With a runway of opportunities ahead, these 10 names – if bought in a basket approach and kept for the long term – can make healthy returns for an investor.
The year 2020-21 has not been short of a whirlwind but the stock markets soared over 80% from the lows of March 2020 to the end of FY21. Despite a pandemic, the upward trend in momentum has been a relief to some and a surprise to many given the problems at the bottom of the pyramid. However, markets made money for all those who were invested pre-pandemic. Fundamentally strong, risky, cyclical – all themes have played out one time or other in the past year but the fears of a second wave are now real and with interest rates already at rock bottom, investors should look for stocks which are more resilient and can withstand difficult times if things start moving from bad to worse.
A basket approach with a diversified mix of sound-quality stocks can help absorb the short-term losses and provide sound risk-adjusted returns. The power of compounding can also play out if stocks are held for the longer term. The key to being a successful investor is being patient. You should let your profits ride and not cut them short unless in need of liquidity. As Warren Buffett rightly says, “When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”
The focus should be on stock selection of companies with efficient leverage, higher operating and free cashflows, strong cash conversion cycle and robust track record of ROEs and ROCEs. Secular stocks are the type of investments which can be made for the long term while cyclical stocks can be held for a 1 to 3-year horizon roughly.
The stocks listed below show the potential to tide through storms and emerge victorious on the other side of the pandemic. With a runway of opportunities ahead, these 10 names – if bought in a basket approach and kept for the long term – can make healthy returns for an investor.
1. Larsen & Toubro
L&T is a big beneficiary of the various infrastructure proposals announced in the recent Budget and the company has not only had a great execution history but has also exhibited financial strength and created value over the years. The company has delivered ROEs of 14% consistently over the last 10 years with operating margins of over 15% over this period. Yet, it continues to trade at attractive valuations with a PE under 15x, making it an attractive value-buy.
2. Dr Reddy’s
Now, with the rise in Covid-19 cases and need for medical support, demand for drugs has skyrocketed and boosted sales of players like Dr Reddy’s who has been a consistent performer by delivering stable net profit growth at 14% CAGR over the last 10 years. Pharma stocks have been underperformers since the past few years and the with a number of tailwinds on their side currently, things seem to be rosy especially for this stock.
3. Dr Lal Pathlabs
Dr Lal Pathlabs too has been witnessing a rise in testing diagnostic volumes around COVID-19. But had it not been for Covid, it would have still performed well given that it’s been a consistent cashflow generator and has delivered ROCEs in excess of 30%.
4. Vinati Organics
In line with rising pharma, the growth in specialty chemical stocks is recently trending. With China being at a disadvantage, exports from India have ramped up and Vinati Organics is a strong contender as a leading producer of IBB. It has delivered ROCEs of over 35% over the last 10 years and has growing profits at 24% CAGR.
5. Pidilite Ltd
Pidilite Ltd too has been another promising player in the chemicals space. The company has a near-monopoly in both industrial and consumer adhesives as well as associated solutions. It has leveraged its position well enough to consistently deliver excellent shareholder returns and can be a good buy for your portfolio.
6. Coforge
Further adding on to the defensives in your portfolio, a mid-cap IT player such as Coforge can be a good pick because it has been continuously increasing its deal wins and has been ramping up on acquisitions to boost its capabilities in the BPM and digital solutions space, thereby benefitting shareholders. With the tech upcycle in place, quality players such as Coforge stand to continue delivering impressive returns to shareholders over the long term.
7. Kotak Mahindra Bank
Amidst the pandemic, the government took effective steps to ensure that credit availability was not an issue for businesses. In fact, the RBI reduced interest rates and announced moratoriums for borrowers to give them relief. While this was a positive step, many banks have been cautious and made sufficient provisions to safeguard their assets. Kotak Mahindra Bank is one such bank which raised funds at the start of the pandemic and has been extremely cautious when it comes to lending. It has been maintaining the quality of its book and has been consistently delivering 20%+ CAGR growth in profits since past 10 years.
8. HDFC Ltd
Another player benefitting from lower rates is HDFC Ltd. This NBFC has the brand, an experienced leadership team and the market share in loans which makes it a true leader.
9. SBI Life Insurance
Insurance is another theme which has picked up steam quite recently and has huge growth opportunities given its underpenetrated nature. After LIC, SBI Life Insurance is among the best private insurance player with a leading APE growth (20%+). The company commands strong market share and continues to gain as it offers a multitude of products. With FDI limits in insurance now extended, players like SBI Life are bound to be at an advantage.
10. CDSL
As the lockdown forced many to stay at home, demat accounts have seen a surge in the past year. With this rising interest in the stock market, CDSL as a depository will continue to upscale and benefit. Being in a duopoly with NSDL, CDSL has created a strong market for itself and will continue to gain revenue as markets mature and volumes rise.
A basket of 10 fundamentally sound stocks could do the trick in making wealth in the long term. As Philip Fisher says, “Usually a long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.” Keeping this philosophy in mind, investors should stay invested and stay safe in this pandemic.
(By Nirali Shah, Head-Equity Research, Samco Securities)
Disclaimer: These stock recommendations have been made by Samco Securities. Readers are advised to consult their financial planner before making any investment.
