Friday, July 25, 2008


In the present market scenario, with volatility being the order of the day, I believe investors should stick to safe stocks with solid managements behind them. Even though some sectors have been beaten badly, investors would do well to not look at how much a stock has fallen from its highs, to base their investment decisions on.

It is important to differentiate between stocks and sectors where the losses are justified because something is basically wrong with their business models and those where the present drubbing is due to some temporary factors which are likely to ease out with time. Fundamentally sound stocks offer an incredible opportunity to buy at bargain basement levels and simply wait for fundamentals to reassert themselves.

In my opinion, there are enough indications for the real estate sector to be de rated by the markets. The main reason of course being that, the valuations of these stocks were NAV based. The NAV being the value of the land holdings of the company translated into potential for development. Since the companies decided their own NAV’s, this factor was open to various interpretations. Now with real estate prices crashing, the NAV has come down, though the extent of the fall is debatable. Again deals are not happening on the ground. Some sale is made at an inflated price and this is used as a benchmark to justify valuations of similar properties. The fact that the deal holds only a notional value is conveniently ignored.

Since most of the real estate companies listed on the stock exchanges are recent entrants, there are no parameters to judge their track records. In the absence of historical data by which to evaluate them, such stocks pose a significant risk on the downside. Though their prices may look extremely attractive when compared with the highs achieved by them, investors would do well to remember that a lot of tech companies fell to 10 % of their top valuations following the 2000 dot com bust.

A marked contrast are the PSU banks, many of them having decades of history and giving great dividend yields, now available for less than book value. I believe the reasons for the drubbing they have received are temporary in nature, as discussed in a detailed previous post on PSU bank stocks here.

Investors in this market need to have the conviction in the stocks they own, so as to ensure that they do not panic in case of a sudden fall. Hence they would do well to invest in businesses which have stood the test of time and which can be valued using simple and conventional methods.

1 comment:


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