This week we covered the market snapshot, Why investing in high PE multiple companies works, Sector and company rotation, Interesting quarterly result insights and some curated reads. Happy reading!
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1. Market snapshot
Power/Utilities and Industrials gained the most last week i.e. up by 5% and 3.8%. In fact, not just last week, Power has been one of the best performing sectors in last 3 and 1 duration.
The only sector which lost last week was Pharma- down by 0.8% but it has generated good returns (57%) in last 3-year duration.
Last week, large-cap was up by 1.7% respectively. Large-cap has performed better than all the other categories in the last 3 years also.
2. Why investing in high PE multiple companies works for investors
Lately, everyone is buzzing about the bonanza of tech startups entering the markets. This whole discussion on valuations of tech startups started from Zomato’s listing.
Now the debates on Zomato have shifted to other new-age tech companies which have or are about to get listed. There are many talks on how companies like Nykaa have PE multiples of ~814x before listing and have reached ~1600x after listing. Sounds scary right? Here is the full list:
But does high PE multiple necessarily indicate wealth destruction?
Say Company A has a PE of 126x currently. This might scare away many value investors but does this necessarily mean there is no value? Let’s understand.
What if I tell, you can still earn 15% CAGR consistently for the next 15 years even with multiple derating? Assuming 100% of profits reinvested in the business itself with consistent ROE’s
So what really matters?
Sustainability and growth prospects!
At times investing in companies with high multiples like Google, Facebook or Amazon might still give decent/attractive returns if the company has the ability to sustain its revenue growth, margins and ROIC for a longer period of time and vice versa.
So rather than worrying about the multiple, one should be more concerned about the fundamental prospects of the company to generate attractive returns.
3. Sector and company rotation
“If invested in metals during 2011-2020 one would have not earned any returns but in the last 1 year it has been the best performing sector”
In the recent video by PMS Bazaar, Aniruddha Sarkar of Quest PMS has explained how to go about sector/company rotation. Here are the key pointers from the same:
- Each and every business/ sector goes through business cycles. This can be due to many reasons like a demand-supply mismatch, capital flows in the country or consumer sentiments.
- Many times market behaves differently from the economy because the market mostly detect and factors in ~6 months before we can a significant impact is visible on the economy.
- The best time to switch from one sector/company to another is when another sector shows signs of a turnaround after a bad phase of underperformance or there is much noise in the existing sector/company.
Exposure in a company can be increased when the current developments are avoided by everyone. As it happened in the Tata group when Chandrashekhar became chairman (ex-TCS CEO).
At the bottom, one might consider looking at Financials, consumer discretionary and cyclical. In the expansion phase at IT and basic materials (Metals) and during a bear market healthcare and utilities is something one can track.
4. Interesting weekly result updates:
5. Visuals of the week:
5.1 1st time in last decade when WPI is significantly higher than CPI
Since FY13, WPI has never been so marginally higher than CPI the way it is currently. This means the price of raw materials like crude, mineral oils, textile, chemicals (constituents of WPI) have increased significantly. Core inflation is still at higher levels but fuel inflation is at its peak currently.
Lower CPI indicates that high raw material inflation has not passed onto consumers yet. We recommend you to read Equirus’s report on WPI-CPI divergence.
5.2 Cash in circulation has doubled since Demonetisation
6. Good reads of the week:
6.1 An excellent piece by Solidarity advisors on “Will technology firms take value away from private banks”.
6.2 A good read on inventions “the same stories again and again” by Collaborative fund.
6.3 An insightful thread on how “Delhivery” became a logistic behemoth.
6.4 A write-up by Deepak Shenoy on Red flags in Subhiksha (A retail chain) and he has also compared it with Satyam.
6.5 A thread on how to play out delisting i.e. a special situation by Katalyst wealth.
7. Multipie interactions of the week:
At Multipie, we believe in the power of community. This week we celebrate our member Ganesh (@gsninvest) becoming a SEBI registered research analyst with a meme and invite code GSNINVEST786.
That’s all for this week. Please share with your peers if you found this helpful and subscribe to start receiving the weekly digest in your mail! Happy weekend!