March 15, 2008

Clusters of Investment ideas

I am finding more ideas in some sector/ sub-sectors than others. Such as,
- IT midcaps
- MNC Pharma
- Auto components
- Auto OEM

For some reason, valid or otherwise, most of the companies in these sectors have been beaten down. The reason range from genuine concerns (US recession, Rupee appreciation etc for IT sector) to investor apathy (MNC Pharma). My approach in such cases is to list all the companies in the cheap sector, filter the most attractive ones and invest in all of them.

For example, I can see the following attractive ideas in IT Mid cap space

- Patni computers
- NIIT technology
- Zensar
- Hexaware
- Sonata
- Aztec

I have not done a detailed analysis on these companies yet and may discard a few. However I do feel that there is too much pessimism around these sectors. It not surprising that the market has beaten down these sectors as during bull runs, most investors prefer high growth companies and avoid companies which show low growth (even if they have a high Return on capital)

High PE v/s Low PE stocks – Most of you must have noticed that stocks with high PE or high valuations are getting hit harder when the market drops. This does not mean that these companies are over-valued or will do badly. If the analysis is correct and the companies does well, then investors in these companies should do well in the long term. However you have to be comfortable with the high volatility in the stock price. In comparison the low PE stocks, of which not much is expected, don’t drop as much during market drops. However they do not gain as much during the rise too.

5 comments:

JFBlogger said...

hi Rohit,

Nice post, I agree with your hight PE/Low PE comment. It's interesting however as normally higher yielding stocks hold up better than lower yeilding ones, however in the UK at least this hasn't been the case.

Other investment ideas:
GSK - UK based Pharma recently bought by Warren Buffett. Historically Low PE and High yield for a Pharma.

Oil Producers - These companies, valued by their assets haven't kept up with the surge in oil prices and as such are 30% undervalues. I recommend Soco international, SIA.

Rohit Chauhan said...

Hi jfblogger

I think GSK pharma is not a listed company in india and indian investors cannot buy equity in foriegn markets directly (i think, could be wrong here).

i read on buffett's pharma investments recently and he mentioned a few years back that if you are confident of a sector, but cannot pick specific companies, then buying a basket of good companies in the sector is a good strategy. i am trying the same approach here too.

foriegn oil producers are out of my circle of competence and indian oil producers have very different economics - they are controlled by the goverment and have to bear the subsidy costs.

regards
rohit

Anonymous said...

Tech sector does not mix well with the criteria which Buffett has on simple and low-product cycle innovations. Indian IT although is service oriented and deals primarily with supply of bodies..

On the pharma side, I am surprised Buffett is doing anything. Since, it contradicts two of his principles -
1. Circle of competence - Buffett does not have much competency in the pharma sector!
2. Pharma needs to invest heavily on drug discovery, is regulated and can encounter disaster with the failure of a drug. The exception being generics...

So a bit surprised about this...

Rohit Chauhan said...

anonymous

I think in a recent CNBC interview buffett explained his thoughts behind the pharma sector. i think he has the competency, just that new drug discovery is diffcult to predict (i think he mentioned something like that)

I think a lot of Indian IT is really a services business, at worst labor arbitrage than high tech. so the investment ideas above are really commodity or near commodity businesses available at very low valuation. these companies are not really like coke or gillette type companies

My Space.The Voice In My Head said...

Hi Rohit,

Great blog.Keep it up.

You mentioned apart from Pharma & IT there were two other sectors that you were looking @

1.Auto components
2.Auto OEM

I was also looking at the these sectors after reading your blog,more so after the NANO launch.....if the Indian economy over the next 10 years is going to be where it is supposed to be...then buying a car wouldnt be a dream for most of the population.So, not looking at the current or short term scenario of rising interest rates and US recession, i think things look bright for the whole auto sector.

I started looking at Banco products which is a major suplier of radiators, intercoolers, oil coolers, gaskets etc since the last 40 years to all BIG car manufactueres and other industries and from what i have read till now about it,i think it well respected in the field too.In the current slide down in the markets ,it has come down to an attractive level for buying.

I am not a financial person , so i justed glanced at the annual reports and the quarterly results and they look satisfactory to me.One interesting news that i came across was that "Japan Metal Gaskets" its technical know-how knowledge supplier picked up ~5% stake by way of preferential allotment this quarter.From a layman pespective like mine , i think it exudes confidence in the company.

I would like to know what are your thoughts on the company?