too understands the need to pick the right seed and has enough
patience to wait for the seedling to blossom into a full-grown tree.
He knows that it will be a while before his investment gives returns.
However, the long-term investor differs from the mango farmers in a
key aspect. Investors often buy a blue-chip share and then forget all
about it for years, instead of booking profits regularly. The farmer,
on the other hand, never forgets to harvest his mangoes when they are
ripe. For, he knows that leaving them infinitely on the tree will mean
that they will just rot and fall to the ground.
A true value investor retorts back by saying that this is akin to
trying to time the market and considered a cardinal sin for an
investor. But there is ample evidence to suggest that a simple long-
term 'buy and hold' strategy, even for the bluest-of-blue chips,
hasn't always given great returns. Microsoft, probably the most well-
known company of our times, is a good example. Any investor, who had
bought Microsoft in the early '90s and had held on to it for a decade,
would have made 50-60 times of his invested capital, as Microsoft went
through a mind-boggling growth phase, unparalleled in history.
Though the company continues to grow even now, if an investor had
bought the Microsoft stock in '00-01, he would taken a big hit,
despite holding the scrip of such a great company for more than a
decade. It's simple. Although you may own the stock of a blue-chip
company, which has strong growth prospects, it is quite possible that
the price of the stock may have already discounted future growth. In
simple words, the stock may be past its prime when it comes to
generating wealth for the investor. So, it's always prudent to book
profits when a great company is heading towards a lean phase and
reenter the stock when things get brighter.
We, at ETIG, have identified the stocks which you should sell, taking
advantage of the recent bounceback. At the same time, we have also
prepared a list of stocks in each of these sectors, which are better
equipped to face the future, if and when happier times are back.
Capital Goods & Construction
The Indian economy has seen an unparalleled investment boom and
companies in the capital goods and construction sectors have had a
rollicking time in the past few years. Investors who put their money
in these stocks managed to reap big rewards. But the honeymoon seems
to have come to an abrupt end, which is clearly reflected in the fall
in Index of Industrial Production (IIP) numbers in recent months.
SELL
Siemens: The market has already priced in a 40% year-on-year (y-o-y)
rise in profits in this scrip. With net profit margins already
falling, Siemens looks overvalued. Add to that a fall in the
outstanding order book and the stock becomes a definite sell. Having
fallen more than 50% from its peak, investors should use the current
20% bounce-off from its lows to get out of this counter.
ABB: With a price-earnings (P/E) multiple that is much higher than the
industry average, ABB is the costliest stock in the capital goods
sector, with the market factoring in as much as a 50% growth in
profit. Rising input costs and a slowdown in industrial productions
don't help. All this means that ABB definitely ceases to be a big
buy.
At the same time, a fall in the growth rate of order backlog from 61%
in December '06 to 49% in December '07 suggests that it is entering a
moderate growth phase. So, investors should use the current bounce-
back to cut, or at least reduce, exposure in this stock.
Simplex Infrastructures: Simplex is currently trading at a P/E
multiple of around 38. To justify this, the company's earnings per
share (EPS) has to grow by 40-50% y-o-y for the next seven quarters.
This looks tough, given the credit squeeze, rise in interest rates and
a likely slowdown in investment demand. Investors might do well to
exit this stock.
BUY
Thermax: A better-than-expected quarterly performance and a P/E of 23,
which is lower than the average, seems to suggest that this stock has
a great chance of getting re-rated. A continuous improvement in
operating and net margins over the past three years and the fact that
Thermax's line of business offers it a certain degree of exclusivity,
give you ample reasons to believe that it's better geared to face any
slowdown in the sector than most of its peers.
Alfa Laval: With its core area of business, environment and energy
management, getting greater focus, Alfa Laval is better placed than
most of its peers to face any slowdown in the sector. At the same
time, with a P/E of just around 18 and a dividend yield of 2.8%, it
looks like one of the most attractive bets in the capital goods
sphere. Moreover, the expectation of Alfa Laval garnering a bigger
share of its parent's outsourcing business makes it a juicy
proposition.
IVRCL Infrastructure & Projects: The stock is currently trading at a P/
E (on consolidated basis) of less than 20, one the lowest among tier-I
stocks in its sector. In contrast, its net profit has doubled in the
past one year and is expected to remain buoyant, aided by its
subsidiaries and a 20-25% earning growth in its core business. All
these reasons make the stock a good buy at these levels.
Information Technology
The cynosure of all eyes until recently, the IT pack was the biggest
laggard when the indices were going ballistic last year. However, with
the froth gone and the high-fliers grounded, the IT pack seems to have
made a comeback since January's crash. But a slowdown in the US and an
appreciating rupee are proving to be the biggest hindrances in the way
of its phoenix-like comeback.
SELL
Patni Computers: With 75% of its revenues coming from the US, against
an average of about 55% for other top Indian IT companies, Patni is
probably the worst prepared to face a US recession.
Source: ETIG
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