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What would I buy in 2008?

2008 is here and have I changed my bearish stance? To a certain extent I have. I still think there is value in there worth buying but to be honest there is just too much happening that is scary as well. But before I outline those, here are my choices for the year:

Canara Bank

Which the bank has run up a bit recently (I bought at 330 on Monday, and it’s at 400 today!) the new face and logo of the bank is likely to bring on better customer recall. With over 2500 branches, the bank has a greater reach than HDFC and ICICI bank combined (They have around 1000 branches each) and the EPS last year was around 34. The bank is growing at 15-20% on EPS, but the new look and technology approach should help it grow faster, to an EPS of about 40 by March 08. It’s also gaining on momentum, and to me technicals are quite important, as they show investor sentiment on the stock.

Ranbaxy, DRL

These guys need to be re-rated, and should show strong earnings growth. The dollar is a bummer, though.

Reliance Industries

Regardless of its recent runup, the stock looks poised to benefit from RPL starting activity, the retail chain starting to show traction, the Vimal re-launch, Exploration and discovery and from the gas pipelines finally flowing. I think this stock still has a long way to go, though you may see some kind of correction relative to the whole market in between.

Why no more?

There are more value plays perhaps but I don’t want to know about them. This is still a momentum market, and the signs from the US are not at all good. With oil rising to $100 per barrel, life will get quite difficult on all players, and inflation will raise its head soon.

Secondly our market is overheated. At a 25 P/E we are pushing the envelope. To tell you NOT to invest would be stupid, and I now believe the market has a while to go before we come crashing down. It looks like a 21,000 on the Sensex or a 6,500 on the Nifty will still not faze investors, and I would not be surprised if we surpass that.

Liquidity is another issue – with trusts getting the equity go-ahead, pension funds allowed to invest in the markets, and all sorts of liquidity easing happening, we may be in for a wild ride. But it’s still not a good time to invest for the long term. The short term, yes. I have money in there that’ll get out as soon as we see a reversal, purely because I don’t trust the market.

If you want to take advantage, buy indices instead – the Nifty Midcap 50, or the Junior BeEs. And get out when there is a trend reversal!

Disclosure: I own the above stocks.

  • Nikhil Kulkarni says:

    >Wanted to know what you think of DHL – ‘coz have heard they will be going for another IPO in mid-2008

  • சாமான்யன் Siva(stocksiva.blogspot.com) says:

    >Useful.Thanks.

  • Anonymous says:

    >Deepak,

    What are you comments on Reliance Energy / Reliance Power ?

    REL – Reliance Energy Limited
    REPL – Reliance Power Limited

    One does not what what the promoters are upto, with the power projects from REL being transferred to REPL at no cost. Fundametals apart, there is some possibly funny math.

    REL will hold 5,080,000,000 of REPL shares post-issue. REL comprises of 228,533,275 shares. Therefore, each REL share indirectly holds 22.22 REPL shares. (Info culled from prospectus / last filing. The multiplier could be a bit off since REL has since issued a few shares.)

    The price of an REL share should hence be 22.22 x REPL share price + value of other operations.

    If the price of REPL is in the 400 range, REL should at least be 22 times 400 = 8800. REL closed today around 2500. If the Grey Market Premium for REPL is considered, there is a bigger number for REL.

    For instance consider the discussion in http://www.moneycontrol.com/india/news/ashwani-gujral/concentratesectors-like-banks-real-estate-gujral/11/25/319538


    Q: Reliance Energy is closing in on Rs 2,500 now. What kind of targets would you put on that stock?

    A: Well it is now getting into that zone where it’s doing 6% on a daily basis. Such sort of parabolic moves, when they start moving it is probably the last phase.

    Theoretically, the target is Rs 2,700-2,750. But clearly before the IPO it could show you crazy prices. But above Rs 2,700 people need to start booking out, because once the event is over one should be clear that some of the fancy will come off.

    What am I missing ?

    A quote from
    http://www.chicagogsb.edu/capideas/win02/market.html


    The most prominent example of mispricing in this study is the case of Palm and 3Com. Palm, which makes hand-held computers, was owned by 3Com, a profitable company selling computer network systems and services. On March 2, 2000, 3Com sold 5 percent of its stake in Palm to the public through an IPO for Palm. Pending IRS approval, 3Com planned to spin off its remaining shares of Palm to 3Com’s shareholders before the end of the year. 3Com shareholders would receive about 1.5 shares of Palm for every share of 3Com that they owned, thus the price of 3Com should have been 1.5 times that of Palm. Investors could therefore buy shares of Palm directly or by buying shares embedded within shares of 3Com. Given 3Com’s other profitable business assets, it was expected that 3Com’s price would also be well above 1.5 times that of Palm.

    The day before the Palm IPO, the price of 3Com closed at $104.13 per share. After the first day of trading, Palm closed at $95.06 per share, implying that the price of 3Com should have jumped to at least $145. Instead, 3Com fell to $81.81.

    The day after the IPO, the mispricing of Palm was noted by the Wall Street Journal and the New York Times. The nature of the mispricing was easy to see, yet it persisted for months.

    Is it mispricing in the case of REL / REPL or something else ?

    – AC

  • paddy says:

    >I liked your analysis on how you would invest. I also like your choices Canara bank and RIL. I am not sure whether Pharma will go up this year. I have a different propositions. Will not a holding company such as Tata Investment corporation (ideal) or Nalwa be a good choice. natural discount to NAV that is available may be able to protect against rought tides. Pl. let me know your opinion.
    thanks
    Venu

  • Deepak Shenoy says:

    >Nikhil: DHL will be interesting as logistics companies have gotten a large amount of investor interest. Have to see what’s on offer.

    Anon: REL/REPL, don’t bank on mispricing. Holding companies have traditionally been valued at 20-50% of their holding primarily because the holding is not liquid. For instance if REL wanted to sell it’s holding in REPL the price of REPL would drop 50% or even 80%!

    paddy: see above argument for holding cos…nav discount is normal and to be expected…

  • kalind says:

    >Hi,
    I have a portfolio comprising shares which were bought between 2-3 decades back and present. The current market cap is around 30 lakhs. Should I hold onto them or sell them? I have everything in physical form. Which demat services and online trading services would you recommend?
    Thanks in advance.
    Regards,
    Kalind

  • Anonymous says:

    >Hi deepak just wondering if it would be possible for you to do a more detailed antlysis of canara bank? It looks interesting and there’s quite a lot of talk around about how to evaluate banks. Would love to see you take on bank evaluations with regard to Canara. Also look forward to your take on the reliance power IPO. And would really like to know if you’ve taken a look at the future group IPO that’s coming up. Do let me know. Thanks.
    Mark

  • kram says:

    >Folks:
    2008 will be the year that all ‘new’ investors – defined as those who have NOT participated in the last crash of 2000-2002 – will suddenly be faced with reality (a negative growth and losses with no end in sight for a few years going forward). Many will leave the market never to return (like in the past).

    Kalind, with a portfolio dating 2-3 decades back, you should be telling us what to do rather than asking for suggestions!!! 🙂

    But this is a golden opportunity to weed out the dead stock in your portfolio and convert to cash. Do it as soon as you can.

    Coming to where to invest in 2008, a majority of your investment decisions for this year should revolve around Gold and Silver. You can do ETFs, Gold Mining Stock Funds or even physical Gold and Silver – even at this ‘high’ rates.
    As far as stocks go, you will probably be better off playing the F&O segment in a minor way with good advice rather than buying particular stocks. Stick with cash, Fixed Income securities and Bullion and you will actually make money.

    While prediction is a fools game, as ALL analysts have predicted between 22500 and 30000, I expect the Sensex to touch between 15000 and 17000 this year as the US gets increasingly desperate towards the fag-end of the year (post-election).

    Within the next 3-5 years we may see 8000 – 12000 in the index. Going out on a limb on this one.

    cheers

  • Surya says:

    Shows how useless it is to predict the stocks markets.
    Atleast you got your stance right 🙂