Last Updated on Sep 7, 2022 by
This article is written by Dr Vikas V Gupta, CEO and Chief Investment Strategist at OmniScience Capital. He believes that “Chasing Alpha leads to Risks and Chasing Safety leads to Alpha”. Check out smallcases created by OmniScience Capital.
There are many “Fantasy stocks” or “Story stocks” which lure investors with their futuristic stories and how they are likely to grow. One class of these stocks have no profits and large losses. Another class of these stocks have good profits, but their valuations are at such a level that even if they perform as expected at heroic growth rates (20%-25%) for extremely long periods of time (read a couple of decades) without any problems in between—which is highly unlikely—they will still deliver somewhat below the Sensex and Nifty returns.
Consider a company with a PE of 80. Even if it grows at 20% for 20 yrs, it is priced such that the return to the investor, in the long run, at this price is 12%! (based on a DCF analysis with earnings fully retained with an ending multiple of 20.)
That is your typical fantasy stock. Don’t get lured by the 20% growth rates and strong moats and think that the price doesn’t matter. It matters. At this price, the short-to-mid-term returns might mirror the earnings growth of 20%, but the long-term returns are likely to be 12% or lower.
If there is any reduction in the growth rate and it actually compounds at 15% instead of 20%, you are going to earn around 7.5%! This is if you are a buy-and-hold investor. The reaction of the market would be a drop of nearly 60% in the price once this fact becomes known! In Scientific Investing we call these stocks, Capital Imploders.
A better way is following the Scientific Investing Style which focuses on “Enhance Safety, Enhance Growth, Enhance Returns”, in that sequence. This means to focus only on fundamentally robust stocks, meaning, eliminate Capital Destroyers and Eroders. Furthermore, eliminate the fantasy stocks, i.e., Capital Imploders. What is left is the Capital Multipliers investment universe. From these companies, one can pick companies with SuperNormal profitability, which arises due to persistent competitive advantages, and which are available at SuperNormal prices.
Let us look at some of the opportunities available today. However, do not consider this as financial advice and read the disclaimer properly. Before any investments, it is important to consider your investment objectives, risk profile and suitability of the product.
Table of Contents
HCL Technologies
This is one of the largest IT companies in India. HCL Tech company has been growing at nearly 17% CAGR over the last 10 years and is expected to continue growing at around 12-15% for the next couple of years and further accelerate in growth rates as Mode 2, which includes, Digital, AI, IoT, Cloud, Cyber Security, which contributes around 25% of the revenues, becomes a larger proportion. Currently, Mode 2 or Digital Revenues are growing at nearly 30%. It is available at a PE of 29. The Omni DX smallcase provides exposure to the Digital Transformation theme via Indian technology services companies and includes HCL Tech. Omni AI-Tech Global smallcase provides exposure to the Artificial Intelligence theme and includes HCL Tech, Indian technology companies and global technology giants, such as Apple, Microsoft etc.
IRCON International Ltd.
This is one of the premier companies tasked with the modernisation of Indian railways. It has grown at a 16-17% CAGR over the last 5 years. IRCON International Ltd. is working on the prestigious Bullet Train project and several other projects. This company is available at a PE of around 10 and an expected growth rate of 16%-17%. With an order book of ₹34,000 crores, it gives an earnings visibility of 5-7. To get exposure to IRCON and other similar companies from the huge capex plans of the Indian Railways’ National Rail Plan 2024 and 2030, one can consider the Omni Bullet Train thematic. This portfolio benefits from the 7 Bullet Train projects, 30+ metro projects, and several Regional Rapid Transportation Systems.
Larsen & Toubro
This is a deal hiding in plain sight of Mr Market. The premier Engineering and Infrastructure company has grown in double digits for the last 10 years. L&T is available at a PE ratio of 19-20. There is a great opportunity for growth from the huge infrastructure capex under the National Infrastructure Pipeline (NIP), the National Rail Plan, Atmanirbhar Bharat and Defence. Some would call it an IT company with nearly 50% of its market cap explained through its holding of 3 dynamic IT companies, i.e., L&T Infotech, LTTS and Mindtree. To get exposure to this company and the related themes, one could consider the Omni Bharat Defence, Omni Bullet Train or Omni Royals.
Power Finance Corp
An AAA-rated company, this is the largest NBFC in India providing exposure to the power sector growth, under NIP, and reforms. The company owns 52.63% of REC which is another large NBFC in the power sector. Power Finance Corp is significantly undervalued and sports a dividend yield of 7% and a PB ratio of 0.46. With an RoE of 15-20%, it can grow at double digits. Omni Super Dividend and Omni Power provide exposure to this stock and related themes.
Cochin Shipyard
A hidden smallcap gem, this defence company is the only company in India, and one of the few in the World, which can manufacture an Aircraft Carrier. Cochin Shipyard which currently targets 12%+ growth rates is implementing plans to target 6-8X the current revenues by 2030; this is a 20-25% growth rate. It is available at a PE of 8 and a dividend yield of 4%. Omni Bharat Defence and Omni Supertrons provide exposure to this company.
Of course, you could buy individual stocks discussed above if they suit your needs but remember to not allocate more than 4-5% in each stock and create a diversified, though focused, portfolio of 20-30 stocks.
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Disclaimer: This article is only for informational purposes and should not be construed as advice, suggestion or recommendation. Do you own research or consult a professional financial advisor before making an investment decision.
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