best stocks from the worst industries

8/3/2019 Best Stocks From the Worst Industries

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Best stocks from the Worst Industries

Buying at the bottom and selling at the top is a universally accepted stock market rule, but few people

have the courage or discipline to follow it. The rule becomes all the more important now with the market

near its all-time high. Herd mentality is the biggest mistake investors make in bull markets like these.

Since most stocks have already moved up significantly, well above what is warranted by their

fundamentals, theres no point chasing them further. The best strategy right now is to identify sectors and

stocks that are yet to participate in the rally in a big way.

Another rule that investors need to keep in mind is about sector rotation. Each bull market rally brings its

own sets of favourite sectors and stocks and rarely does a sector or stock, that leads one bull market

rally, participates in the next. Why?

First, it can be purely due to "investor folly". Since everyone starts chasing the same sets of

sectors/stocks, valuations hit the roof. For instance, Information, Communication and Entertainment

sector stocks (popularly known as ICE) were the darlings of 2000 rally with most stocks from this sectorquoting at unrealistic valuations.

Once the fancy goes, prices tumble, bringing valuations well below what is warranted. This is another

extreme behaviour and it happens because investors, who are still nursing their wounds, totally desert

these sectors irrespective of how the sector is or companies are performing.

Though Indian IT companies remained

fundamentally strong and continued to show decent

growth, their market price rarely went up. For

example, Wipro, a fundamentally strong IT major, is

still quoting at Rs 430, 56% lower than its adjusted

peak of Rs 980 (in February 2000).

Once we consider the rise in markets (Sensex and

Nifty trebled from the 2000 peak), we will know the

level of underperformance of this stock since the

"tech bubble". The comparative price chart of Wipro

and Sensex since Feb 2000 will reveal this. This is

despite the fact that Wipro outperformed Sensex in

the recent rally that started from March 2009.

Secondly, it isnt just investors' folly. The problem

goes beyond overvaluation. Companies themselvesget carried away with the hype, and take up projects

beyond their means landing themselves into trouble.

The problems can be due to over capacity, unrelated

diversification, liquidity issues, etc. And since the

companies themselves are in trouble, the investor

loss can be much steeper than in the first case.


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Making the right choice

Investing in stocks that have not participated in the rally is a very small step. The main task is to identify

the right sectors and stocks. The first step is to know why these sectors are underperforming the market

now. If a sector is only going through a temporary cycle there's isnt much to worry. But one must avoid

those facing fundamental problems.

Likewise, it is safer to avoid small industries that are in trouble, unless youre sure about their survival.

The reason for this is that small industries can sometimes go out of business (like type writer industry did

some time back as computers took over). Big industries that are essential for our economic well being

(like cement, steel, telecom, real estate, oil and gas etc) tend to survive and come out stronger from the

cycles. The second and the most important step is picking the best stocks in these industries.

Here are six stocks worth investing in from sectors that have not been doing well recently. The data and

analysis used in the story are based on market conditions prevailing between December 6 and December

10.

Oil & Gas

The sector's underperformance can be

attributed to the non-transparent price control

mechanisms. Things may worsen as the US

dollar is expected to weaken, pushing global

crude oil prices up again. But all companies

from the sector are not affected uniformly.

While PSU companies may continue to suffer,

impact on private sector companies like

Reliance will be limited due to huge exports."Reliance Industries looks interesting because

its refining margin has improved to around $8

dollar", says Deven Choksey of KRC Research.

Further, its international expansion plans will also act as cushion.

Another segment that is not affected by govt

controls is the oil exploration sector, in fact, it

will be a direct beneficiary of crude price

increases. With an owned fleet of 19 rigs, Aban

Offshore, the largest private sector offshore

drilling company in India and among the top 10

globally, should be able to take advantage of

high oil prices.

A major concern for investors in Aban has been

its high leverage (total long term debt as of Mar

2010 was Rs 13,946 cr against shareholders funds of Rs 2,181 cr). This concern too will subside once

the company's long term fund raising plans go through.


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AlternateEnergy

The crash in crude prices from July 2007 has taken the sheen out of alternate energy producers and

capital goods manufacturers catering to them. Suddenly their funding stopped, orders got cancelled and

investors started doubting their viability. The quantitative easing plan from US Fed, however, has revived

hopes of oil prices moving up. And that means good news for the industry.

Praj Industries, the biggest Indian solution

provider for the ethanol industry, is expected to

benefit from the expected increase in crude

prices. Though the company reported

disastrous September quarter results (topline

fell to Rs 138 cr from Rs 218 cr due to

deferment of orders; net profit fell 80 percent to

Rs 7.83 cr), things have started stabilising

now.

The company got fresh orders worth Rs 150 crlast quarter (60 percent of which are from

international markets) taking the overall confirmed order book to Rs 600 cr. This needs to be executed

over a period of 12 months. New enquires are also increasing significantly with ASEAN and Africa at the

forefront of new orders. Domestic ethanol production is also seen to go up after the govt recently raised

the ethanol price to be paid by oil marketing companies to Rs 27 from Rs 21.50 per litre.

Sugar

The market cycle suggests this isnt a good time to enter the sugar industry. The sugar cycle turned sour

in Jan 2010 and is expected to remain like that for some more time. Unlike historical cycles, however,

fortunes of sugar companies are being associated with international crude oil prices because of ethanol,oil blending programmes.

The possible diversion of sugarcane for ethanol

production in Brazil (primary producer of

ethanol), is the main trigger. That explains why

global sugar prices have started going up

again. But the main trigger for the Indian Sugar

sector will come from sugar decontrol, as and

when it happens.

Balrampur Chini, India's second largest sugar

producer, is best suited to benefit if sugar

prices continue to move due to the ethanol, oil

linkage because of its strong fundamentals.

Further, growing revenues from the power and

distillery segments will act as a counter weight against the sugar cycle.

Realty


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The real estate sector is not out of the woods yet, but things have started stabilising. Most real estate

companies, for instance, are reporting good volume growth. Further, they are still quoting at reasonable

valuations. "Since the sector weight right now is very low, this sector may get a structural re-rating once

things improves further", says Tarun Sisodia of Anand Rathi Securities.

HDIL is one stock that is expected to benefit

immensely from the possible re-rating of the

sector. Phase I of its Mumbai Airport

Rehabilitation Project is nearing completion and

shifting of 20,000 slum dwellers from the MIAL

area is expected to finish by Mar 11.

Completion on deadline will be major factor for

HDIL's re-rating. Further, it has raised Rs 3,470

cr since May 09, including Rs 1150 cr QIP

recently. The reduced debt level is likely to aid

its land acquisition programmes in future.

Electronicmedia

The sector is underperforming the market primarily because of the loss reported by several big players.

Further, the September quarter results may not be that great for the industry due to the base effect (major

festivals Navrathri/Dussera, which fell in the second quarter last year came in the third quarter this year).

Zee Entertainment Enterprise is a strong company from this segment. It has smartly come out from the ad

market slowdown and ad revenue has jumped sharply in recent quarters. Further, its subscription

revenue also grew at a brisk pace largely due to the increasing contribution from the direct to home (DTH)

subscriptions. The Dec quarter is expected to be good, for the media sector in general and for Zee, inparticular says Apurva Shah of Prabhudas Lilladher. Still Zee has underperformed the broader market

along with other media companies in the recent past. Once the focus comes back to the sector, this

counter is expected to outperform again.

Telecom

Though mobile users are happy about falling call rates, investors are worried about its impact on

profitability of these companies. This is why leading mobile operators grossly under performed the market

in the recent rally. But analysts say that rates can't go down much from current levels. "Telecom tariff war

is past", avers Deven Choksey, managing director, KRChoksey Securities.

Bharti Airtel, the leading GSM player with 14.3 cr subscribers and a market share of 29% as on Sep 30,

2010, will be the biggest beneficiary if the tariff war ends and the industry gets into a consolidation mode.

With its African operations to be consolidated for the whole of the second quarter, the uncertainty

regarding the impact of call rates cut in Africa will also be over.

best stocks from the worst industries

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