Investing is a lot like cricket. In T20 cricket, when you select a team, you choose players based on availability, playing conditions and skills. In a tournament like the Indian Premier League (IPL), every team gets a finite purse to choose the right players. That ensures that you do not overspend on high profile players only. You have to pick up the right talent to make a balanced team within all these limitations. So, you take a few experienced players and a lot of young players who could produce the desired results for your team. Fast bowler Jasprit Bumrah of Mumbai Indians is an example. Before getting picked for the Mumbai Indians team, he barely played any domestic cricket. He not only helped Mumbai Indians to win five IPL titles and went on to play for India in limited-overs cricket. He is also now the lead bowler in Test cricket for his country.
Stock market investing is a lot like that. You have to consider fundamental and external factors similar to those cricket selectors consider when creating a balanced team. Then, based on the money you have, you select a few stocks that could turn into multi-baggers in the future.
The right sector
Stock market analysts crunch all the data to develop profit estimates of companies after each quarter. They align their expectations and recommendations based on their conversations with company management. Earlier, there was difficulty getting information on corporate results and management discussions after quarterly results announcements. However, today, all the ‘concall’ transcripts and presentations are published by companies on their website.
As an investor looking to choose the right sector, you need to go through these conversations and understand a few basics. Recently, mint, a business newspaper, reported that in the first quarter of 2022, stock markets had delivered 90 multi-baggers. These were low-priced stocks that rose multiple times their value. Many of them were also categorised as penny stocks. An analysis by Edelweiss, a securities firm, says that 50% of the wealth-creating stocks (multi-baggers) belonged to 10 sectors out of the 74 tracked by them in the past decade. The winners were those in the software, chemicals and pharmaceuticals sectors. “Picking the right sector is getting the ‘wind beneath the wings for many investors,” said the Edelweiss analysis. Before picking the stocks, you need to figure out a few sectors you can grow sustainably over next few years.
With global supply chain disruptions and the government’s emphasis on manufacturing in India through production-linked incentives, many new sectors have opened up. Even if international trade resumes, major importing nations are unlikely to depend on a single manufacturer like China for everything. There would be a plan B for most multinational corporations. India’s manufacturing sector has an opportunity to tap into the potential demand like never before. These could be sectors like pharmaceuticals, speciality chemicals and consumer electronics. Even the automobile sector is witnessing traction in the export market, with the demand for cars and auto components growing steadily.
The IT services sector is another area that could throw up winners. With the need for digital transformation rising, India’s IT services skills will be tested again. Large MNCs in the US and Europe would undoubtedly spend more and look to Indian companies to provide reliable services. Similarly, cloud computing is another area of growth. As a first step, you may want to watch out for the results of these companies. They discuss the outlook for the financial year ahead. Then, follow their performance in the stock market.
You want to buy tomorrow’s heroes today. After all, today’s share prices function for tomorrow’s profits. You need to be interested in finance and have no fear of numbers for that purpose. To identify a potential winner, you need to be both. It is not for the faint-hearted. You cannot just say that you will put money, and the rest should take care of itself. It requires an effort to learn about factors that make a multi-bagger stock. It may take time but you could soon stumble upon your potential winner.
(The author is editor-in-chief at www.moneyminute.in)
50% of the wealth-creating stocks (multi-baggers) belonged to 10 sectors out of the 74 tracked by Edelweiss in the past decade