
Time for Tata-fication of your portfolio?

Summary
- This is how you should go about investing in Tata group stocks…
The makers of Titanic were certain the ship wouldn't sink. In World War II, Germany was certain it wouldn't lose. In 2007, traders at Lehman were certain the bank couldn't go bust.
More recently, the campaign managers of Joe Biden were certain that Trump wouldn't win. Unfortunately, stock markets also proclaim false certainties from time to time. And unsuspecting investors get trapped.
One such certainty that investors often swear by is that buying the stocks of well-known or reputed companies in any proportion, at any time, is never a bad idea.
For instance, a news report recently pointed out that a bunch of Tata group stocks are trading lower compared to 52-week highs.
It, therefore, advised investors to consider this a golden opportunity to load up on Tata stocks from the group “as much as they want".
Now, there is no doubt that the Tata group enjoys reputation that few other corporate groups across the world do.
Plus, there are several other factors that offers the Tata companies an edge.
- The group is well-diversified across sectors and across geographies.
- Many companies in the group have backward and forward integration.
- Being part of the group offers Tata companies economies of scale and access to cheaper funds.
The listed businesses under the group have a reasonably long track record of fundamental soundness. Also, they have largely been minority shareholder friendly.
So, isn't a correction in valuations an icing on the cake?
'Where is the false certainty?' you make ask.
The problem is that valuations often far exceed the economic potential and earnings growth prospects.
So, stock prices do not move in sync with volatility in the economy.
Also, steep valuations either follow good earnings or precede a slowdown.
So, loading up on stocks from any corporate group without ascertaining the intrinsic value of individual stocks is fraught with risk.
It is a fact that stock prices rise and fall much more than the economies and companies that underlie them.
The market behaviour is hard to predict and often seems unconnected to economic events and company fundamentals.
Economics and finance, assume that all investing decisions are based on sound rationale.
But the crucial role played by psychology and emotion often causes this assumption to be mistaken. And this applies to even the most mature stock markets.
To prove this point, Howard Marks shared the following data in his July 2024 memo. It shows the annual deviation in the benchmark S&P 500 index versus deviations in the US GDP and corporate profits, over a 40-year period.

As we can see the deviations in the index are almost 25% higher than changes in corporate profits. Also, they are six times higher than the economic growth.
Investor sentiment can sway based on a variety of external and uncorrelated factors. It is for this reason that no matter how certain the future of a corporate group is, it's still necessary to ascertain the future of individual stocks.
Of course, most investors in India would dismiss concerns about Tata group stocks citing their willingness to hold on to the stocks for the long term. But that alone cannot guarantee commensurate risk adjusted returns.
Now, let's take the opposite case with yet another group of stocks - public sector undertakings (PSUs).
Indian PSU stocks are known to be a poorly governed lot. At least they were until a few years back.
Not surprisingly, their stock market performance for decades reflected the poor investor sentiment.
I was not surprised when my bullish views on PSU defence and railway stocks, back in 2018 and 2019, were initially met with a lot of scepticism.
After all, there were stocks listed for long that had remained in the back burner for years.
So, the share of stock market wealth created by PSUs shrunk from almost 50% in 2005 to negligible by 2020.

But anyone who shunned all PSU stocks without checking the fundamentals of a handful of them, missed out on massive opportunities.
Since 2020, this group of stocks has handsomely outperformed the benchmark BSE Sensex.

Therefore, buying stocks from a particular group is a good idea if the upside in individual stocks is thoroughly assessed.
Having said that, no matter what the reputation of the group, one must stick to asset allocation rules.
This will ensure that the portfolio is reasonably safeguarded even if stocks from a particular group underperform.
Disclaimer: This article is for education purposes only. It is not a recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com