Stock selection is an extremely intense exercise and depends a lot on individual preference, investment horizon and risk taking capacity.
In general, value-based approach is the safest way to make risk-adjusted returns. For this one needs to search for under owned and out of favour stocks of well-run companies. Companies usually go out of favour when they either hit a rough patch in their earnings growth cycle or there are some negative developments linked to company’s management or its operating environment. More often than not this happens when the sector in which the company operates is facing headwinds in the form of increased competition, slowdown in demand or regulatory hurdles. These negative developments pull down the stock prices of all companies operating in that particular sector. However, well-managed companies nearly always come back sooner or later and adversities help them emerge stronger in their fundamental strengths. Hence bad times in any sector should usually be a good time to accumulate stocks of bell weather companies operating in that particular sector.
So, given the uncertainties surrounding us, a simple and safe strategy for 2019 can be to add fundamentally strong stocks in beaten-down sectors. Now sectors which are beaten down in this market are capital goods, infrastructure, real estate, pharmaceuticals and corporate banks.
By corporate banks I mean those banks that are deriving major part of their turnover and growth from corporate and other business loans as opposed to those that derive larger revenue from retail and consumer lending. Due to the burgeoning NPA problems, these banks have been facing struggling to repair their balance sheets. Business opportunities had to be side stepped as the focus had to be on trying to recover bad loans and recapitalisation. No surprise that the share prices of these banks plummeted and smart investors sold out of these counters. Now after several years of staying out of favour with smart investors, these stocks are gradually finding interest coming back. NPA issues are slowly but surely getting sorted out. Despite some upward movement over the last few months, valuations are still very cheap in this segment.
While the real estate sector is still in a lull and likely to remain like that for some time, much needed regulations have finally come into force here. Many companies have gone out of business due to changes in the regulatory environment and slowdown in demand. Consolidation has happened in a major way and weaker players have moved. Companies with robust business models will now be able to capture a bigger market share and grow at a rapid pace. Hence despite the sector as a whole not doing anything great, individual stocks of well established real estate companies are a great buying opportunity. Being out of favour for many years, here too valuation comfort is there.
Infrastructure and capital good manufacturers are seeing traction after many years. Bell weather companies in these sectors are great picks for investors.
Pharmaceutical sector is one place where investors have multiplied their wealth over the last few decades. It has been a consistent performer and selecting outperforming stocks in this sector has been a relatively easy task. However, this sector has underperformed and generated negative returns to investors over the last 3 years. Due to this many frontline pharma stocks are now available at very attractive valuations. Demand for pharmaceutical products are likely to remain robust and I see this fall in stock prices as a great opportunity to accumulate stocks with a long term view. While it may take time for sentiments to change but certainly this sector cannot remain subdued for too long.
To conclude, I suggest buying stocks of frontline and well-managed companies engaged in real estate, infrastructure development, capital goods manufacturing, pharmaceuticals as well as corporate banking.
(By Ashish Kapur, CEO, Invest Shoppe India Ltd)