Are we back in the bull mode? In just a fortnight, our carefully considered, but small, investing bets in the Safe Wealth mportfolio have all delivered positive results, ranging from a sober 3% (ironically enough, this happened to our top pick, Glaxo Consumer) to a spectacular 25% (Tata Steel, one of our smallest positions; that's a double irony!). Rather than gloat over this 100% reported success rate in picking stocks for the model portfolio over such a short interval, I would prefer to take it as a random quirk of fate plus a solid market uptrend that defies investing logic.
This investing logic says that we are headed for macro trouble. Otherwise, why would I start with 84% in cash? Governments around the world are bringing their own governance into question with their acts of commission and omission. Consider the reckless imprudence unleashed (on almost a daily basis) by the US authorities to clear the toxic asset problem in their banking system. It seems to my (untrained) economic sense that the government will lend taxpayers' money to prospective buyers of toxic assets of the banking system. Or, consider the wanton rollout of fiscal and monetary largesse back home in India as the elections approach. I'm afraid it's only a matter of time before some, if not all, hell breaks loose in the financial markets.
So, should we be selling the embarrassingly good returns we have posted in the past fortnight or so? No, because in the first place, we do not want to run this portfolio like a trader's den. Also, if we had anything over a 30% overall long position in the portfolio (70% cash or lower), I would perhaps have liquidated at least half of our holdings based on my macro bearishness. But chickenhearted that I am, I had gone only 15% long (this is rear-view wisdom at its brazen best). Therefore, we'll hold on to this long position. At the current market price, we have invested a mere 16.2%, so we will buy more for Safe Wealth only after the markets crack in our favour. In terms of new ideas for Safe Wealth, there haven't been any suggestions from readers that merit dissemination or dissection this time. However, for Wealth Zoom, some more ideas warrant our attention.
These fall into two categories, one of which is 'good or great businesses available for a decent bargain value'. Some stocks from the pharmaceutical sector could fall into this category. There are many analysts who argue that pharma represents an even more stable value proposition than the FMCG sector in the face of the global economic slowdown as the pharma companies' bargaining power will remain undiminished owing to the 'life-saving' nature of their business.
Also, Indian pharma companies have an additional bull factor going for them. This is the rapidly growing business segment of Contract Research and Manufacturing Services (CRAMS) that some of them provide to patentholding (innovator) companies in the western world. Globally, CRAMS was a $44-billion space in 2007, and analysts estimate it will grow by at least 12% CAGR to cross $80 billion by 2012.
Among the most profitable and consistent stories is that of Divis Labs. It has strong chemistry skills and is present in the highly lucrative custom synthesis subsegment of CRAMS. The newly started carotenoids business can become another profitable opportunity for Divis. The earnings growth at Divis has been spectacular at 197% for 2006-7 and 70% for 2007-8, as it has exploited the first mover advantage and ramped up the business. While this will surely level off over 2008-9 (an estimated 21% growth in earnings per share) and 2009-10 (estimated growth of 16%), Divis remains a highly profitable business at over 40% EBIDTA and 43% RoCE in 2007-8. At around 11 times 2009-10 earnings, it is cheaper than the pharma companies that are growing slower. The other companies in this space are Nicholas Piramal, Dishman Pharma and Jubilant Organosys. The marginal players include Shasun Chemicals and Suven Pharma.
The other type of stocks that we might consider for Wealth Zoom are that of terribly beaten down midcaps (which have now become small) where the value is visible.
These offer a trading opportunity to exit on a bounce-back. The risks are obviously higher here and one needs to be wary of acquiring 'cheap' stocks that get 'cheaper'. These have been researched and mentioned by me in the past for the readers' benefit and include stocks such as the Federal Bank, GSFC, Orient Paper, Kesoram Industries, Rallis India, Sesa Goa, Navabharat, and Bartronics. Some of these have moved up appreciably in the recent past, so we'll steer clear of them for now. But something tells me that a deep crack might just provide us a decent opportunity to grab some of this flotsam during low tide. And trade it out with zero emotion when the time comes.
