STYLES OF INVESTING

Investment is a means to park surplus funds in different avenues known as investment class. These funds appreciate over a period of time and yield returns that are expected to be superior and exceed the rate of inflation. Investment should be made in different asset classes so that a balance is maintained between combined rewards (returns) and risks attached to the different asset classes. Investment in equities is one such class wherein investors park their funds; however, it is considered to be a risky asset class as an investor expects higher returns from investing in equities. Here too different investors adopt different styles of investing and the underlying basis for which they are investing might vary.

There are various theories based on styles of investing which have come up at different points of time such as:

• Active versus passive companies.

• Growth-oriented companies versus value-oriented companies.

• Small-cap versus large-cap.

Here in this story we have considered the different styles of investing which are commonly followed or practiced. The period of holding might differ in each case but usually investments are made for a longer tenure. Buying and selling of stocks with short duration such as one or two weeks or up to one month or so might be considered as trading activities and not investments. The styles of investing comprise: a) Alpha stocks, b) Beta stocks, c) Valuation-based stocks, d) Stocks based on dividend yield, e) Stocks in cyclical sectors, f) Contrarian view stocks, g) Event-based stocks, and h) Active stocks based on market rumours, etc.

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Alpha Stocks

These are the stocks which have sound promoters and professional managements who have built a sustainable business model that has survived even in times of crisis and consistently delivered good financial performance. These stocks would have witnessed continuous uptrend in their share prices based on strong financial performance which has lured investors to remain invested in these counters or scrips and become investors’ favourites over a period of time. 

Examples: Bosch, HDFC, Eicher Motors, MRF, Shree Cement, etc.

DSIJ View: Investors should always stay invested in these stocks and accumulate on dips as these offer regular dividends and high capital appreciation. Good for long-term investment.

Beta Stocks

These are stocks which have remained volatile based on one or the other factors. Sharp swings in share prices (either side) would have been witnessed in these stocks. Generally these stocks do not boast of a stable financial performance and have a highly leveraged balance-sheet. At times the business model of these stocks comes under threat as the management goes aggressive in the business growth or has moved into unrelated businesses which have not yielded favourable results. Also, the stocks react immediately to any adverse event specific to the industry or the respective company.

Examples: Adani Enterprises, DLF, Jaiprakash Associates, Reliance Communication, Suzlon, etc.

DSIJ View: Investors and readers should acquire these stocks when a sharp fall or correction is witnessed in a short span of time based on any negative news flow or event as these may bounce back shortly once the impact of the event or news flow subsides or vice-versa. Good for short-term investment.

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Valuation-Based Stocks

There are various valuation parameters based on which a company is valued such as price to earnings ratio (P/E ratio), price to book value (P/BV), enterprise value to EBITDA (EV/EBITDA), enterprise value to sales (EV/Sales) and sum of total parts (SOTP). However, companies in different industries or sectors adopt different valuation parameters. For example, banking and financial services companies adopt P/BV; cement, metal and telecom companies adopt EV/EBITDA; FMCG and pharmaceutical companies adopt P/E, and so on. Generally investors look for stocks which are trading at low valuation as compared to their peers in anticipation that the stock with see an uptrend and the valuation gap will narrow down.

Examples: It is difficult to specify the names of stocks in any respective category as with changes in prices of respective stocks the valuation matrix changes. However, selected PSU banks like PNB, BOB, BoI, etc. and metal companies such as SAIL, Tata Steel, Hindalco, Nalco, etc. can be looked at as these are currently trading at low P/BV and EV/EBITDA.

DSIJ View: Investors and readers should acquire stocks which are trading at low valuation but with some exceptions. For instance, certain companies with not a good financial track record and a bleak future might be trading at low valuations and may look cheap but must be avoided. Similarly, certain companies that have posted robust financial performance with the potential of being sustained may be trading at very high valuations and look expensive but must be bought in view of long-term profits. Good for long-term investments.

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Stocks Based on Dividend Yield

Though investment in equities is considered to be a risky asset class, there are investors who look out for companies which have high dividend yield (in excess of 3.5 per cent) with the objective of earning a fixed income. These investments also provide an opportunity for capital appreciation.

Examples: It is difficult to specify names of stocks as with changes in prices of respective stocks their yield will also change. However, Sensex-based companies like Coal India, NTPC, ONGC, Tata Steel, Infosys and GAIL can be taken into consideration.

DSIJ View: Investors and readers should keep an eye on stocks which have a policy of consistently paying dividends. These companies should be accumulated at low prices when there is a sharp correction in the markets and the prices of these stocks also go through a correction mode. Good for long-term investment.

Stocks in Cyclical Sectors

Mostly each industry goes through a business cycle wherein there may be a few years which will show robust financial performance and some years which might not be that great. The tenure of each such cycle might differ from industry to industry and even for the same industry in the next cycle.

Examples: Stocks in metals, cement, shipping, sugar, hotels, etc.

DSIJ View: Investors and readers should start investing in top companies of sectors which they feel are expected to be in an up-cycle in the coming years and exit from companies in sectors where they foresee the start of the downturn. Key stocks in metals and cement should be accumulated currently as the GDP is showing a robust sign of improvement and uptrend. If there is a sign of huge growth in trade (import-export), shipping companies should be accumulated while if there are signs of huge growth in business and tourism, hotel stocks should be focused on. Good for long-term investment.

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Contrarian View Stocks

These stocks are found in a few specific sectors wherein investors take a totally opposite view of an event as that of the market and invest accordingly. These investors stand to gain in case the outcome of the event is in their favour.

Examples: Rate-sensitive stocks and commodity-driven stocks like crude oil, rubber, etc.

DSIJ View: Investors and readers should invest in stocks of specific sectors if they have a contrarian view on the ongoing trend. For example, crude has been on a declining trend and oil and gas stocks have corrected sharply; any investor who has a contrarian view and believes that crude will bounce back should start investing in this sector. This theory holds true for rate-sensitive stocks too. Good for long-term investment.

Corporate Event-Based Stocks

These are stocks wherein some event such as merger and acquisition, fund-raising or restructuring has taken place and resulted in the stock being under momentum.

Examples: Sulzon (acquisition by promoter of Sun Pharma), Spicejet (acquisition of promoter holding by the earlier promoter), Century Textiles (promoters’ warrants issued to A V Birla Group’s company), Aditya Birla Nuvo (demerger of carbon black division and sale of ITES business).

DSIJ View: Investors and readers should get into these stocks as the share witnesses momentum based on events such as those stated above. However, one should stay invested in these stocks for a long-term period only if they believe that the advantages of such events are expected to stay for years to come or else exit these shocks once the event actually materializes as other factors might start playing their role on the stock’s performance. Good for both long and short-term investment.

Active Stocks Based on News or Market Rumours

These are stocks which are expected to see movements based on any news or market rumours. A trader generally makes his trades in these stocks and exits in a short span of time. One needs to be very careful while investing in such stocks as the movement in the price of these stocks is too quick in either direction.

Examples: Expected US FDA approvals or restrictions for pharmaceutical stocks, expected hike or reduction in custom duty on gold for jewellery stocks, expected hike reduction in interest rate for rate-sensitive stocks, etc.

DSIJ View: Long-term investors should avoid such stocks as these are only for traders. The movement in their share prices is too quick and one needs to understand the impact of the news flow on a particular industry and company. Good for short-term investment.

Disclaimer

The above stated styles of investing are just a means to make readers aware as to how to stay invested in equities by following different strategies at different point of time so as to make money. However these strategies do not guarantee returns in each case and may depend on the price at which the investment is made and the market conditions post such investment.