The Hindu Business Line : Idea stocks romp ahead

Our `idea' stocks portfolio has delivered returns of 290 per cent over the past year. The portfolio of `idea stocks' suggested for the next twelve months is: 3M India, Astra Microwave, Bharti Tele-Ventures, Champagne Indage, Gateway Distriparks, IDFC, IFSL, Indiabulls Financial , NDTV and Opto Circuits.

A COMBINATION of extra cash on hand and investor anticipation of industry growing at a healthy clip has proved a winner over the past 12 months.

Stocks of companies with new ideas seen as emerging large-cap stories ran up substantial gains.

A portfolio of ten such stocks notched average returns of 290 per cent. During the same period S&P CNX 500 registered returns of only 59 per cent.

Entrepreneurs with ideas were most sought after. Risk was temporarily banished from investors' lexicon.

The stock market fancy for the next big idea now knows no bounds.

There is so much money floating around that ideas are declared winners with only as much as a fleeting glance. It is because of these factors that in a downturn such stocks could easily fall as sharply.

The demand for ideas and the enhanced risk involved should not, however, deter serious investors from considering these stocks.

These stocks require investors to hold through several crests and troughs to generate high returns.

Fixated on ideas: Ten stocks were suggested as possible multi-baggers in this column in August 2004.

They: Astra Microwave, Bharti Tele-Ventures, Centurion Bank, Financial Technologies, Geojit Financial Services, K Sera Sera, Matrix Labs, Pantaloon Retail, Power Trading Corporation and TV Today.

They were chosen from stocks that were trading at a high price-to-book value.

That is, their market capitalisation was several times higher than the shareholder funds of the company, termed net worth in accounting parlance.

Markets placed a higher value on the assets in place because of the potential for such assets to generate super-normal returns.

Of these ten stocks, six recorded gains of more than 100 per cent.

In particular, Financial Technologies gained 1,400 per cent and Astra Microwave 500 per cent. Two stocks — K-Sera Sera and Power Trading — lost value.

Matrix Labs and TV Today under-performed. This could be a trend with idea stocks. A few generate astronomical returns while others perish by the way side.

Ideas for 2006: It is in the nature of `idea' investing that once you identify your picks you should stick with them for more than a year.

It will probably take the best part of a decade for a company to realise the full potential of its ideas. It does not make sense to abandon ideas mid-way. In particular, it is not logical to exit from stocks of promising companies that have under-performed.

Having said that, it is probable that a few ideas lose sheen while fresh and better ideas emerge.

Investors thus need to exercise great care in retaining some stocks and discarding others to craft a portfolio for the forthcoming year.

Keeping these factors in mind, the following ten stocks are suggested for the next 12 months: 3M India, Astra Microwave, Bharti Tele-Ventures, Champagne Indage, Gateway Distriparks, IDFC, IFSL, Indiabulls Financial Services, NDTV and Opto Circuits.

These stocks are trading at an average price to book value of nearly 11. The average price-to-earnings multiple of these stocks is about 35.

Sales and earnings of these companies are also growing fast, justifying the premium valuations.

Average sales growth in the quarter ended June 2006 was 121 per cent. Average profit growth was 180 per cent.

Evidently, these growth rates make the stocks alluring despite the rich valuations.

Apart from business growth, the operating profile of these stocks is also fascinating.

All the 10 companies possess unique advantages that appear to be sustainable from a competitive perspective.

Excepting IDFC and Gateway Distriparks, other companies are in industries that are in early stages of development.

A few, such as Indiabulls, are pursuing strategies that may appear audacious to build a financial sector powerhouse from scratch.

Champagne Indage has been around for years. This company is India's leading wine producer with a 75 per cent market share.

Others, including Astra Microwave and Opto Circuits, have discovered their competitive edge in recent years and have been doubling their business each year.

The scope for growth remains strong. Stock prices are expected to continue to reflect that hope.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page