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Solidity better than sexiness

Dipen Sheth lists some stocks that he would want to exit, and use the cash to buy relatively ‘safe’ stocks for the Zoom portfolio. Here are his buy and sell clues.

Dipen Sheth | Print Edition: March 20, 2008

Sold

Wealth Zoom: Welspun Gujarat

Wishlist

Wealth Zoom:

Sell—Apollo Tyres, Sical Logistics,Alpha Geo, Idea, Sujana Towers

Buy—Exide, Zee News, REC

This fortnight’s portfolio review avoids reference to the B-word that had taken centre stage in every discussion concerning your money. After all, why should an annual Finance Ministry exercise in mildly tweaking some tax rates (or tinkering around with concessions and allowances for people and companies) invite prime coverage in the media? The broad direction of economic policy being advocated is almost identical, irrespective of political affiliation, so perhaps B-day should be no more than a day for taking stock or reaffirming where the country’s economy is headed.

Reversing the last three fortnights of continuous battering, Wealth Zoom has drifted up to a net asset value (NAV) of Rs 12.39, which translates to an absolute gain of just under 24% since inception. Safe Wealth (with an NAV of Rs 12.24) has earned 22.4% for you since inception.

If there is one lesson we have learnt from the meltdown, it’s this: our portfolios should shield us from volatility, not multiply it! Wealth Zoom is where we have faced the most painful volatility pangs. Not surprising, since mid caps and growth stocks tend to get most battered whenever macroeconomic clouds threaten to spoil the party. And it is here that we will, over the next few weeks, realign ourselves to counter these risks to some extent.

To this end, we are decreasing our exposure to the capital goods space, which has had over five years of good performance. Let’s book profits in Welspun Gujarat. This is a costly stock now (remember we have already earned over 127% on it!), and all the positives accruing from its plate mill commissioning seem to be factored into the current price. There is no doubt about the pedigree of this company; it’s just that the price does not seem right to remain invested any more.

Click here to see Wealth Zoom Portfolio
Click here to see Safe Wealth Portfolio

Other stocks in Wealth Zoom where I am considering an exit in the foreseeable future (and where your opinion is welcome):

Apollo Tyres Going nowhere as a stock, in spite of a very creditable business performance and future plans. Shall we just be patient with this one?

Sical Logistics Yes, it’s a great business of stevedoring, transportation, port development, container freight stations and offshore vessels. But when will it deliver big money? Another case of waiting for Godot, I guess.

Alpha Geo Down over 40% from recent peaks, terrific capability in the business not really translating into results. Inorganic growth plans not working out as per promise?

Idea Cellular Falling average revenue per user (ARPU), lower customer additions and drifting margins have combined to pull down this telecom challenger’s showing in recent times.

Sujana Towers Indifferent showing in the last quarter, fund raising plan announced. Initial promise of a pure-play towers business not really panning out; wonder why…

All these looked like good stocks and businesses when we entered them, and suddenly don’t appear that “safe” anymore in a market that’s clearly drifting. What will we do with the cash? Given a choice, I’d gladly add the following mid caps. They are high on the pedigree charts and will hopefully bring some sanity to our Zoom portfolio if we encounter more volatility in the months to come:

Exide India’s battery leader is adding capacities quietly, even as it remains a large investor in ING Vysya’s fledgling insurance business in India. This is one company with franchise. Rising lead prices have been fully passed on to users—margins show no signs of slowing down.

Zee News The only listed bouquet of regional language channels, a segment that’s growing faster than the mainline English or Hindi segments. Some of these are slated to break even over the next few quarters and provide strong operating leverage to the numbers. And yes, they do have a news channel!

REC (on listing) Another lowvolatility business, mandated by the government to lend to the power sector. Will grow its loan book steadily and provide some stability to our Zoom portfolio, hopefully. Should we consider this for Safe Wealth instead?

Petronet LNG High-growth regassifier of imported liquefied natural gas (LNG), likely to benefit from its own strong cash generation and increasing capacity at Hazira and a new facility at Kochi. Earns good profits on spot cargo trading. Fears on profit sustainability likely to be overplayed.

Punj Lloyd This largish mid-cap answer to Larsen & Toubro has so far disappointed on the margin front, but order book build up in recent months from its Singaporean acquisition (SembCorp Engineers & Constructors) provides long-term comfort. Watch this space.

Jindal Saw Realigning its pipe business towards India-based manufacturing. Disposed off the US capacities at a huge profit. Will now invest the surplus cash in upping capacity at its Indian facilities.

Federal Bank Has recently raised over 1.5 times its networth in a rights issue, thus buying headroom to expand its loan books several times over the next five years. Excellent customer franchise and is a prime candidate for a takeover from a larger Indian or foreign bank. Available at under two times adjusted book value for 2008-9. What else can I ask for safety plus growth?

It’s a little funny that we should be seeking relatively “safe” stocks for Wealth Zoom but remember that we must drive in accordance with the changing weather conditions. There’s plenty of economic growth and business opportunities out there, but investors are getting more choosy about what to punt on. And in such a situation, it does not make sense to be a heavyweight contrarian; solidity might earn us more than sexiness!

Disclaimer: Model por tfolios are based on the independent opinion of Dipen Sheth, head of the research team at Wealth Management Advisor y Services. They do not reflect the opinion of the firm.They are for reference and information of readers.The firm is not soliciting any action based on the portfolios.

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