Rakesh Jhunjhunwala has been itching to buy something for a long time. On the one hand, the stock prices of top quality companies have plunged and are looking attractive. On the other hand, the possibility of a further downfall in stock prices cannot be ruled out.
In such circumstances, traditional wisdom is that you should gently dip your toes into the pool to test the waters and not plunge in.
Rakesh Jhunjhunwala has done that in his latest stock pick of Escorts Ltd. On Wednesday, 14th August 2013, Rakesh Jhunjhunwala quietly walked up to the Escorts counter and placed an order for 6.21 lakh shares.
In an otherwise dismal day of trading, Rakesh Jhunjhunwala’s action brought cheer to the investors and Escorts’ stock price surged 20 per cent to Rs. 88.
Escorts, a manufacturer of tractors, is one of the stocks that has been badly affected by the slowdown in the auto industry. It had plunged to a low of Rs. 48 on 25th March 2013. However, after that it staged a smart recovery.
Escorts reported good standalone results in the quarter ended June 2013. The sales turnover of Rs 1,175.93 crore and net profit of Rs 58.30 crore for the quarter ended June 13 compared favourably with the sales turnover of Rs 862.36 crore and net profit of Rs 26.89 crore for the quarter ended June 2012.
One stock picker who deserves to be complimented is Rajen Shah of Angel Broking who had homed in on the stock in April 2013, when it was trading between Rs. 48 & Rs. 54. Rajen Shah pointed out that though Escorts’ profit had gone up 100 per cent in the first quarter ended December 2012 despite stagnant growth, the stock price had plunged to Rs 54. He emphasized that there was a lot of irrationality in the market which was giving a golden opportunity to investors. Rajen Shah theorized that as Escorts has sold the same number of tractors in the January-March quarter as it had in the same quarter last year, a good jump in profits is expected and its reported earnings per share will be about Rs 7. He also pointed out that the stock of Rs 54 was about 7.5-8 times the earnings and “it is too cheap“. “You just need to buy and may be over the next two years probably you could be sitting at 100 per cent gains“, he said with a sparkle in his eyes.
Well, Rajen Shah was perfectly correctly in his analysis. At the CMP of Rs. 88, investors who heeded his advice would have taken home absolute gains of 63% and annualized gains of 188%.
Anyway, the bottom line is that investors need to come out of their burrows and start looking at bargains to buy into.