Exiting markets to re-enter

Our fund manager books profits on a number of shares and will use the surplus cash to do some cherry picking in the small- and mid-cap sector.

Dipen Sheth | Print Edition: Nov 29, 2007

The good news this fortnight is that Wealth Zoom stock portfolio has suddenly found its feet, three bad picks notwithstanding. We’ve gained 32.1% in under five months since inception. This has happened due to a recent rejig with some aggressive exposures in small- and mid-caps, and it looks like this portfolio may well catch up with Wealth Safe in the foreseeable future.

Our heavy bets on Opto Circuits and Southern Biotech have both paid off handsomely; our top two items are up 47% and 71% since we bought them. In keeping with the mandate I have for Wealth Zoom, I have chosen to book profits by selling half our position in Southern Biotech, perhaps a little too early?

The other changes this fortnight are also sells, and this move towards cash is unlikely to find me many supporters. We’ve exited Punj Lloyd and Crompton Greaves totally, against conventional wisdom but keeping in mind the stratospheric valuations that they are quoting at today. Again, reducing Shringar Cinemas by half seems silly just when it has perked up, but take a look at their September numbers and you will support my action.

Safe Wealth
Click to view the performance of our Safe Wealth portfolio.

What I now like about this portfolio is that we are now up to 21% cash. This gives me the incentive to do some more cherry picking with our smaller picks or find out other mid-cap gems for you. You might have noticed that recent additions like Alpha Geo, Radha Madhav and Electrotherm have performed well. Got any more like them?

Meanwhile, we are yet to book losses and exit from our lemons: Gateway Distriparks, Shasun and Global Vectra. And there could be more pain coming here: their recent results are not exactly inspiring. On to Wealth Safe, our longterm investing machine. We are up almost 35% here in the 20-odd weeks that we’ve been around on Dalal Street. Last fortnight’s picks (Sterlite and Britannia) are beginning to stir into action but they still have a long way to go. Our textiles, and chemicals and commodities exposure here is zero, while we seem a little overstretched on consumer sector at 16.3%.

It is in this portfolio, however, that many of you are peeved with me for having been a seller through much of this rise. Mr Patel, a regular reader of MONEY TODAY, says that I am not walking my own talk on Wealth Safe, since I have sold too soon. He might have a point.

Consider the evidence: my chicken-hearted selling spree was on full display in Jindal Steel & Power (six shares purchased at Rs 3,374.85 on 18 June), where I sold five out of the original six shares at an average of Rs 6,100. And yes, we’ve sold our sole remaining Jindal Steel & Power share this fortnight for Rs 12,119! And if this is not enough, I have chosen to sell our remaining 67 shares of Power Finance Corporation this fortnight at Rs 272.45.

Wealth Zoom
Click to view the performance of our Wealth Zoom portfolio.

When markets rally on a theme (emerging-market theme is the flavour of the season), valuations may not matter for some time. Especially when they looked stretched to fund managers, who may frustratingly persist with classic valuation parameters like price-earnings (P/E) ratios. Future growth becomes more “visible” than normal, and three-year forward P/Es of favoured stocks and sectors frequently cross 20 or 25.

How else do you explain the whopping 117% return that we have earned on Areva T&D? It’s currently quoting for a two-year forward P/E of over 50 already. I sold a little over 40% of our exposure to this gem when we were up 40%. Thankfully we still have 13 of our 23 shares in the portfolio at today’s price of Rs 2,861. Some more gems that I have part-sold “too early”: Reliance Communications, HDFC Bank, NTPC, Reliance Industries and Bhel. In addition, my total exits from Siemens and GMR Infrastructure have resulted in further opportunity losses.

While I admit that my sell orders seem a little over-cautious in hindsight, I am now doing some selective buying by increasing Tata Steel, Maruti and Grasim Industries (all these stocks are fundamentally strong and off their recent highs). And I have done this with no bias towards the price we exited them not so long ago. As a result we are down to about 25% cash in the Wealth Safe portfolio, which might still seem a tad too conservative to some of you.

As always, your suggestions and criticisms are welcome at our website, blog or via e-mail.

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