Bull market leaders create fortune, Why there is a strong case for old economy stocks to be upcoming bull market leaders?

April 19, 2020

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Strategic Alpha

Dear Followers,

No matter how much one does research about the stocks, one cannot make money in stocks unless the stock performs. Reliance was range-bound for almost 9 years, many people were in confusion company is showing consistent profits why the stock is not rising. the answer is very simple, reliance on industries stock was out of favor. No matter how much stock-specific research a person does there is no guarantee that stock prices will surge for a consistent profit maker.

Let us now dive deep into various fortune creation phases, I have divided fortune creation phases into three different periods from 1995-2020. Why I am saying fortune creating phase and not wealth creation phase, because, as I am a full-time investor it becomes important for me to create higher returns than mutual funds because then I am not justifying the job of being a full-time investor.

Let us go forward with all those phases

FIRST PHASE OF FORTUNE CREATION(1995-2002)

 

INFOSYS Rs 1 stock in 1995(Adjusted for splits and bonuses) and 200 Rs in the year 2000, a staggering 200X.
    INFY 1995-2000

     Infosys was the first big move for celebrity investor Ramesh Damani in 1993 was when Infosys went public. Having briefly worked as a coder in the US, he knew Infosys would benefit from huge labor arbitrage. He invested Rs 10 lakh in both Infosys and CMC. By 1999, his investment had grown a hundredfold. In classic Warren Buffet and Charlie Munger’s style, he’d experienced the advantage of hanging on to a good business.

 Britannia was Trading at 10-15 Rs in 1995 by 1999-2000 it was trading at 100-120 Rs, A impressive 10X in 5 years.BRITANIA 1995-2000

ITC became 6X in 5 Years from 1995 to 1999ITC 1995-2000

WIPRO became a 200 bagger from 1995 to 2000 WIPRO 1995-2000

Dr. Reddy’s became a 10 bagger from 1995 to 2000DR REDDYS 1995-2000

 

REVERSE MULTIBBAGERS OF 1995-2002 PERIOD

Somebody how had found value in above stocks in 1995 period has created Hugh wealth for themselves, However at the same point of time, if somebody had bet on these below businesses, they have eroded their wealth by 50-90%,

SAIL was trading at 55 Rs in 1995 and by the year 2002 it was trading at 4.25 Rs, almost lost 90%SAIL 1995-2002

Tata Steel was trading at 170 rs in 1994 and by 200-2001, it was trading at 30-40, losing 60%+ of the value.TATA STEEL 1995-2002

BHEL was trading at 10-15 Rs in 1995 and by the year 2002 again it was trading at the same price, so 0% capital appreciationBHEL 1995-2002

Vedanta was trading at 12=13 rs in 1995 and by the year 2000-2001 it was trading at 1-2 Rs, losing 90% of the value

VEDANTA 1995-2002

Larsen and Tubro were trading at 40-45 Rs in 1996 and again it was trading at t same price in 2002.LARSEN 1995-2002

Conclusion:-
During the 1995-2002 period, it was a time of IT, Pharma, and FMCG Companies, and those who invested in these sector stocks created fortune for themselves. There were businesses like l&T which was a consistent profit maker or BHEL still the stock was trading in the same range. So old economy stocks like BHEL, L&T, SAIL, Tata Steel, Vedanta were out of favor during those times.

 

 

2ND PHASE OF FORTUNE CREATION( 2002 to 2008)

SAIL 2002-2007

Larsen was trading at 40 rs in 2002 and by the year 2008 it became 25X in just 6 years

LARSEN 2002-2008

Vedanta was trading around 1.20 to 1.80 in 2002 and by 2008 it was trading at 220, it almost did 150X in 6 years

VEDANTA 2002-2008

Tata Steel was trading at 70Rs in 2002 and by 2008 it was trading at 850 Rs, a staggering 11X.

TATA STEEL 2002- 2008

Unitech, again an old-economy stock was trading at 0.50 paisa in 2002 and by the year 2008 it was trading at 530 Rs, 1000X in 6 Years

     Dolly Khanna was looking to buy a flat in Delhi in 2003-2004 and stumbled upon Unitech, a realty company. Amazed by their luxurious office, Khanna decided to investigate the company. He found out that Unitech was available at a valuation of Rs 100 crore and Citibank and other FIIs held big stakes in it. Impressed by the business, he invested Rs 5-7 lakh into the stock and decided to forget about it. In 2008, as the realty boom came, his petty investment of 5 Lakh turned into 25 Crores.

UNITECH 2002-2008

REVERSE MULTIBBAGERS OF 2002-2008 PERIOD

Somebody who had found value in the above stocks in the 2002-2008 period has created huge wealth for themselves, However at the same point of time, if somebody had bet on these below businesses, they have eroded their wealth by 50-90% or some stocks below became value traps for them.

 

INFOSYS STOCK PERFORMANCE CHART 2000 TO 2007

     INFY was trading at 200 Rs in 2000, if somebody had bought just looking at past performance, by 2002 it was trading at 35-40 Rs and by 2006-7 again trading at 200-220 Rs. So even though Infosys showed a consistent profit from 2002 to 2008 period stock did not create any wealth for shareholders. It took 5 years to return to the earlier highs.

INFY 2000-2007

DR REDDY’S STOCK PRICE PERFORMANCE FROM 2002-2008

Dr. Reddy’s  became a trap stock from 2002-2008, though its profits grew consistently during that period stock was trading between 2002 to 2008

DR REDDYS 2001-2008

 

HIND UNILEVER STOCK PERFORMANCE 2000-2010

If somebody had bought Hindustan Unilever thinking that consumption theme is here to stay in India, for them hind Unilever proved to be a value trap. Now, why does it happens, even though this company reported consistent profit growth stock languished from 2000 to 2009. It’s because sector/stock was out of favor. Mean reversion is imminent. A period of outperformance will be led by a long period of underperformance. The stock was trading at 300 rs in 200 and by the year 2010, it was again trading at 300 Rs.

HINDUNI 2000-2010

THIRD PHASE OF FORTUNE CREATION ( 2008-2018)

 

DR REDDY’S PRICE PERFORMANCE FROM 2008-2018

Dr. Reddy’s Share Price went up 10X in Just 6 years from 2008-2018

DR REDDYS 2008-2015

 

 

AJANTA PHARMA STOCK PRICE PERFORMANCE 2008 TO 2015

Ajanta Pharma Went Up 80X in 8 Years from 2008 to 2016, it was trading in the same range from 2002-2008. SO Period of underperformance followed by a period of outperformance. along with just outperformance, Ajanta pharma’s business performance got a big boost which brought PE Expansion led by EPS Blast.

AJANTA PHARMA 2008-2016

 

BAJAJ FINANCE STOCK PRICE FROM 2008 TO 2020

Bajaj Finance underperformed from 2005 to 2010 its share price was trading in range 35 to 5 Rs in 2008 and again to 36 in 2010. It went up to 4900 rs recently in 2020, a staggering 900X in 12 Years. Here again, it proves a long period of underperformance leads to outperformance. Of course such outperformance is also led by market share gains in the consumer lending business. But if one can find such a story during panic like now one can create a fortune for themselves.

BAJAJ FINANCE 2008-2020

 

REVERSE MULTIBAGGERS OR VALUE TRAPS 2008 TO 2020

AJANTA PHARMA STOCK PERFORMANCE FROM 2014 TO 2020

However same Ajanta pharma if somebody had bought in 2014 just looking at past performance from 2008 to 2014, the share price of Ajanta pharma is trading in the same range, even after it has shown good growth in profits from 2014 to 2020. Its Profits have grown from 234 Cr in 2014 to 469Cr in 2018.

AJANTA PHARMA 2014-2020

 

DLF lost 90% of its value from 2008 to 2020

DLF 2008-2020

 

SAIL lost 90% of the value from 2008 to 2020

SAIL 2008-2020

 

Tata Steel was trading at 9000 Rs in 2008 and now in 2020 it’s trading at 288 Rs

TATA STEEL 2010-2020

LEARNINGS

  • 8-10 years of sectorial underperformance bring 4-6 Years of outperformance and selective stocks If picked right with great delta In profits can create a fortune for Investors.
  • For Eg- 2002- 2008 entire pharma sector was out of favor despite pharma companies continued to show earnings growth. But Pharma companies started coming in favor in 2008 and by 2015 selective stocks like Ajanta Pharma became 80X which was trading at a ridiculously low valuation in 2007-8.
  • No matter how continuous profit a company generates if the sector is out of favor then one cannot make fortune creating profits. Only betting blindly in the long term is very difficult because people don’t have unlimited patience. So finding a patch of 5-6 years of the supernormal period can be extremely rewarding.

 

WHY OLD ECONOMY STOCKS WILL BE LEADERS IN NEXT BULL MARKET

For old economy businesses 2002-2008 was a flourishing period and brought a lot of over capacities in the sector which was haunting the sector from the past 10 years from 2008-2018, however after consolidation in the sector, after bankruptcy code, sector is poised for next leg of profitable growth. I believe 2020 to 2026 will be a golden period for old economy businesses like Cement, Infra, Steel, etc.

Indian banking sector just came out of NPA Cycle. It cannot afford to go again into NPA by lending to steel, cement, power, and infra, companies in these sectors will be facing credit crunch thus disrupting supply and making the scenario of tight supply VS improved demand. Companies that are sitting at underutilized capacities now and no new CAPEX will drain their cash will make the most in the next  5-6 year period. There will be a rich pricing scenario over medium-term 3-5 years. So there is a strong case for commodity companies.

BLOOMBERG COMMODITY INDEX ALSO POINTING THE SAME

Bloomberg Commodity Index Trading at 30 years Low, Many Commodities are trading below the cost of production which is unsustainable, Such pessimism was last seen during 1998 and It gave birth to the mega bull run in commodities from 2001 to 2008.

BCOM 30 YR LOW

COMMODITY CYCLE TO TURN POSITIVE

comodity cycle to turn

CONCLUSION AND MY TAKE

No matter how the company performs, if the sector is out of favor one cannot make money from the stocks. A long period of outperformance is led by a long period of underperformance and vice versa, mean reversion is imminent.

For Eg- FMCG Stocks like Nestle Trading at 85 times earnings, Hindunilever trading at 75 times earnings have already priced in future 5-year growth. The sector has already outperformed in the past 10 years, the same happened with these stocks from in 2002 period. They were trading at hefty valuations and from 2002-2008 it underperformed. In the next 5-6 years, these will underperform even though companies post a consistent rise in profits.

Old Economy businesses had a tough time from 2008-2018, however after bankruptcy code entire sector gone through consolidation, we have not seen many new steel plants, cement plants coming in the past 10 years, consolidation has already happened as Tata steel bought Bhushan steel,  Arcelor Mittal bought Essar steel, etc. After a period of consolidation of 10 years, old economy businesses are poised for profitable growth.

Bloomberg commodity index is trading at 30 year low, prices of many commodities are trading below cost of production which is not sustainable for long, we have seen the past, whenever such things have happened like in 1998 there is a sharp increase in prices, after every crash, there is a rise mean reversion is imminent.

What to Buy?
Yes, it is highly probable that the next bull market will be lead by old economy businesses, but out to play out this thesis?

As commodity player companies are price takers and not price makers. So to be best safeguarded it is good to buy Debt Free, Cash Rich, Lowest Cost Manufacturers, Market Leaders having big entry barriers, Companies having the logistical advantage, Companies having great raw material securities. When you buy the most efficient player in their bad times, these will be survivors of the bad phase because of its cash position and lowest-cost manufacturing abilities, these will be the last man standing during the crisis period and these businesses will be the first businesses to thrive during a good time. With many other competitors going bankrupt during such an event of COVID-19 these players will emerge strong when the storm settles down. Many companies in this sector are trading at 10% to 25% of the replacement cost. So when the sector will enter into commodity upcycle and business up-cycles there will be many stocks giving 10-20 bagger returns

         

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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