Riding the Bull and Handling the Bear by Basant Maheshwari

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One of the investment screening insight that the speaker offered for getting mega sector calls right or for identifying dominant sector bull themes, is to locate complete packs of companies from a sector that are making new highs (every day) or to look at sectors growing at about 30%. Sectors growing at more than 30% for example could be among the leading sectors. However, such sectors could attract the limelight only after doubling or tripling. Companies in these sectors are seen likely to be expensive on valuation metrics with trailing P/Es of 30-40x and forward P/Es of 20-30x. But the accompanying sector bull rallies have been seen to sustain for over 20 years – investors would therefore need to develop sufficient insight and conviction to remain long over an extended period. He highlighted a few other characteristics for identifying emerging leading sectors. Companies in these sectors are likely to be relatively illiquid and unpopular. Big companies of today for example Infosys followed this pattern. Illiquidity signifies that the stock may be undiscovered and yet investors could be reluctant to invest in illiquid stocks.

Companies offering more than 30% growth with positive Free Cash Flow (FCF), dividend payout could provide enough cushioning to investors wary of price corrections. Historically sector leaders such as Infosys, L&T have continued to return the capital to investors post correction. Conversely, companies that do not bring with them dividends and or free cash flow would be vulnerable to corrections of more than 50%, if a growth story punctures. Free cash flow/ dividend protected companies on the other hand are likely to correct to less than 50% if the underlying thematic ran out of steam. Another price-based indicator for a vanishing growth story is that the associated stocks are less likely to sustain new highs for more than a couple of days. One is reminded that very few in the market are able to sell at the top as the window is likely to be short – a couple of days, bottoms on the other hand could sustain for more than a few months.

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