One Long-Term Investing Theme To Find Multibagger Stocks

A few months ago, my friend bought a flat in a posh area of ​​Mumbai.

After the pandemic, he and his wife are working from home. While he had always wanted to own a house, this was the phase that turned a slow-burning desire into an almost obsession.

It was a big ticket purchase. And not the end of the story. For the next few weeks, about a month, with a substantial budget, was dedicated to outsourcing the interior design work, including furniture, plumbing, and paints.

He bought things he didn’t really need – a new refrigerator and washing machine. The perfectly functional old one was discarded on OLX.

It was easily 8% of that. Investing in property.

Now that doesn’t seem like much in percentage terms. But considering the type of investment in real estate, it’s a significant sum.

Whenever a home is purchased, it also triggers spending in other categories toward most things that go into the home. It’s no wonder that home sales are considered an important indicator for the economy.

Now this was not the only example. Bookings and residential prices are strengthening despite rising lending rates.

While global events such as the Russia-Ukraine war, the outflow of FIIs and the US Fed’s hike in interest rates are grabbing all the limelight, more relevant factors suggest that the economy’s prospects are being overlooked in the coming years. .

Another issue is the unwinding of corporate balance sheets and increased capex activity.

The government has raised its capex target by 35 percent to Rs 7.5 trillion. It is highly likely that this will bring in private capex, ushering in a virtuous cycle.

Supply chain issues and inflation remain under short-term pressure on profitability. But corporates are more confident about long-term demand than they have been in the past few years. They are investing capex to meet this. This contributes to banks’ healthy balance sheets, high capacity utilization, and healthy cash flows.

A conducive environment with strong government intent to restore infrastructure and make the country self-sufficient is another positive.

Schemes like PLI have been set in motion.

I think the boost from this capex revival will not be limited to the infra and capital goods sector.

As I shared in the example at the beginning, there will be positive effects in many areas.

So what can happen a Capex recovery Meaning for the stock market?

Let’s look to history for some answers.

India witnessed one of its strongest capex cycles in 2003-2007. And so the market boomed.

Those who took advantage of this opportunity made perhaps the biggest gains in a decade.

Now it’s not as easy as it sounds.

Consider the case of the paint sector.

A few weeks ago, Grossm announced an aggressive capex plan in the paint sector. It increased the planned investment from Rs 50 billion to Rs 100 billion. Its capacity is 1.33 billion litres. It is very close to the market leader Asian Paints.

It’s not hard to imagine what this could do to existing players. Increased supply is likely to increase competition and price pressures.

No wonder then that major incumbents including behemoths like Asian Paints and Berger Paints witnessed brisk sales.

This is going to be a common problem in some other sectors as well.

So a huge investment planned in a particular sector can turn out either way for the stocks of that sector. It will depend on supply demand dynamics.

So how can you be on the right side of the capex bet?

Well, I would look for companies that are suppliers to the entire industry and not to a specific company in that sector.

For example, in the above case, there is a small cap company that is a major supplier to paint companies, including but not limited to Asian Paints.

What makes it even more of a hedged bet is that the company is not focused on a particular sector. It is a supplier of food and FMCG and co. Pharma companies as well as. And clients are likely to benefit from capex expansion in these sectors as well.

Another factor I would look for would be the quality of the balance sheet. Track record of promoters is also important. Have they executed projects in the past? How good are their capital allocation skills?

For example, one of my high-conviction small-cap recommendations stands to benefit from a boom in infrastructure, rising housing demand, construction, increased capex cycles, and increased government focus on water supply.

I wouldn’t value these tailwinds if it weren’t for the company’s underlying balance sheet, and the fact that much of its ongoing capex plan is self-funded.

While the capex cycle of 2003-2007 pushed many small caps to mid-caps, blind participation in thematic plays led investors to bet on stocks like Suzlon Energy and Unitech.

As you prepare to take advantage of perhaps one of the biggest themes of the decade, don’t look away. Basically strong stocks and the margin of safety in pricing.

abandonment: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

Syndicated from this article. Equitymaster.com.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)