Always buy bombed-out stocks; avoid stocks which are in fancy
It is an elementary principle of investing as enumerated by greats like Warren Buffett, Peter Lynch and Rakesh Jhunjhunwala that one should only buy those stocks which are not in fancy, are quoting at throw-away valuations and which have a huge margin of safety.
One striking example of this are the banking stocks. Till a few months ago, Private and PSU Banks were regarded as the pariahs of Dalal Street and were unowned by most participants of Dalal Street.
However, today, these stocks are much coveted and have given fabulous gains (see Madhu Kela and Sridhar Sivaram rightly advised us that the Banking sector is entering a “Golden Phase” and to aggressively buy Banking stocks)
Manish Chokhani explained this point very eloquently and provided many real-life examples of PSU Stocks which were shunned by most investors.
“HAL, BEL, NTPC, Power Grid all these have performed because they started from such a bombed out valuation and despite privatisation not happening. If Concor and IDBI Bank are offloaded this year, maybe people will start imagining that a lot of privatisation will happen and the PSU pack will continue to keep running,” he said.
He also cited the example of M&M which is suddenly in favour amongst investors after the launch of its XUV and Scorpio SUVs.
Hindalco can give 60% gain in next 2 – 3 years
Chokhani made it clear that he does not like Hindalco as a stock. However, he still made it the subject matter of his thesis to explain how a stock which is not liked can become interesting to astute investors.
He explained that Hindalco has a market capitalisation of about 9 Billion with 4 or 5 Billion of Debt which makes their enterprise value equal to about 13-14 Billion. The company will make, even by conservative estimates, 3 to 3.5 Billion of EBITDA. This can be used to pay off the debt. This will make the equity value of 9 Billion to rise to an equity value of 15 Billion by sheer paying off of the debt.
This mathematically gives an upside of 60% in the stock price in just 2 years, he said.
Chokhani added that even if the debt is not repaid and the EBITDA is invested in new projects, that will also increase the profits and the equity value. This could result in gains of upto 100% in the stock price.
So, the stock price of Hindalco offers a high margin of safety, he concluded.