It’s often said you don’t get good markets and good buying opportunity at the same time. Remember 2009, 2011-2013, all these were bad years for the market, but great years for stock picking. We believe the same will hold true for 2018-19 as well.
Stocks have seen decent correction in the last 7-8 months. Previously only the small and mid caps were taking the beating; it’s good that even large caps have started correcting now.
Small cap index is already down 30% and the mid cap index is down 20-25% and therefore in our view and looking at the past instances, the downside (if at all) might be limited at another 10-20%. Barring 2008 (the markets were extremely crazy then) when the small cap index corrected by more than 70%, most of the corrections have been of the order of 20-50%.
For investors who were investing in 2016-17 and 2017-18 and who have stopped investing now, we believe you can’t make a bigger mistake. Remember, it’s the very nature of the markets to rise and fall. There have been such falls in the past and will happen in the future as well and every time the markets have recovered and gone on to record new highs.
And the investors who invest aggressively during such downturns make the most of the money in the longer run. In fact, we are much more comfortable with the current market environment than we were in 2017 or in the beginning of 2018.
In line with the above strategy, we have been asking our members to continue investing in positively rated stocks in phases because the pain will not last forever.
We have also released our new recommendation for all our premium members and the details are as below:
Increasing promoter holding – In the last few years the promoters have increased their holding in the company by more than 5%. This is despite them already holding a large chunk in the company. We like companies where the owner’s interests are aligned with the shareholders and when the owner himself increased the stake we like it more.
Backward and forward integration – Since some time now the company has been working on both backward and forward integrations. The company has started manufacturing key starting raw materials and also the end products and we believe the same will be margin accretive in the longer run.
Capacity expansions without much strain on balance sheet – In the last 4 years the company has expanded its capacities by more than 75% and that too without any major strain on balance sheet and equity dilution.
In fact for the same period the debt equity ratio of the company declined from 1.5 to around 1.2.
Shutdown in China – In the last few months and quarters there has been a major shutdown in China in the product category the company operates in. We believe our new recommendation could be a beneficiary of the same on account of both higher demand and higher prices.
Reasonable valuations – The good thing about market corrections is that valuations become reasonable during such times and the same has happened with our recent recommendation. The stock is now trading in the lower zone of the valuations it has traded in the last 4-5 years.
Overall, in our view, with expanded capacities in place, improvement in utilization rates, higher end product prices and new launches, the company is likely to sustain high growth in sales and profitability for the next few years.
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