A quick post to round off this weekend.
There is always some group of stocks or a sector that is looked upon favorably by the investment community. In the 1980s, US saw a frenzy for bio-technology companies. Closer home, in the 1992-94 period, financial/investment companies were looked upon very favorably in our markets. Then the 1999/2000 bubble needs no introduction – pharma and IT companies were the blue eyed boys of the market. In the 2007/2008 market, we’ve had a frenzy for power and infrastructure companies and these companies were quoting at astronomical prices. How do we define ‘astronomical’ here? I’d define it as unusually high P/E, P/E and P/CF multiples.
Why did everyone buy into the frenzy, apart from the ‘bigger fool’ theory? Well, we were promised in 1992-94 that Indian incomes were increasing and there would be insatiable demand for all these financial/investment companies. In the 1999-2000 bubble, we were promised that the entire world would outsource to these IT companies and the earnings of these companies would shoot through the roof. In the 2007-08 world, we were promised of the riches in the distant land where every home in India would have power and every road would be Autobahn like. Since there was a huge shortage for both, there is huge demand, and hence the frenzy.
Why am I droning on and on here? Well, I have started to sense that the consumer stock story is very similar to the stories above. Obviously, nobody can call the top of the market, but you can certainly see the signs all around. Indian demographics will start earning, they will have more disposable income, even in a recession spending on these consumer items will not decrease, high P/Es, high P/Bs and high P/FCFs are there for all to see. In fact, one stock (Jubiliant Foodworks) had a P/E of 85 (recently ‘corrected’ to 65) – and we are seeing this in almost every newspaper and touted by every analyst. Most of these consumer stocks quote at ‘astronomical’ prices and I think many people will be disappointed when they are left holding the bag (and yes, we all think that we will sell the stock, just before the market crashes – I was an investor in DLF back in 2007 frenzy and I thought the same; sold it at just break-even).
I have no idea how people even think of buying any stock which is quoting at P/E multiples of above 35-40 (which most consumer stocks are quoting at), but then maybe I am just a conservative investor.
Yet again, I’d like to emphasize that these stocks may not be bad companies at all. However, what is your entry price on these stocks? If your entry price, say on JBF was at when P/E was at 85, then I am not really sure you can recover your money. Some of the financial companies in the 1992-94 frenzy also made money for investors in the long run, but you can count them on your fingers. People who bought into the Infosys story at the 1999-2000 peak just about broke-even in 2006 (including dividends). Therefore, two points – 1) Check if it is a market frenzy with a certain group of stocks. 2) Check your entry price and evaluate whether you can make money of these stocks.
To sign off, I’d like to quote the Guru, Benjamin Graham –
“Somewhere in the middle of a bull market the first new issues make their appearance. These are priced, not unattractively, and some large profits are made by the buyers of the early issues. As the market continues to rise, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the prices asked verge on the exorbitant. One fairly dependable sign of the approaching end of a bull swing is the fact that new issues of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history.”
And to emphasize the last couple of lines in Graham’s quote, I present to you one of the recently
IPOed listed on the BSE ‘consumer stock’ company – Rupa and Company –
The IPO price was Rs.200. It briefly went to Rs. 300, and is now quoting at Rs. 150/-. Abnormal P/E. And investors who invested in the IPO – well, a straight 25% loss in about a month. That’s what happens if your entry price is not right.
Note: I am not calling a top in the ‘consumer stock’ story, nor am I denying that there is a huge consumer story. All I am saying is there is a huge difference between there being a consumer story and investing at the right price. (recent example? look at the valuations of all infra companies now (frenzy of 2008). You might be misled into thinking they are small cap stocks)