Kenneth Andrade of Old Bridge Capital advises investors to look at industries which are consolidating. (Graphic by Financial Express)
When valuations appear to be stretched, and the equity benchmark indices trade at all-time high levels, where does one find prospective buys? Kenneth Andrade of Old Bridge Capital has an answer– look at businesses with no growth. In an interview to CNBC TV18, Kenneth Andrade, Founder, Old Bridge Capital said, “You effectively find value where there is no growth. Where the industry is actually beaten down, and they earn below the cost of capital. These are also times where markets actually consolidate, to two or three businesses. That’s a happy hunting ground for us.”
Explaining how the strategy works, Kenneth Andrade said, “ As an investor, one usually looks for low valuations, and we find low valuations when the businesses are consolidating. Then we wait for a cyclical recovery. Low valuations essentially means low price-earnings multiples. When you get the earnings growth momentum, you get expanding valuations.”
In an interview to ET Now, Saurabh Mukherjea of Ambit Capital said, “What we’re telling clients is look at the sectors where nobody wants to invest. Look at IT and pharma, there are very high quality franchises, which are trading at 14, 15-16 times earnings, with solid cash generation, high 20’s Return on Equity, both in the large-cap IT stocks, and mid-cap pharma stocks. There’s plenty of value there, but investors currently don’t want to look there.” In the same interview, the expert observed that investors are picking up overvalued stocks from other sectors. Investors are obsessed about buying overvalued financials,” he told the channel. Interestingly, IT have pharma have been major laggards in the year so far.
S Naren of ICICI Prudential too is betting on the recovery of IT and pharma sectors. In an interview to ET Now, S Naren said, “We are going to see that in the next three years, rupee is likely to go back to the old depreciation situation. The two principal exports of India are IT and pharma. Actually they have got hurt in the last four years due to a flat rupee. We think they will gain out of a flat rupee depreciation from here over the next 2-3 years.” These voices are more an exception than the norm. As John Templeton once said, “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
