Yippee!!
It is not yet like the ‘old times’ but I sure hope it is a start. Late last week’s global sell-off was almost as good as anything we have seen since the worst fears of the crisis began to abate last spring. The fear is back and for some, the rebound is just a memory.
We all know why it happened (though I have to admit that for me, the reason is not that important – if we were to believe in Taleb, there could have been ANY reason for the markets to fall. After all there was so much belief in the ‘green shoots’).
But still a quick run through on the reasons being quoted:
Firstly, there is this lack of confidence in the European governments' ability to repay their debts. So fears over Greece added to a troubled auction of Portugal's debt. Which then were added to the concerns that actually Spain's bigger economy could be in even deeper trouble than Greece or Portugal's. And ofcourse there are the issues with Ireland and Italy.
(Altogether, there is an acronym for this combination of countries – PIIGS. Not a very adorable term if you happen to be from any one of those countries). See chart below which depicts 10 years government bond spreads for each of these countries (specially note Greece’s trend line – not yet a Greek tragedy but maybe a Greek drama).
And to these concerns over sovereign debt came the news of rising unemployment in the US. For all one knows, there could be a glitch in the data compilation – if it can happen to reports on melting glaciers, why can’t it happen to jobless claims data?
Notwithstanding how the data came about, there were 6 per cent more new jobless claims last month than in December. This was certainly not in the script that the ‘markets’ were waiting to read.
“If you're not confused, you're not paying attention”
Ofcourse we know what effect it had on financial markets. On the equity front, the Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks. Even Gold and crude were no exceptions. See the chart below.
“Expert: Someone who brings confusion to simplicity”
The interesting thing however, is the change in tone of the commentators and the role played by the media in hyping such events. I am not sure whether in such times all commentators change their messages from positive to negative or the media only reports the negative side. I suspect it could be a combination of both.
So amongst others we have reports of JPMorgan Chase saying that it was turning “less bullish” on developing-nation equities in the first half of 2010 and the term ‘double dip’ beginning to mean a bit more than dipping your favourite tea bag a second time. Naseem Taleb has also reportedly said that if there is one trade that every human should have, it should be shorting US Treasuries.
“One man’s meat is another man’s poison”
On the other hand, there are others like Kraft Foods, the maker of Oreo cookies, who have just issued bonds for its takeover of Cadbury Plc. Pepsico did the same for its acquisition of 2 of its bottlers. In fact companies in the U.S have spent the highest portion of bond-sale proceeds in more than a decade for acquisitions and expansions. This was ofcourse led by Warren Buffett’s “all- in wager” on a US recovery (purchase of Burlington rail by Buffett) and taking advantage of the lowest borrowing costs since 2004.
So everyone obviously doesn’t think alike. And these mixed signals are exactly what creates the confusion. And by the way, this also tells us why someone buys stocks when exactly at the same time someone else is selling (buy has to equal sell at all times – if everyone was a seller at a particular time, who would buy?). And so it is in times like these that value investors start to find bargains.
A couple of mispriced stocks came on my radar over the last little while. Two of them are Aditya Birla Chemicals (earlier called Bihar Caustics) and Visaka Industries.
Aditya Birla Chemicals (ABCIL) – CMP 77/- ; PB of 0.6; market cap of Rs 170cr
The company’s main products are caustic soda and chlorine. The industry has been plagued by over-capacity (more than 80% new capacity has been added in the industry both within and outside India) and countries like US and China have reportedly resorted to dumping in the Indian markets. In consequence, companies like ABCIL and Gujarat Alkalies have been forced to cut prices. This has led to a recent fall in their realizations and hence profits.
However, the interesting thing is that over the last 6 years, ABCIL has had a free cashflow (pre capex) of Rs 50-60cr a year. Also, their known capital expenditures seem to be over and they have repaid quite a bit of debt. Hence, at this point in time, the market is valuing the company at ~ 3.5-4X its yearly free cash generation.
This company therefore could become a rerating candidate – that could happen in case there are ‘surprisingly’ good results over the next couple of quarters (that in turn could happen if the prices of caustic soda trend upwards). Or they may decide to do something with their extra cash (as mentioned their capital expenditure now should be limited). For example, they may decide that the market is not rating their company fairly and may do a buy back. Either way, this is a cheap company (which could well become cheaper, but that should not matter).
Visaka Industries – CMP 123/-; PB of 0.87; market cap of Rs 200cr (USD 45m).
This company manufactures asbestos cement products. The business has been showing a growth YOY and QOQ. It has paid a minimum Rs 3 as dividends since 2005 (around 2.5% yield at current prices) and over the last 6 years, the company has had a free cash flow of around Rs 25-30cr. This company is what we would call a ‘GARP’ (growth at reasonable price). Demand for the company’s products are likely to go up, as these are attractive to the rural market, being affordable as well as weather and fire proof. These are therefore natural upgrades from thatched and tiled roofing that exists in many parts of the rural housing.
“I have nothing to offer. Except my own confusion.”
As an aside, I was re-reading Malcolm Gladwell’s “Outliers’ recently. The concept behind the book is that when we hear the success stories of some of the biggest names like Bill Gates or The Beatles, we conjure up visions of brilliance and the extraordinary talent they have/ had. However, by diving deeper into the lives of a few of these successful people, the writer illustrates that there was much more to the success than just talent. It was about being born at the right time.
In a similar way I believe that by being born in an era where the balance of global economic power is shifting eastward, we too have a historic opportunity available to us. To be able to get good returns in the right priced opportunities available in places like India or China.
And the more the prices fall, the better the probability that we can realize the historic opportunity quicker. So let the confusion reign – its better for investors like us. There is no confusion in my mind on that.
