In last month or so, I have had an opportunity to interact with few folks on email. Many of these folks very interested to know whether it is time to sell any stocks in my portfolio e.g. ONGC, Reliance Capital, HDFC Bank, ABB, etc. Many of them wanted to check if it is time to book some profits. And few folks made a comment that Reliance Capital, NTPC, and ABCIL are not fundamentally strong for buy and hold portfolio.

All the folks who I interacted with, could be right. And I can be wrong. But the point being in what context? Relative to what objective?

Reliance Capital: Looking at PE ratio, an investor will say it is extremely overpriced. It is not worth buying. But then, investors fails to understand that PE ratio alone is not a holy grail. I am continuing to hold this company in my portfolio. This does not mean, I would advocate buying at today’s 800+ price point. Another reader mentioned to me that he bought Reliance Capital at 1200+ price and since then it has continued to drop. It has given him a negative return. Can I buy it now, so that he could reduce his negative margin and potentially return his capital when price increases? What is the rationale of buying at 800+ or 1200+? One reason the PE ratio is high because the future expectation is already built-in the price. So when you buy at 1200+ the future growth has already been built-in.  You have already paid the price of future growth which does not exist yet! In short, you paid for something that does not exist. You paid for future expectations. This is an investing fallacy.

Now think from a perspective of cost basis being below 400.  This is change in context, isn’t it? Now the dilemma is, selling today would give 800+ bucks. Great return. Take that cash and stash it under the bed!  That will preserve my capital (for a moment ignoring inflation) Or you would look for something else. When you look for something else the odds are 50/50 in your new position. I have discussed this in more details in my series of posts on when to sell. The dilemma is does, one expect safety of capital in existing position, and continue expected growth?  This is conundrum.  I like these scenario, specifically, when risk is low.  Reliance Capital continues to pay growing dividends over time. It is expanding into new business lines. As of today, I continue to remain invested in Reliance Capital because my risk of capital erosion is low and I continue to expect the growth over 5 to 10 year term (12% minimum). It is in this context, I believe staying put here in this company is much better option that stashing cash somewhere in bank.

NTPC: One reader compared the equity returns of NTPC shares to general market trends and concluded that the returns are practically zero in last two years. For those two years only, yes, I would tend to agree the returns from NTPC could be considered as zero relative to index. Quoting a sentence, “Even though 2 years is not a very long term, I think it is long enough to start worrying about, esp when its peers have moved up”. Do you understand the investing fallacy here?

Power sector is a business where it takes 3 yrs to start generating power. And probably another 3 year to break even. Let us be optimistic and consider that  it takes 5 yrs to break even from power purchase agreement  (a.k.a PPA) and start of construction. A private sector company such as Adani, Reliance, Indiabulls, et al., form a company and come out with IPOs. Along the way they keep making announcements. Retail investors are willing to pay price for that future expectation of power plant which does not exits. OR profits which is five year away. You have already paid for the power plants and profits from it. How can you expect more growth? An investing fallacy which has no rationale.

NTPC with 70% market share, profitable, well run company,  history of execution, vision to double power output by 2020. And retail investors do not want to be part of it, but would be happy to pay premium for future expectations. Look at NTPC in the context of loss of capital and downside risk. Imagine in 2008 you had NTPC in your portfolio. You won’t know until you owned it. The downside to NTPC was much lower than other companies.  Doesn’t it provide much better avenue relative to stashing cash in bank savings and FDs?

ABCIL: I agree with readers who suggested, it was time to sell. I had already done it. I had mentioned in my ABCIL analysis it does not have a typical characteristics of long term buy and hold type of company. The price point at which I brought provided downside protect, and hence was attractive. I consider it sketchy when it comes to long term sustainability and continued growth. By sketchy, I mean I consider it high risk to capital. The market price passed the cross over point for my future expected cash flow (dividends + capital appreciation). Expecting ABCIL to continue to grow with low risk to your investing capital would be fallacy.

In Summary….

Individuals always seem to compare “returns” with market index. Would you invest in index fund or ETF if you are not a good stock picker? Probably not. You would still chase individual stocks. Then why compare with index?  They always seem to compare past because it is obvious. Why we do not compare future expectations of growth? Why we do not compare future sustainability? Why we do not compare future risk? Reliance Capital or NTPC may have done badly in last two years. But reference to what?

Yes, PE ratios and comparison to market cannot be ignored. But they are just one spoke in a wheel. As of today, in my viewpoint, NTPC and/or Reliance Capital have much more positive spokes. Both have low downside equity risk, lower probability of capital erosion, likely sustainability of dividends and capital appreciation, higher probability of returns compared to stashing cash, and option to reinvest dividends (adds to growth which I have not talked much about).

Why do we ignore sustainability and consistency?  In today’s environment where we live on day-to-day news events, sustainability and consistency have lost its meaning.

Disclaimer: I hold shares in both companies. I am not advocating buying or holding these companies. You should decide based on your own objectives. For example, don’t buy shares of NTPC expecting index-like returns, or returns similar to peer companies.