Huge risk of buying when there is clarity
Novice investors like you and me are wired to believe that there is a huge risk of buying when there is uncertainty and no clarity.
However, this is far from the truth.
The reality is that there is a huge risk of buying when there is clarity because stocks are already fully priced in and quoting at exorbitant valuations, with no margin for error.
Basant Maheshwari gave a practical example to prove the point.
He explained that just six months back, NBFC stocks had crashed like a ton of bricks in the wake of the ILFS liquidity crisis.
Investors of all hues were running around scared.
All housing finance companies crack!
DHFL now down 25%
Indiabulls Housing down 10%
Repco down 5%
Can Fin down 5%
— Mubina Kapasi (@MubinaKapasi) September 21, 2018
— Darshan Mehta (@darshanvmehta1) September 21, 2018
As many as 60 stocks 4m NBFC space fell up to 50% so far in Sep. including names like DHFL(down 57%),Rel Cap (down 34%), Baj Fin (down 22%) et al on d back of debt mkt liquidity concerns. Near term risks and NIM compression seem to have already been factored into stock prices.
— Jagdesh (@cjrsaaketa) September 25, 2018
However, Basant and Madhu Kela advised us to use the opportunity to grab the stocks at bargain basement prices.
Basant Maheshwari #OnCNBCTV18 says don't think Govt can let NBFC sector fail. Think earnings will support market going forward, should go & buy high quality names right now, think it’s a good time to invest in quality names pic.twitter.com/fanh6Hp7Mh
— CNBC-TV18 (@CNBCTV18Live) September 24, 2018
— RJ Stocks (@RakJhun) September 22, 2018
We can now see the sagacity of the advice with the Bank Nifty surging to all-time highs and NBFC stocks giving handsome returns.
— CNBC-TV18 (@CNBCTV18Live) March 28, 2019
The same theory has been propounded by Jim Cramer, an authority on US stocks, on how we should grab stocks when there is “incredible value” staring at us and it is “too dangerous” to stay on the sidelines.
— Mad Money On CNBC (@MadMoneyOnCNBC) January 18, 2019
Buying HFC stocks was a mistake and I dumped them
“We do not own any HFC right now. We got fed up and dumped it sometime back,” Basant announced in a solemn tone.
The trio of Ayesha Faridi, Abha Bakaya and Nikunj Dalmia stared back in disbelief.
The reason for the disbelief is because Basant has not spared any opportunity in the past to declare that he is “super, super bullish” about HFC stocks like PNB Housing Finance, CanFin Homes etc and that they are “blind buys“.
“We were super bullish on HFCs all these years but now there is one more super to the super bullishness. Now we are super, super bullish,” Basant had said earlier.
Retweeted CNBC-TV18 News (@CNBCTV18News):
“Very bullish on Can Fin Homes & PNB Hsg Fin”, says Basant Maheshwari…. https://t.co/0bjRxsYZWm
— Basant Maheshwari (@BMTheEquityDesk) April 5, 2017
Basant had earlier lost confidence in Can Fin Homes after it missed earnings guidance on a couple of occasions.
He issued a press release which said that investors who bet on corporate action and price have to be nimble footed and ahead of the curve.
Excerpts from a newsletter sent to our PMS clients:
When you bet on corporate action and price you have to be nimble footed and ahead of the curve – which we were. However, when you bet on business, earnings and secular growth you ought to be lazy and lethargic which we also do. pic.twitter.com/Mxtad7GZiI
— Basant Maheshwari (@BMTheEquityDesk) April 7, 2018
Canara Bank calls off Deal with Can Fin Homes.
— Mangalam Maloo (@blitzkreigm) March 31, 2018
As regards PNB Housing Finance, Basant described it as a “mistake” and gave a long-winded explanation why he dumped it.
“We make mistakes in life and my mistake was balance sheet is not enough so it is like unless the kanya daan happens, the baratis would not get the food to eat. The kanya daan did not happen with HFC and we got no food to eat. After two years, with stock doubling, we almost sold when it fell 30-40% from the top but that is how life is. We learn something new in life and then you move on,” he said.
What about the “Lakh crore ki Kahani” theory?
It is worth recalling that Raamdeo Agrawal had recommended PNB Housing Finance at the Sohn India 2017 conference on the premise that is a “lakh crore ki kahani” owing to the incalculable demand for housing in the Country.
— Rattan Joneja (@rattanjoneja) June 7, 2017
We will have await an update from Raamdeo on whether he still maintains his buy recommendation or not.
We will also have to consult Vijay Kedia on whether he still believes that the Housing Finance sector could be the “next market leader“.
In my view, 'Housing Finance' sector could be the next market leader.
— Vijay Kedia (@VijayKedia1) January 30, 2017
Buy stocks with consistent growth even if PEs are high
Some investors have a penchant for buying stocks with high-dividend yield and cheap PEs even though the growth rates are moderate.
Basant opined that this is a mistaken strategy.
He cited examples of stocks like Corporation Bank and Dena Bank which were the fancy of some investors owing to their high-dividend yields and rock-bottom valuations.
Needless to say, these stocks have turned out to be junkyards of the highest order and squandered vast fortunes of investors.
“Consistency is the single most important factor in stock analysis ….. 15-18% is not good enough for a 40 PE, it has to be above or around 25% …. I would pay 40-50 trailing to buy a 25% growing company for the next five, seven years,” Basant said.
“What decides that PE is not just growth, it is the sustainability of that growth, the ability of the company to handle its situation and still deliver the growth,” he added.
Best stocks to buy now
It is elementary that we have to be heavily invested in Banking and NBFC stocks now because they are the flavour of the season.
Basant cherry-picked three large-cap and fail-safe private banks for us to buy now.
These are Axis Bank, ICICI Bank and HDFC Bank.
He advised that investors with a short-term horizon of one year can tuck into Axis Bank and/or ICICI Bank because they are witnessing a “valuation catch-up” against arch rival HDFC Bank.
These stocks will outperform HDFC Bank in the short-term.
However, investors with a five-year perspective would do well to back HDFC Bank.
“HDFC Bank still remains a no-brainer,” Basant said with conviction in his voice.
“Very dangerous” to buy PSU Banks
Basant cautioned investors to not get tempted by the cheap valuations of PSU Banks and to stick to private banks.
“All these big private banks are fine but if you want to be cute and start playing the PSU banks, that would be a very dangerous thing to do,” he said emphatically.
What about Bank BEES?
Taking a cue from Basant, investors who do not want to mess around with individual stocks can consider investing in the ‘Reliance Bank BEES‘, an ETF (Exchange Traded Fund) which is listed on the stock exchanges and can be traded like any other stock.
The top-ten holdings of the ETF are the following stocks:
|% of AUM
|Kotak Mahindra Bank
|State Bank of India
|Bank of Baroda
|IDFC First Bank
|Punjab National Bank
As one can see, the ETF has a concentration of private bank stocks which will save us from the vagaries of PSU Bank stocks.
The ETF has posted an impressive return of 42% over 24 months and 25% over 12 months.