It seemed that markets were hell bent on proving me wrong. 🙂
And if you include dividends, it touches almost 29%. And this is against Nifty’s return of 15.8%. And here we are talking about big, country-wide banks and not small cap stocks.
|Note – Returns based on prices upto 14th-May-2014|
But before you put your money in PSU banks, please remember that on the business front, almost nothing has changed for these banks. Its only because of the so-called-hope, that these stocks have charged ahead. But having said that, prices these shares were trading sometime back were ridiculously low compared to historical valuations. And because expectation from this portfolio is to give better returns than index in next 5 years, this current out-performance should be taken as an exception and not as a rule.
But there are two simple yet important observations which I would like to highlight here:
- Sometime in January 2014, concerns about asset quality were getting a lot of media attention & hence stocks of these banks reached almost absurd levels of undervaluation. But when the markets turned euphoric due to elections, it was the group of larger banks (SBI, BOB, PNB, etc) that bounced higher than smaller ones (Syndicate, Allahabad, Andhra, etc). This came as a surprise as I expected smaller ones to be more volatile and prone to movement due to market noises (even though asset quality of these smaller ones pose a bigger question than that of larger ones.)
- Another interesting fact is that this Portfolio of government owned PSU banks is quite a volatile one. And as you can see in table below, quarter-on-quarter portfolio returns have fluctuated from -14% to +47% over the last 6 months. And that is a very high level of volatility. So, those who have difficulty sleeping at night due to stock markets, please avoid this group of stocks 🙂
|A screenshot from previous post dated 15-Feb-2014|
|Detailed PSU Banks Tracker Portfolio – Quarter 1 Update|
|Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)|
After witnessing substantial falls in good, stable stocks like Bharti & SBI (Almost 10% in 2 days), it occurred to me that what would happen if suddenly, the markets decide to correct? My first reaction was that I would start picking up good stocks.
But what actually happens is that when the markets fall, a large number of stocks start appearing on the buying screen. And because one is spoilt of choices, it becomes very difficult to choose among so many good stocks available at cheap prices. I faced a similar situation in early 2008 when all indices and stocks were falling like there was no tomorrow. But I was lucky to make some money during that period.
So how to be prepared for such falls?
The answer is to have a Stock Watchlist.
It is always wise to be ready to grab an opportunity rather than allowing opportunity to take us by surprise. A watchlist helps in this case. How? Once you create a watch list of great companies, you can monitor these companies. As share prices fall, sooner or later they will become good investments too (in addition to good companies).
Though we do follow a number of stocks mentioned in our Stocks We Stalk section, below is a list of stock which we would be delighted to buy in case market corrects and these stocks are available at lower prices –
|Stocks to buy during market corrections|
So now we know which stocks we want to buy in case markets correct. So what should we do now? Pray for a major correction, what else? 🙂
- These 5 stocks are selected on basis of our (not your) risk appetite.
- These stocks have been selected for long term (10+ years) and not for trading on daily or even monthly basis.
- We do not expect these to be multibaggers. Though we would love them if they become one.
- Selecting these 5 stocks in core does not rule out any further addition to core in future.
- These stocks do not disturb our sleep at night.
- We may or may not be comfortable with stocks current price.
- We are comfortable and very happy with present dividend policy and consistency of these 5 stocks.
In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.
|Click to enlarge|
- Out of 50 Nifty stocks, we have selected 20 stocks. Basis of selection is our preference for companies which can called as stable stocks and which won’t be in any trouble in case the markets decide to close for next 10 years.
- Before we move further, please make sure that you understand what exactly is a PEG Ratio?
- We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
- For each company, we have calculated 3 PEG Ratios –
- Using latest EPS Growth Rates (2010-2011)
- Using Average of all EPS growth rates in last 5 years
- Using least positive EPS growth rates in last 5 years
- Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
- Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
- For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
- But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
- A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
- Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.