Thursday, 21 June 2012

Kingmaker Stocks

Careful investment in stocks can be really rewarding. Learn to invest in the proper way and in the proper company at the right time and you can have handsome gains. Let’s take the consumer goods sector to illustrate this further.

Everybody knows that consumer is king.
Well, we would like to extend the adage by saying that Consumer Goods Stocks are Kingmakers. Fast Moving Consumer Goods (FMCG) companies, as the name implies, are in the sector catering to the consumer’s daily requirements. These companies can be in any segment like personal care, oral care, food processing etc. Some companies which operate in FMCG are Nestle, HUL etc. Other companies like , kitchen appliances, watches, paints etc are consumer-durable stocks.   Asian Paints, TTK Prestige, Titan, etc. are such stocks to name only a few.

By the very nature of their business, these companies have potentially a large market base which will only grow in the coming years in the consumer-driven economy as these are all product-oriented businesses. Any good company in this sector will normally trade with a high-premium (our yardstick for growth stock). It does not mean that these stocks are expensive or that the investor should stay away from them. It only means that the market believes in their ability to maintain their growth momentum with growing business and give good return on equity  in the long run.

Just to give an example ITC presently trades at a market price which is 28 times its earnings. HUL which has a wide range of products in the consumer durables and daily use sectors has a market price which is close to 35 times its earnings. Another example is Asian paints, which is the undisputed leader in decorative paints business, enjoys a market price 40 times its earnings.

But these look expensive ?

These figures don’t mean they are expensive in the long run. They only go to show the market sentiment towards these companies. It only means that the investors believe that they will grow even more in the future. Whenever there is a price correction on these stocks with a correction in the market, a new entrant will have a great opportunity to invest in these stocks and enjoy regular dividends. Investment in stocks of these companies at the right time and for long duration will be very rewarding.

A good company maintaining EBITDA margin with good growth in sales always gives the investor a chance of future price appreciation with their growth trajectory. Companies having very good market penetration or those which intend to have more market penetration in the future always justify investing in them. They constantly tend to expand their core businesses or add a new segment to their existing portfolio of businesses. Investing in them for the long term is thus justified despite the high premium prices. Also, well known consumer growth stocks always carry downward risk as compared to value stocks in same segment. This is because  high valuation often gives chance to the investor to enter when correction happens, i.e. buy on a decent deep.

Some of the points to be considered when looking investments in such stocks are:

  • undisputed leadership,
  • predictable business growth,
  • regular dividend ,
  • increasing dividend payout/yield etc.

Consumer driven stocks like paints, domestic appliances etc. tend to give more returns than benchmark index and are less volatile comparatively. They are normally considered as forever stocks. Forever stocks can be of any sector which fit these pointers.

The investor need not be intimidated by high prices of growth stocks. Instead it is well worth the investor’s time to try and understand the reason for such high premium prices. If it is grounded in well-rounded market fundamentals as opposed to empty hype, then it is justified to invest in such stocks. There is every reason to believe that these stocks will give good return on investment in the future.