Sanjoy Bhattacharyya, the acclaimed value investor, in his latest articles in Forbes India (article 1 & article 2), reminds us that the best investment opportunities are to be found when the markets are cloaked in fear. He cites the example of the 2007 debt crises when the markets plunged to their lowest level. Top quality & blue chip “invincible” stocks like Asian Paints, Crisil, Bajaj Auto, Nestle, M&M and Shree Cements were trading at rock-bottom prices relative to their historic valuations and offered a huge margin of safety. However, investors did not touch the stocks with a barge pole. The fear of an economic collapse was overwhelming. When the market bottomed out in March 2009, there started an epic global stock market rally and the few brave investors who had recognised the situation as being an once-in-a-lifetime opportunity and bought stocks reaped a rich harvest.
Taking a cue from the lessons learnt from the 2007 crises, Sanjoy Bhattacharyya explains that the failure to understand the nature of the risk leads to an exaggerated sense of vulnerability amongst investors and that is why then shun buying stocks even when the valuations are attractive. The mantra for the thinking investor should be to “buy fear” and “sell confidence” says Sanjoy Bhattacharyya. He points out that a strong contrarian instinct is the primary intellectual and emotional discipline that defines the most successful investors.
Sanjoy Bhattacharyya explains that in the present context, there is an air of uncertainty which has been caused by the fragile macro-economic environment. There is heightened volatility in global markets and increasing risk aversion which has caused international investors to tighten their purse strings.
In this environment, investors are making the classic mistake of seeking safety by picking predictable growth stocks (consumer staples and pharmaceuticals) like Hindustan Unilever, Asian Paints, Nestle despite their sky-high valuations and of ignoring stocks that are high in ambiguity and which are available at bargain prices.
If investors can brace themselves to face the uncertainty and buy the stocks that are not in favour at present, they can have sizable gains over the long run promises Sanjoy Bhattacharyya.
From a practical viewpoint, Sanjoy Bhattacharyya advises investors to look at businesses that have an established track record of secular growth in sales and profits, stable margins, outstanding working capital management and rational capital allocation based on dominant market leadership and technical excellence. If the stock is available at a reasonable valuation then there is also a margin of safety available.
In terms of specific stocks, Sanjoy Bhattacharyya recommends that investors take a close look at Cummins India (455) and Supreme Industries (330). Two other stocks that meet the test of an attractive business run by competent management and which are available at a reasonable price are Navneet Publications (Rs 63) and VST Industries (Rs 1,620) he says. He explains that both are available at an earnings multiple in the low to mid teens, deliver return on equity in excess of 25 percent and are run by a management team with a commendable record of rational capital allocation.