In an earlier post ("Market Cycles and Sectors") on Dec 1, 2008 the sectors that receive prominence during different stages of the economic and stock market cycles were discussed.
Does that mean that you, as a small investor, should look at investing in all those sectors? Probably not.
Fund managers, who are under pressure to perform in the short term, have no alternative but to move in and out of sectors depending on the particular stage of the stock market. They also have access to company managements and better research resources and larger funds than small investors.
With considerably less funds and little or no research capabilities, small investors like you and me are better off choosing only a handful of sectors to invest in.
Some industries are in an environment that helps to create substantial competitive advantage. It is easier for the companies in such industries to make money.
Four sectors that I like - based on their competitive advantage and cash generation capabilities - are :-
1. FMCG: Strong brands built up over the years create huge competitive advantage. Companies tend to be solidly profitable, debt free and generate a ton of cash (which is distributed to investors through generous dividends). The market leaders have been around for many years, so they are slow but steady performers.
This sector is practically recession proof and should form a significant part of a small investor's core portfolio. Companies to look at are HUL, ITC, Colgate, Nestle, Brittania, Dabur, Marico.
2. Pharmaceuticals: Like FMCG, Pharma companies are recession proof, have strong brands, are hugely profitable and good dividend payers, and long term growth is assured because of the large population. MNC Pharma companies have access to better product pipeline from their overseas parents. Domestic Pharma companies profit from generics and contract research and manufacturing.
This sector should also receive pride of place in your portfolio. Companies to look at are Glaxo Pharma, Aventis, Sun Pharma, Lupin, Glenmark.
3. Financial Services: Banks pay less interest to depositors and lend the money at higher interests. For current account holders, banks pay nothing at all. Many make more money by selling other financial products to their customer base - such as insurance, demat accounts, credit cards, mutual funds, home loans. Home loan companies tend to be highly profitable with long term growth assured.
Companies to look at are State Bank of India, Bank of India, HDFC Bank, Axis Bank, HDFC, LIC Housing Finance, Sundaram Finance.
4. Media: Many companies have competitive advantage through regional language and regional market domination. This sector also tends to be recession proof.
The dynamics of the media business was covered in an earlier blog post on Sept. 8, 2008.
Are these the only sectors that an investor should look at? Obviously not. But this should be a good starting point in building a long term portfolio.
Future posts will cover other sectors and criteria for individual stock selection.
11 comments:
Hi Subhakar
I was reading your blog and was quite impressed with the recommendations that you have made. I am a conservative investor and more or less agree with the 'picks' you have made. Though you would agree that picking them at the right price could be a little bit challenging.
Thanks Rohit. You have probably realised from my recommendations (they are not really 'picks' because they are all well-known stocks) that I'm also a conservative investor.
The Sensex appears to be in a sideways consolidation range between 7700 and 11000. While all the recommended stocks are currently available at reasonable prices, you may be able to enter at better rates once the Sensex retraces to the lower level of the range.
You can also try to 'Rupee-cost-average' by systematically investing every 10-15 days while the Sensex stays within the range.
being a dividend investor, I love FMCG too. I would tend to think, all conservative investor would like FMCG.
Thanks, TIP Guy.
Guess dividend income is considered old fashioned investing. Most young investors find FMCG unexciting and lose money in their quest for the mythical 20 baggers and 100 baggers.
Unexciting?
If they calculate that IF invested at the right levels (say Circa 2004 - I do not know markets before that), FMCG would be akin to a FD, only that dividends and any profits you skimmed off would be tax free. Likewise for Pharma, especially for unexciting stocks like Glaxo, which like an elephant moves 100 bucks either way in five years. But, a Glenmark would have provided multi-bagger returns.
I think these sectors have more to do with err...what's that bad word? "Preservation of Capital"? ;-)
Hi Eswar
Good to hear from you. If one had entered the market like I did - fairly clueless and investing willy-nilly into whatever was the flavour of the month - the outcome would be obvious. Lot of hard-earned money down the drain.
Preservation of capital is of the utmost importance. Retaining wealth is much more difficult than making it. Some are lucky to own a few multibaggers. Very few retain their profits.
To me sustainability of returns is more important. Multi-bagger will automatically come with it. If interested check out this link
http://www.theincomeportfolio.com/2009/03/measuring-progress-yield-on-cost/
is this multi bagger or sustainability ?
Hi,
Nice post. As Ben Graham says in the intelligent investor "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative".
The sectors highlighted by the post are defensives as some would call it. I do agree on the broader points but would like to dispute on certain companies like HUL. Simply because the higher ROE has come about by not higher earnings, but by stock buybacks. Nothing wrong in it per se, but it does not result in an needed "adequate return on the investment". I think companies like ITC & Dabur have done that fairly well over the years. So they do fit the bill.
Venky
I think most, if not all of the fresh entrants are like that.
It does take time to realize (especially if one enters during a bull market, which I am sure 99% do :-)) that Warren Buffett's Rule #1 "Never Lose Money" is perhaps the most important rule in the stock market. It took me 2 years to comprehend it's meaning :-)
Besides I think conservative and patient investors are a rare breed.
Generally, I think most of the "investors" look for instant action. But, FMCG and Pharma stocks are mostly slow movers.
I honestly would love a stock which stays range bound for a year and a half and in the next three months - zooms. Gives ample time for addition and also review of few (at least a handful of) quarters' performance just to ensure that the basic reasons for picking the stock remains.
But, the "rest of the world" loves zip, zoom, crash, bang and bust and hence they remain "unexcited" :-)
You are obviously smarter than me, Eswar. It took me nearly 5 years to learn patience and defensive investing. (Now you know the secret of why my URL is what it is!)
A couple of cyclicals like Hindalco and Tisco can meet your investment criteria of meandering along for a long while and then spurting up fast.
Hi Venky
You have a point there about HUL. I have been invested in it for so long and have received such huge returns that I some times ignore that its performance hasn't been all too great in the recent past.
During Keki Dadiseth's time, HUL (then HLL) got into a lot of unrelated di'worse'ification. They have mostly extricated themselves from the mess.
It is still a good stock to own for the steady dividend income. Plus it saves one's portfolio during bear markets. So does ITC. Dabur is good too, but I don't track it.
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