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Big dips: How to choose stocks in a downturn

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The Nifty’s fallen 15% since its highs, and even then I had said that it was not undervalued. I seem to put my foot in my mouth when I comment but I still maintain that we are not overvalued.

Currently, the Nifty has a P/E of 18. This may not sound significant but from what I see, nothing much has changed in the earnings growth area! Meaning, I still expect to see growth of over 25% in the top few companies (which comprise the Nifty) and this means that there is still value in these companies.

Tata has acquired Corus at a 12 billion dollar value, and Suzlon and Hindalco are also paying big money for their acquisitions. This will hit their books in the short term, but provides excellent long term value for all these companies, mainly because the integration will give them lower costs and higher margins.

Reliance and IPCL will merge and the benefit will entirely go to Reliance. Think about it – IPCL has a P/E of less than 6, and Reliance is at about 18. IPCL has past 4Q earnings of Rs. 50 (approx) per share, which adds to Rs. 1300 cr. of profit over the last four quarters. The combined entity, if you add up the last four quarter profits, will have 11,857 cr. of profits, giving an EPS of Rs. 82 per share. At the current price of Rs. 1285, RIL shareholders will have a company of P/E 15 or so – which, at the rate it’s been growing, is remarkably cheap. I am personally buying RIL shares on a regular basis nowadays.

Now, what am I saying? Should you just go and buy any company because the Nifty seems undervalued? Well, no. Like in the RIL-IPCL case above, make your decisions based on future potential.

A lot of companies will seem like bargains to you now. Bajaj Auto at 2500! It was up to 3000 a couple months back! But that is no reason to buy, because 3000 could have been simply too high an expectation. In the face of rising interest rates, people will have lower leverage to buy vehicles, so the growth may be tempered. Plus, with the world cup around the corner, Hero Honda, a prime advertiser, is likely to put a lot of heat on Bajaj. So perhaps Bajaj is not the best bet today.

Another example: SBI is at 955, and just three months ago it was above 1200. That’s a 20% drop and may look like a darn good deal! Unfortunately, interest rate hikes and slowing growth in retail lending will take its toll, and perhaps SBI will not grow at 20% or more in the next few months.

But there are others which sound just too good to be true. BHEL for instance, has an existing order book of 30,000 cr. Plus, the government wants more ultra mega power projects, which BHEL has a lot of expertise in. And the growth seems less dependent on interest rates or competition pressure, so the earnings visibility is fantastic. Add to this the fact that they’ve announced a 1:1 bonus (likely to be decided by May) and that their price is now at Rs. 2,000 (a P/E of 24). At the current price this seems like a great buy!

Disclosure: I own all the stocks above. And none of these will give you benefits overnight or within three months. Think of this as investments that will pay your medical bills when you are old.

If you find a vendor selling apples cheap, will you buy the half rotten ones that were ripe a few days back? Or will you choose only the good ones? It doesn’t matter if they are cheap, you still want good apples.

This market has a lot of value, but you must search for value that is absolutely plain and obvious to you. Don’t buy based on other people’s tips, or what you remember of the stock price during the boom.

And if you find a good stock, please let me know too. Perhaps we can share and earn a lot more together!

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