperform.

Name Crore EPS Price % PE NiM NPA nim/npa nim/(npa*pe)




























BoB 4800 109 450 24.2 4.1 2.2 1.3 1.69 0.41
PnB 4954 135 480 28.1 3.6 3.2 2.4 1.33 0.38
Union 2157 37 109 33.9 2.9 2.5 1.6 1.56 0.53

12

Amit,

Interesting post!

At times like this, there are two ways to value a stock

a. Assume you are buying the entire company and you cannot sell it for 30 years. What is the value of the company to you as a private owner? Then divide by the shares outstanding and come to the stock price. If it is trading at a significant discount, then go ahead and buy it. You need to be patient about it. When you buy a house, you don’t check everyday whether the price has gone up. Why do it to a company that you would want to own?

b. Imagine you have to build a company like BHEL. What is the replacement cost for that business. If the stock trades at a significant discount to it. You might want to consider buying it.

disclosure: ‘Biased’ answer because long BHEL at @190’s, added some more in 120’s and 103. Majority of the shares are in the lower 100’s. (Might buy more) – NOT an INVESTMENT advice…

Balaji

13
[quote="jamit05, post:8, topic:456338067"] 1.08 Indus Ind [/quote]

Amit,

One other piece to think about in addition to everything you talked about.

a. In a commoditized industry, lower cost translates to better advantage. RBI publishes tables that talk about the cost of Funds.

A quarter or two ago, I went through the analysis. Bank of Baroda 5% and ICICI 4.2% have access to low cost funds. SBI is at 5.35%, HDFC 6.1% and YES Bank at 8.1%. Consider this as we look into the levers of profitability for the bank. Lower the cost of funds, the more you can flex.

Balaji
Name Crore EPS Price % PE NiM NPA nim/npa nim/(npa*pe)
HDFC 6870 30 584 5.1 19.5 4.2 0.2 21.00 800 20 342 5.8 17.1 3.1 0.3 10.33 0.60
Axis 5234 116 1201.45 9.7 10.4 2.9 0.4 7.25 0.70
SBI 15343 200 1798 11.1 9.0 3.3 1.8 1.83 0.20
Yes 1300 39 240 16.3 6.2 2.4 0.1 24.00 3.90
BoB 4800 109 450 24.2 4.1 2.2 1.3 1.69 0.41
PnB 4954 135 480 28.1 3.6 3.2 2.4 1.33 0.38
Union 2157 37 109 33.9 2.9 2.5 1.6 1.56 0.53
14
[quote="GreyFool, post:11, topic:456338067"] > Most Banks particularly the PSU lot will have negative earnings this yr. So the ratios will change drastically. I've always preferred to buy the best when prices crash. WHen rate cuts actually happen & macro's start to improve then the 'not so good' financials outperform. [/quote]

Name Crore EPS Price % PE NiM NPA nim/npa nim/(npa*pe)




























BoB 4800 109 450 24.2 4.1 2.2 1.3 1.69 0.41
PnB 4954 135 480 28.1 3.6 3.2 2.4 1.33 0.38
Union 2157 37 109 33.9 2.9 2.5 1.6 1.56 0.53

Hi Grey,
Thats the thing about big banks. They are very unlikely to have negative earnings. They may have lower earnings not meeting market expectations, or the NPAs may rise... but they are bound to earn because of their business model, which when simplified is :
The Borrow at X and Lend at X+2%
I have looked at around 10 years of history into these banks... not a single quarter of negative earnings!
They have gotta earn... less or more.
15

linkhttp://valueoperations.com/index.php/entry/how-to-analyze-banks-quickly-5. Link: http://valueoperations.com/index.php/entry/how-to-analyze-banks-quickly-5.

Great post. It explains NiMs and what banks are good.

I too have a liking for Axis Bank and in my list it competes with SBI right at the top.

I expect to buy AXIS lower, much lower. Reason: I did not have the numbers, but from the internet-chatter I gathered that Axis Bank has good amount of Investor Expectation grilled into its price. When this expectation becomes negative, which is in order, Axis will fall harder than SBI.

My target entry price for Axis is Rs.800… dont believe it… live to see it :slight_smile:

16

This is precious information. Finally, I find one piece of data that pegs SBi better than HDFC.

Another perspective:

Talking basic business, if I buy HDFC at this price then this business is earning me 5% annually as per PE of 20. This is bad business, regardless of how good the company is!

Union Bank, on the other hand, is giving a return of 35% annually (PE of 3). Now, this is nice.

But, Union has amassed nasty NPA of less than 3%. This is apparently a problem, but of how much intensity?

This 3% NPA is no more than its less than two year’s earnings. So this roughly increases PE to 5. In essence, PE of 5 has a better scope for returns than HDFC’s PE of 20!

Plus, Union’s Earnings may get hitmuch worse… but is very likely to bounce back up. The very bad earnings won’t last because Union is well spread in cities, esp, Mumbai and has a good structure.

My family is banking with them for 25 years. Our business has taken good amount of loan from them. Hence, I know that they have a solid structure.

They give loan against collateral and are for most part pretty strict (not as much as HDFC). They ensure the quality of the business. They are also well spread in the business districts. Bounce back is inevitable.

Finally, an investor is better off looking for companies that are a little vulnerable (not too much though) so that when times are bad the price falls generously enough and in good times rise back up. Else, although stability is achieved returns are subdued at best.

17

I have obtained Net Profit, EPS and Price from reliable sources. Other columns are calculations.

18

I have been stuck trying to justify purchase (SIP) in Bhel, Gail, EiL, Nalco, Sail, Union Bank, SBI and Corporation Bank.

My points of worry:

1). They are all PSEs.

2). Are being thrashed in all corners.

3). And Nifty has not even completely corrected.

Then I came to a realization. Something I read a while ago. One has to decide what he wants to be: A Value Investor or a Growth Investor. Both styles have a very different flavours of success.

A VI is satisfied with a company that:

1). Earns regularly. Has endless history of quarterly profits. Some cyclicals like Sail and Nalco would have subdued profits, but definitely not in loss.

2). Has little or no debt (except banks) and even if there is a portion then it is easily serviceable.

3). Reliable management.

4). No fancy acquisition intention or history, or major investment plan.

5). Has deep history. Not a new-comer. (And some other important details too)

(A Growth Investor would look for very different parameters like high ROE, OPM etc.)

And most important point is, a VI purchases them at a steep discount. Else, remove “Value” from “Value Investor”… he is a plain investor with no special Edge!

The reason these companies come to attention is because PSEs are being heavily sold due to GOI’s intention to make good. Whatever the reason, the fundamentals of each individual company are still very solid and Dependable.

FMCG, Pharma, IT, healthcare sectors are expensive to a VI. Only sector that corrects would catch his attention.

There may be plenty of downside left… but it feels that the share price will, at some point in the next decade, catch-up to the value.

19

Isn’t growth part of value? (especially if it is conservatively calculated)

Balaji

1).

2).

3).

1).

2).

3). Reliable management.

4).

20

When you compare cost of funds and the current PE of various bank you miss out to see the larger picture.

First question is why is market historically assigning lower PE for SBI than HDFC?

There could be multiple answer to this question but let us see some simple reasons which are there to been seen when applying common sense

SBI is a PSU which means at any time the Finance Minister can call the bank and announce to right off the loans for farmers/students etc.

There is no way one can predict what can happen with any probability.

But on other case HDFC is a private firm run by professional management . They have maintained NPA lower and have used the funds effectively to grow consistently at 25%+.

So if tomorrow there is a crash and HDFC goes down by 25% and SBI by 50%. I will still buy HDFC

Disc.I own HDFC Bank so take my view with fair pinch of salt