RIGHT PICKS

Picking winners to beat the downturn
Some Stocks That Can Help You Outperform A Volatile Market

DURING a downturn in the market, there is often a set of stocks which stand out. These are firms which have a proven track record, huge cash generating capacity and a strong balance sheet. Top companies from the fast-moving consumer companies (FMCG) segment are natural candidates in this group. There are stocks in other sectors, too, which are resilient.
Take, for instance, a company like Petronet LNG, which has recently completed a major capex cycle and doubled its regassification capacity. It’s a stock, which has weathered the downturn and appears promising, especially because FY11 will mark the first full year when the expanded capacity will bring in additional revenues. Recently-listed JSW Energy, which is still trading around its IPO price, also fits into this category, as it is set to double its total power generation capacity in FY11.
Companies that dominate the market place almost like monopolies can be reasonably sure of protecting revenues as well as margins even in an economic downcycle. This makes companies such as Gail, Asian Paints and Crisil less susceptible to a fall in a weak market. Stocks, which are out of favour and are languishing at rock-bottom valuations, could also be considered as shock absorbers, since their downside risk remains low. JK Laksmi Cement and Reliance Communications are two such examples.
At the same time, mature companies that have evolved their business model after years of work and are poised for a fast-paced growth in future may also provide good downside protection in a volatile market. Shoppers Stop’s efforts to derisk its business model and cost optimisation have started paying off as visible in its numbers during the past couple of quarters.
Similarly, textiles major Alok Industries has emerged as a vertically-integrated company with large production capacities and presence across most of the sub-segments of the textiles industry. The resilience built in their business model can be expected to help them weather the storm with little damage. For an investor, it’s always more important to outperform the market in a downturn than outperforming in a bull market. In fact, many experts are of the view that the way an investor reacts to a market crash has the biggest impact on his or her long-term market returns.
If your portfolio is built up of fundamentally sound companies and its value has come down just because the sentiment is bearish, you can be reasonably certain of a bounceback once the next bull run sets in.