I can tell you from personal experience that being a contrarian is the most difficult thing to do. As it is, we suffer from a lack of conviction and confidence when we buy a stock. On top of it, if it is a stock that nobody wants, then we are obviously very reluctant to put our hard-earned money into the stock.
To understand why we behave this way, we have to turn to Parag Parikh, the veteran value investor, who is also an authority on “behavioral finance”.
Parag Parikh points out that investors flock to stocks that everyone else is buying and shun stocks that nobody wants because they instinctively believe that a stock that everyone is buying must be “less risky” than the one that nobody is interested in it.
Parag Parikh’s inverse logic is that if we buy stocks that nobody wants, at throwaway valuations, we stand to make bumper profits when the tide turns (provided the fundamentals of the stock are good).
If we apply Parag Parikh’s wisdom under Daljeet Kohli’s benign and guiding eye, we may be able to muster the courage to buy Jindal Steel & Power Ltd.
In his latest report, Daljeet explains that Jindal Steel and Power is most adversely affected by the Supreme Court’s verdict as it has 6 coal blocks for its sponge iron plants and 1000 MW power plant. The Supreme Court’s ruling not only creates uncertainty on profitability from existing operational coal blocks (Gare Palma IV/I /2/3) but also on the profitability of the US$2.6bn investment in the Angul Steel & Power project as the associated Utkal B1 block is unlikely to be allocated now.
To tackle the grim situation, Daljeet and Abhishek Jain have prepared a “scenario analysis” where they have considered all the possible outcomes and what its impact will be for JSPL.
Obviously, Daljeet and Abhishek have been conservative in their assumptions. At the end of the “Worst-case Scenario” analysis, the duo have concluded that the Utkal B1 block is unlikely to be allocated now to the Angul steel project. However, they feel that the chance for cancellation of Gare Palma blocks is minimal. The result is that “all negatives are priced in” and the stock can be bought for a target price of Rs. 301, the duo say with a note of confidence in their voice.
Given that the CMP is Rs. 213, there is a potential upside of 41% waiting for you, if you dare to be a contrarian!