Is FMCG a bubble?

I have written about bubble forming in Large Cap Pharma in the past. Is the same happening with FMCG? Let's look at the following table and see:

Share	Market Cap (INR Cr)	TTM P/E	P/E of 5 Year Average EPS	P/E of 10 Year Average EPS
Nestle	28432	42.5	54.8	87.6
Dabur	18140	36	52.6	80.6
Colgate	11550	25.5	36.8	68.1
Marico	7595	32.8	48.1	71
Asian Paints	24135	32.4	59	88.9

I have to remind investors here about the valuation of companies with a lot of enthusiasm at the peak of the Sensex level in January 2008. Almost all companies are appearing near the bubble territory. At the bottom in April 2003/2004, following were the valuations:

* bottomed in April 2004
Share	Market Cap (INR Cr)	TTM P/E	P/E of 5 Year Average EPS
Nestle*	4821	18.32	28.2
Dabur	1055	11.6	14.6
Colgate*	1630	18.4	25.6
Asian Paints	2085	15	19.85

Be cautious!!!

Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience. And selling short a too popular and therefore overvalued issue is apt to be a test not only of one’s courage and stamina but also of the depth of one’s pocketbook. - Benjamin Graham

Is change coming?

I had written about two industries, computer software and credit rating agencies in the previous article in September 2009. I had argued that both the industries are providing a service/product which is very important for other industries but both of them do not want to take any liability of the service they are providing.

The game, at least for the rating agencies, seems to be changing. The Dodd-Frank Financial Regulation Bill makes the credit-rating agencies liable for the advice they give and it will be easier to sue them if the bond does not perform up to the stated rating. It took almost 100 years to make the rating agencies accountable for their service.

The shares of Moody's have fallen by more than 70% from top in 2007. Even Buffett admitted he should have sold more shares of Moody's earlier. The Indian stock market seem to be unaware of the consequences since CRISIL and ICRA stocks are making new highs. Is market wrong here?

Since the computer software industry is new, I guess it will take 50 more years for them to become accountable.

The analyst must pay respectful attention to the judgement of the market place and to the enterprises which it strongly favours, but he must retain an independent and critical viewpoint. Nor should he hesitate to condemn the popular and espouse the unpopular when reasons sufficiently weighty and convincing are at hand. - Benjamin Graham

Some auto-ancillary stocks have still way to go

Recently, I was delighted to see a big run up in share price of an auto ancillary company, ZF Steering Gear. The company came out with its quarterly earnings on July 14, 2010 and the share price went up from INR 300 to INR 390 in less than ten trading sessions. But I still feel the company has a long way to go before it runs out of steam. Why? The reason is the past performance. The company's share price is still more than 10% below the August 2005 high of INR 450. The profits have climbed from INR 20.5 Crore in FY2005-06 to INR 36.19 on TTM basis and is expected to do at least INR 45 crore this year. The book value of the company has increased from INR 77 in FY2005-06 to INR 150 FY2010. Thus P/E has contracted from around 20 to less than 10 and P/B has contracted from 5.8 to around 2.6. Disclosure: I have a long position in the stock.

Investors are well advised to buy a business that's so good that a dummy can run it, because sooner or later a dummy will run it. - Peter Lynch

Crows everywhere are equally black

The crows here are nothing but financial media, be it print, TV or now websites. See the following article Stocks which are expensive but still good for investors. Isn't the title itself contradictory? How can expensive stocks be good for investors?

There has been a lot of media bashing lately from bloggers across the world especially value investors like Barel Karsan and controversial bloggers like Zero Hedge.

The title of my article sums up the facts clearly so I don't need to explain much.

Sound investment principles produce generally sound results. -Benjamin Graham