Contrarian Bets For 2021
Investors seek various ways to beat markets and attempt to create wealth in the longer run. Which strategy is to be used depends on the investors’ investment horizon and also on the skills inculcated by the investment decision-maker. Yogesh Supekar explains why it is the right time to adopt a contrarian approach even as the DSIJ Research Team suggests top contrarian bets for 2021
When the pandemic hit us in 2020 and the markets started crashing, an overall air of pessimism ensured that the stocks had a free fall with very few investors willing to buy equity at that point of time. In such a scenario, anybody who bought stocks and has bet big on the market has been a true contrarian. There are very many investors who bought equities in March without actually having a deep understanding of what contrarian investing is all about. Contrarian investing is an old technique – a proven technique that can help investors rake in good profits in equity markets if the execution is correct.
It is important that the concept of contrarian investing is understood accurately, and the execution of the strategy is precise. A contrarian strategy, simply put, means going against the broader trend and buying when nobody is willing to buy and selling when everyone wants to buy. While it is extremely easy to understand this concept intuitively, it is extremely difficult to execute this strategy in real life. Practically the whole process of identifying a stock that can be a contrarian bet is not easy and may involve loads of research. Investors, especially new ones, often get the strategy wrong because of a lack of clear understanding of the concept. There are some common myths surrounding contrarian investing style, as outlined below.
Going against the herd with every investment you make is extremely tough mentally.
Myth 1
Contrarian investing is all about buying beaten-down stocks. :
Often investors tend to buy cheap and beaten stocks thinking that the stock is a contrarian bet. The fundamentals are very important while applying contrarian investing strategy. The focus of the contrarian investing strategy is on finding deep value rather than simply buying stocks that have fallen by a huge margin from their 52-week highs. One must understand that it is possible that a stock, even after falling 50 per cent from its 52-week highs, could be expensive while any stock that has more than doubled in a year could be offering tremendous value and is actually trading cheap compared to its peers. Smart investors have an uncanny ability to identify value and usually avoid making investment decisions based on stock prices alone.
Myth 2
Contrarian investing does not allow buying into high PE stocks. :
Another common myth amongst several investors is that those stocks that are trading at substantially high PE ratio do not qualify as a contrarian bet. In other words, those stocks with high PE ratio do not offer any value – this is the common understanding. While one must be cautious of extremely high PE ratios no doubt, stocks, however, need to be evaluated on a relative basis and it is quite possible that a stock is trading at extremely high PE multiple but its TTM PE is lower than the industry average, indicating some bargain available in the stock. Thus, merely looking at high PE ratio can prove to be a grave mistake. Investors can screen for stocks with high PE but lower than the industry average PE and the stock should enjoy higher RoE than the industry average RoE. This way one will be able to understand if there is any value in the stock even if the PE for the stock is perceived to be inflated.
The tables below highlight such stocks in the current market situation.
Contrarian investing & Warren Buffet
Warren Buffet is one of the most celebrated contrarian investor world has known for several decades now. There are many successful contrarian bets in his name however the highlighted couple of examples will help understand the contrarian investing style.
In 1990s , late 1990s i.e. , when everyone was busy buying tech stocks and markets were rallying touching record highs, Warren Buffet did not invest in these high-flying stocks and instead purchased 130 million ounces of silver at rock bottom. AT that time the silver prices were close to a historical low. Everyone knows what happened with the so-called Dot Com stocks. The bubble of Dot Com burst few months later and Silver surged. This is a classic example of not buying when everyone is buying and buying something everyone is extremely bearish on.
Another example which can fit the description of the contrarian strategy is when Buffet bought financial stocks and rescued some of the best financial companies in US. His investments paid off handsomely as the markets recovered enormously in couple of years of his investments.
Dividend yield is also an important factor and one can hunt for value in stocks showing high dividend yield with the P/E ratio being less than the industry average P/E ratio. Following table highlights such stocks.
Successful contrarian investment requires a strategy that is repeatable and enduring.
Human biases create opportunities for contrarian investors.
Conclusion
Contrarian investing is nothing but an attempt to play off the psychological biases, herd mentality and emotions that investors often tend to exhibit. Contrarian investing is all about discipline, temperament and waiting ability or patience. As a strategy, there is little doubt whether it works or not. The successful outcome depends on how contrarian one is (aggressive) and what is the process adopted to be a contrarian. Several studies in the developed world have shown that there is evidence indicating outperformance of loser portfolios versus the winner portfolios in the long term i.e. loser stocks or beaten down stocks do better than winner stocks in the longer run.
Contrarian investing will allow the investors to explore such loser stocks and hence create an opportunity to outperform the markets. It is important that investors adopting contrarian style of investing are realistic and do not overestimate their abilities. It is observed that most investors tend to do so. Contrarian investing involves value buying and there are several methods that can be used to identify undervalued stocks. The thing with contrarian ideas is that the situation may get worse before it gets better. Confidence in the strategy comes handy in such situation.
One of the best ways to beat markets and apply value investing and contrarian bets is to invest in unpopular stocks. These may be names that you have not heard about so often even though they are not being tracked regularly by the analysts. Chances are bright that such fundamentally strong stocks with less following both by analysts and investors turn out to be outperformers. In the current market condition, it will be a useful and rewarding experience for the investors to hunt for value beyond the top 100 or 200 shares in terms of market capitalisation. The market momentum has been so strong that most of the stocks with large market capitalisation are trading close to their 52-week highs.
If we talk about BSE 500 stocks, as many as 356 stocks are trading within the 10 per cent range of their respective 52-week highs with none of the index components trading within the 10 per cent range of their respective 52-week lows. This goes to suggest that the valuation is steep for most of the stocks and to find value bargains one will have to look beyond these top stocks that reflect greater market capitalisation. The market outlook for 2021 remains strong and it will be difficult to find value in such markets as the stock prices are inflated in most cases and with no signs of abating liquidity, the stock prices may remain inflated throughout the year.
Looking at the current market conditions we recommend taking contrarian bets on the following stocks:
East India Hotels (EIH)
BSE CODE : 500840
Face Value : Rs 2
Mcap FF (Cr.) : Rs 1,816.50
52 WK High / Low : Rs 150.09 / Rs 53.66
CMP (Rs ) : Rs 91.70
Under the aegis of the Oberoi Group, EIH Limited operates hotels and cruisers in five countries under the luxury ‘Oberoi’ and five-star ‘Trident’ brands. Also, the company is engaged in flight catering, airport restaurants, travel and tour services, car rentals, project management and corporate air charters. Oberoi hotels and resorts are known around the world for providing the right blend of service, luxury and quiet efficiency. New luxury Oberoi leisure hotels have set their footsteps in the last decade. Trident hotels are five-star hotels which have established a reputation for excellence and are also acknowledged for offering quality and value.
The company owns and manages over 31 hotels with 4,503 rooms. In recent years, the global travel and tourism sector had been portraying robust growth with the industry outperforming the global economies and also contributing greatly to prosperity and employment until recently when it was crippled due to the pandemic. During this time the Oberoi Group took quick steps to streamline its operations, primarily with the The Oberoi Centre of Excellence (TOCE) going ‘live’. The group began to offer its chain of owned and managed hotels efficient delivery of services in the areas of finance, procurement, data management, taxation, business transformation and budgeting.
Taking into consideration the financial performance of the company on a consolidated quarterly basis, we can see that the net sales dipped down to Rs 71.92 crore in Q2FY21 as compared to Rs 335.68 crore in Q2FY20. The Q2FY21 posted operating loss of Rs 87.14 crore in Q2FY21 as compared to operating profit of Rs 35.19 crore in Q2FY20. The quarter saw net loss of Rs 101.63 crore in Q2FY21 as compared to net profit of Rs 28.44 crore in Q2FY20. On an annual basis, net sales were seen declining by 11.85 per cent from Rs 1,810.82 crore in FY19 to Rs 1,596.25 crore in FY20 whereas the operating profit was seen slipping down by 22.33 per cent in FY19 as compared to FY20.
The net profit on an annual basis posted an increase of 20.94 per cent in FY20 at Rs 165.28 crore as compared to Rs 136.66 crore in FY19. This overview of the company’s financial statements makes us believe that the pandemic had a major impact on its operations. However, apart from some declining financials due to the impact of the pandemic, the company has an acceptable leverage ratio. There was around 87 per cent drop in revenue due to the corona pandemic but the borrowings comparatively rose lesser than expected. Looking at another inherent strength, we can see that the company has a strong financial backing of promoters, institutions and corporate bodies.
The company has over 100+ sales team servicing 6,500+ corporates and 1,500+ travel companies, DMCs, FTOs and wedding planners. The company possesses an extensive in-house project management and development experience of creating niche properties and is also successful in developing strong relationships with domestic and foreign clientele and intermediaries. Industry experts believe that there will be a great revival in the travel and tourism industry in the coming future due to the efficacy of the vaccine which will once again have corporate executives, individuals and families globetrotting once again, and therefore we recommend including this stock in your portfolio.
Great Eastern Shipping Company
BSE CODE : 500620
Face Value : Rs 10
Mcap FF (Cr.) : Rs 2,611.52 52
52 WK High / Low : Rs 336.65 / Rs 168.95
CMP (Rs ) : Rs 253.85
Great Eastern Shipping Company (GESC) is India’s largest private sector shipping company. It operates through two businesses categorised as shipping and offshore. The shipping business is involved in the transportation of crude oil petroleum products, gas and dry bulk offshore. The offshore business provides services to oil companies in carrying out offshore exploration and production activities through its subsidiary, Greatship (India) Limited. The company has the expertise and experience of planning for over six decades. It is also one of the leading maritime and shipping companies in the world.
GESC has been a pioneer in the shipping and maritime industry for over 60 years, creating many firsts for the nation and the industry. Having a thorough understanding of the market and clients’ demands, the company is well-equipped to anticipate requirements and deliver successfully and satisfactorily as per the commitments. The business includes products like fleets, product carriers and LPG carriers. Around 95 per cent of India’s trading by volume and 70 per cent by value is done via maritime transport. There are 12 major and 205 notified minor and intermediate ports in India.
Standing at the 16th position in the global largest shipping industry, India operates with a coastline of about 7,517 km. Foreign direct investment of 100 per cent is allowed by the government under the automatic route for port and harbour construction and maintenance projects. The enterprises that develop, maintain and operate ports, inland waterways and inland ports enjoy a 10-year tax holiday from the government. In FY20, major ports in India were able to handle 704.82 million tons (MT) of cargo traffic, implying a CAGR of 2.74 per cent during FY16 to FY20. The government has also taken some steps to improve operational efficiency via mechanisation, deepening the draft and speedy evacuations.
Taking into consideration the financial performance of the company on a consolidated quarterly basis, we can see that net sales dipped by 5.2 per cent to Rs 774.99 crore in Q2FY21 as compared to Rs 817.54 crore in Q2FY20. The period of Q2FY21 posted operating profit of Rs 488.92 crore in Q2FY21 as compared to operating profit of Rs 321.56 crore in Q2FY20, indicating a rise of 52.05 per cent. The quarter turned the net profit positive to Rs 225.44 crore as compared to net loss of Rs 18.93 crore in the same quarter in the previous year. On an annual basis, net sales were seen rising by 3.94 per cent from Rs 3,547.11 crore in FY19 to Rs 3,686.73 crore in FY20. The operating profit was seen increasing by 3.94 per cent in FY20 as compared to FY19.
Net profit on an annual basis emerged positive in FY20 at Rs 207.14 crore as compared to negative Rs 21.45 crore in FY19. Depreciation and interest cost reduced gradually from FY11 to FY20. The scrapping has also been low for a while in the products and crude sector. There are increasing investments in this sector and the cargo traffic points towards a healthy outlook for the Indian ports’ sector. Service providers such as operation and maintenance, pilot and harbouring, and marine assets such as barges and dredgers will benefit from these investments. Within the ports sector, projects worth USD 10 billion have been identified and will be awarded in the coming five years. Considering the strong financial growth and the projected increase in demand, companies like GESC will contribute significantly towards the development of the Indian shipping industry. Hence, we recommend buying this scrip.
Bharat Petroleum Corporation Limited
BSE CODE : 500547
Face Value : Rs 10
Mcap FF (Cr.) : Rs 31,377.59 52
52 WK High / Low : Rs 510 / Rs 252
CMP (Rs ) : Rs 380.65
Bharat Petroleum Corporation Limited is one of the India’s best performing public sector undertakings. It has seen the journey from being an oil and gas company to a Fortune 500 oil refining, exploration and marketing conglomerate. BPCL is India’s second-largest oil marketing company with standalone domestic sales volume of over 43.10 MMT and market share of 22 per cent during FY20. In refining, the company stands as the third-largest in terms of capacity – 15.33 per cent of India’s refining capacity. It is also India’s sixth-largest company by turnover. BPCL’s market capitalisation recently touched Rs 1.2 lakh crore. It has a presence in over nine countries with 25+ global partners.
The company serves through 17,125 retail outlets and 6,150 LPG distributors. BPCL has posted growth via its seven strategic business units, 23 entities and 10,832 employees. The oil and gas sector stands at the eighth position among the core industries in India and plays a major role in influencing decision-making for all the other important sections of the economy. The growth of Indian economy is related to its energy demand and hence the demand for oil and gas sector is projected to grow more, thus qualifying for higher investments.
The government has adopted several policies to cater to the increasing demands. The sector attracts both domestic and foreign investment as attested by the presence of Reliance Industries Ltd (RIL) and Cairn India. India’s oil refining capacity stood at 249.9 million metric tonnes which makes it the second-largest refiner in Asia. According to data released by the Department for Promotion of Industry and Internal Trade Policy (DPIIT), the petroleum and natural gas sector saw an inflow of FDI worth USD 7.86 billion between April 2000 and June 2020.
Taking a look at the financial performance of the company on a consolidated quarterly basis, we can see that net sales dipped by 12.29 per cent to Rs 66,331.22 crore in Q2FY21 as compared to Rs 75,627.99 crore in Q2FY20. The period of Q2FY21 yielded operating profit of Rs 5,371.82 crore in Q2FY21 as compared to operating profit of Rs 3,271 crore in Q2FY20, a rise of 64.22 per cent. The quarter showed net profit of Rs 2,671.57 crore as compared to net profit of Rs 1,324.77 crore in the same quarter in the previous year. On an annual basis, net sales were seen declining by 3.25 per cent from Rs 3,40,879.15 crore in FY19 to Rs 3,29,797.16 crore in FY20.
The operating profit went down by 40.07 per cent in FY20 as compared to FY19. Net profit on an annual basis touched Rs 2,265.11 in FY20 as compared to 7,590.53 crore in FY19, down by 70.16 per cent. India is expected to be one of the largest contributors to non-OCED petroleum consumption growth globally. BPCL has plans of expanding its marketing infrastructure across all business verticals, including 1,550 new retail outlets in the current year. It has charted a capex outlay of Rs 8,076 crore for FY21 including investments in subsidiaries and joint ventures. Energy demand of India is anticipated to grow at a faster pace as compared to other major economies on the back of continuous robust economic growth. Taking all this into consideration, we recommend adding this stock to your portfolio.
(Closing price as of Jan 27, 2021)