Raamdeo Agrawal: Hunt for deep value stocks to beat market in next 2-3 years: Raamdeo Agrawal
It is that phase in the market where just about every conversation starts with inflation and ends with Fed. Is this the right way of approaching the market?
The macro scene is so extraordinary different and extraordinary complex right now that even the press and the authorities would not be able to figure it out. Of course, you have to know the broader things – what is happening in the world outside your office. But I think giving too much attention to figuring out US inflation, India inflation, the tapering and the global macro is very tough. In investing, what matters is what the companies are going to do and how they are going to shape up. We got to focus on the outcome for companies in the next 2-5 years, rather than figuring out what will they (central banks) do tomorrow morning. I don’t think we can invest based on whether they want to stop bond buying or double it up.
We are staring at an extraordinary market. On one side, you have got Paytm and Zomato, which are planning to go public. On the other side, there is BPCL, a deep value oil refinery that the government is planning to divest. There is an appetite for both. So should one focus on platform companies, fintechs, start-ups or deep value names like BPCL, HPCL and SBI?
I think there is place for both. We have seen expansion in valuations of all growth companies. Quality and growth went through the roof in the last 5-7 years. Stocks with slightly lower quality and lack of growth, value stocks or PSU stocks got hammered for various reasons.
I think there are opportunities in both the segments. It depends on what is your style and what you are comfortable with. I think both of them are going to make money and probably some of the deep value stocks may make more money in the next 2-3 years in terms of percentage growth. But if you look at 4-5 years, reasonably priced growth stocks will outweigh anything.
If you have to take your framework of QGLP, which is quality, growth, longevity and price, where is the framework right now fitting in nicely? A couple of years ago it was fitting in nicely with HDFC Bank or Asian Paints. Where is that framework fitting in now?
Because of Covid, demand is destroyed in various segments. For liquor companies, if the daily demand is 100 units and it came down to 50, it will come back to 100 or beyond that. Consumers those who did not buy cars last year or this year will come back to buy immediately as soon as the opening up happens. Today’s newspapers are saying car companies are going to have the highest output in July itself, so the demand is going to come back. For high-quality companies, these demands have been suppressed for some time and the market has hammered them. I think you can buy. These kind of things are not going to happen every time. I am hoping that corona is slowly going to be history in the next 6 months or 1 year and you may never get these companies at these prices.
You like to buy companies which are at an inflection point in terms of market share. You also look at companies which you can buy for more than 5 years. So what fits in the bucket one, which is 1-3 years, and what fits in the bucket two, which is 5 years plus?
After you buy a company and it gives you returns, you do more research to understand whether it is a 3-year idea or a 30-year idea. If it is performing you tend to stay longer and longer.
The three-year ideas are typically cyclicals because when you buy at the bottom, the cycle comes back in your favour. In the next 3 years, you double or triple the money and then get out and move on to the next one if you are lucky. Cyclicals are typically shorter term ideas. If you can get it at at the bottom of the cycle, nothing like it. After a prolonged 8-10 years of deflation, sometime in June-July of last year it turned around. Companies like Tata Steel are 4x-5x from their bottom. These kind of movements cannot last for a very long period. You can make 2x, 3x, 4x in two-three years time and run from there before the true character of the business unfolds. They are cyclicals and it is dharma of the cyclical that they go up and come down quickly.
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