Forget Market Cap & Valuations, Focus on Growth
Basant Maheshwari has always been a ‘growth’ investor.
His philosophy is to buy stocks showing ‘growth’ irrespective of their valuations.
This is in sharp contrast to the philosophy of other investors who are so-called ‘value’ investors, obsessed about the P/E ratio and valuations.
Basant reiterated this philosophy in his latest interview.
“We look at growth. If I find growth in a Rs. 300 crore market cap company, I would like to buy that company. If I find growth in a Rs. 20,000 crore market cap company, I would like to buy that company,” he stated, implying that it is futile to be concerned about market capitalisation and whether the stock is a small-cap or a large-cap.
It is worth recalling that Basant’s investing philosophy is in line with that of Mark Mobius.
Mark Mobius recently revealed his ‘secret formula‘ for finding winning stocks.
Three high-quality stocks fit the criteria laid down by him.
“The big mistake that we made in the past and many investors continue to make is that they look at the price earnings ratio. They look at the price to book value and say if it is selling at below book, it must be cheap. Not necessarily, because the market looks forward. That is the reason why what I do is focus on return on capital employed,” Mark Mobius stated.
He also advised that investors should focus on the Return on Capital Employed (‘ROCE’) and the dividend yield of the stock.
“If a company can have a 20% return on capital employed, that means they have the resources to grow and they can put more money into this growth plan,” the veteran expert opined.
Saurabh Mukherjea has also counselled us to not worry about valuations.
“If You Buy Quality Stocks Even At 100 PE, You Will Still Make Money,” he has famously advised.
Saurabh has also meticulously explained why three of the high-conviction stocks in his portfolio have unending growth prospects.
Alpha Moguls | Basant Maheshwari (@BMTheEquityDesk) doesn’t look at the size of the company but its growth potential.
Read: https://t.co/TCVC5rthcp pic.twitter.com/u7a01tZ9aA
— BloombergQuint (@BloombergQuint) December 30, 2019
Info-Tech & Pharma stocks are for pensioners seeking 8% to 10% return
Basant has never had a high opinion about Info-Tech and Pharma stocks.
He had once recommended Granules India amidst much fanfare.
However, he burnt his fingers badly and thereafter swore off Pharma stocks.
“An isolated pharma company could do well but broadly there are too many headwinds,” he said in a dismissive tone.
Basant also opined that the growth story for Info-Tech stocks has been “punctured” after Nirmala Sitharaman imposed the dreaded “buyback tax“.
“IT is good for a pensioner; you want an 8-10 per cent return, you want a dollar-denominated return in your portfolio, then you are fine with an IT stock,” he stated.
Alpha Moguls | Basant Maheshwari (@BMTheEquityDesk) is confident that India’s top 40-50 companies will continue to grow, drive Nifty 50 higher even as he cautions investors about chasing small caps. @_nirajshah https://t.co/TCVC5rthcp
— BloombergQuint (@BloombergQuint) December 30, 2019
Buy only market leaders even if they are quoting at high P/E ratios
Basant has earlier formulated the theory that high growth financial stocks that dilute equity are good investment candidates.
“When a bank dilutes expensive equity it raises the overall value of the book and makes the stock look cheaper on the post dilution price to book basis,” he stated.
Basant cited the real-life example of Bajaj Finance to prove his point.
Basant advised that we should always stick with the market leader and never trust their counterparts lower in the rung.
“If you are with the leader, you will still survive to tell a story and you will still survive to retain what you have put into the market but not by trying to be over smart. Just to make that extra buck, do not buy the poor cousin,” he said.
He also pointed out that there are two drivers of multibaggers: The first is the earnings growth and the next is the PE expansion.
If a company is growing at 30%, the valuations expands at 10% more so you get more than 30% return on your stock, he advised.
“If you buy a 40% grower at a 40 PE and it grows at 40% for the next five years, the PE ratio at the end of the fifth year would not be 40 it would have upgraded itself to 70 or 80 or 90 and that is where the money is made,” he stated.
“You do not have to buy cheap and sell expensive or exorbitantly expensive you can buy expensive and as long as the growth continues, the expensive would naturally become exorbitantly expensive,” he added.
Alpha Moguls | Basant Maheshwari (@BMTheEquityDesk) looks for growth potential when investing in a stock, he's not worried about market cap or valuation. @_nirajshah
Watch the full conversation here: https://t.co/TCVC5rthcp pic.twitter.com/ZNcTBMYt7o
— BloombergQuint (@BloombergQuint) December 30, 2019
Bullet proof portfolio of 8 multibagger stocks
Basant advised that if we want to construct a “bulletproof portfolio” for the decade, we should buy top two stocks each in the consumer finance and the consumer retail space.
He pointed out that each space has different segments such as the AMC, insurance, private bank, NBFC etc.
Basant did not name any stocks.
However, it is obvious that the reference is to stocks like Bajaj Finance, HDFC Bank, Titan, HDFC AMC, HDFC Life, ICICI Pru Life, Reliance Nippon Life Asset Management, D-Mart, Nestle, Asian Paints, Pidilite, Marico, Dabur, Bajaj Auto, Bata India, Colgate etc.
These stocks are market leaders and have a lot of growth left in them, despite their alleged nose-bleed valuations.
In fact, Basant was part of a distinguished panel of 10 experts which recently recommended 10 multibagger stocks for us to buy in 2020 (see Top 10 Stocks For 2020: Vijay Kedia, Basant Maheshwari, Sandip Sabharwal Recommend Ten Blue-Chip Stocks).
Will stocks to shine in 2020? Here’s Basant Maheshwari sharing his bulletproof portfolio for the decade with @nikunjdalmia @BMTheEquityDesk #Welcome20s pic.twitter.com/sHs2tl8jM6
— ET NOW (@ETNOWlive) January 1, 2020
Very good advice by Basant Ji as always!
Yes very sane advice by Basant sir!